Two new hires bode well for China’s reform

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If “personnel is policy,” as the old adage goes, then two big staffing moves over the weekend suggest China’s financial reform process is accelerating in critical ways.

Chinese leader Xi Jinping signaled as much by elevating protege Pan Gongsheng to Communist Party chief of the People’s Bank of China (PBOC) – and likely to the PBOC governorship in short order.

Xi also reportedly named Ding Xuedong, a senior State Council official, as party chief of the National Council for Social Security Fund (NCSSF).

Pan’s promotion was a particular surprise. Last year, he was stripped of his membership in the party’s Central Committee, a status that was held by his PBOC predecessor Guo Shuqing.

Yet, given Pan’s experience and policy preferences, his ascent also suggests Beijing plans to avoid the yuan depreciation markets now fear. And that Xi and Premier Li Qiang are stepping up efforts to repair China’s shaky property markets.

Pan, who’s done stints at Harvard and Cambridge, has led since 2016 the State Administration of Foreign Exchange, managing China’s US$3 trillion-plus in foreign reserves. As such, Pan is thought to favor stabilizing a yuan that’s down more than 5% this year.

Pan, 59, skews technocratic in ways likely to accelerate steps to repair China’s reeling property sector and boost consumer spending. He’s also believed to favor less adversarial relations with the US, significantly on the eve of Janet Yellen’s first China visit as US Treasury Department secretary.

“China’s weak economic recovery and worsening geopolitical tensions likely prompted Pan’s hasty elevation,” says analyst Anna Ashton at Eurasia Group. “He is a proponent of regulatory reform and oversight and boasts strong international knowledge and connections relative to other Chinese central bankers.”

Over the years, Pan understood more than most in party circles that China’s real estate boom might be followed by a dramatic reckoning. Back in 2014, he warned that “if citizens store their wealth by buying houses, it may cause the real estate bubble to burst or even [cause] an economic crisis.”

Yet Pan’s charge to increase consumer confidence could get an important assist from Ding’s arrival at the social security fund. Ding’s promotion seems a sign that Xi and new Premier Li are getting serious about building a deeper and broader social safety net, a prerequisite to a more vibrant, consumer-driven China.

Ding, 63, has served as executive deputy secretary-general in China’s cabinet since 2018. His resume includes stints at the Ministry of Finance, the Financial Stability and Development Committee and state-owned China Investment Corp.

Ding Xuedong knows a thing or two about financial management. Image: CNBC / Screengrab

NCSSF was established in 2000 mainly to act as a reserve to cover shortfalls in pension funds. It stands separate from local government-managed social insurance funds, pensions and health care and unemployment funds.

Tapping Ding suggests the fund’s missions may be getting supersized and turbocharged at the same time. It’s long been known that such a shakeup is needed to encourage 1.4 billion mainlanders to save less and spend more.

“The economic recovery provides opportunities for further reducing financial risks, strengthening the social safety net and implementing market reforms to encourage private investment while putting the economy on a more efficient decarbonization path,” says World Bank economist Mara Warwick.

She adds that “implementation of key structural reforms remains crucial to solidify the recovery and achieve China’s longer-term goals of environmentally sustainable, resilient and inclusive growth.”

The social safety net piece of the puzzle is vital to prod mainland households to increase consumption to facilitate a shift from an export-driven growth model to one powered by domestic demand, Warwick notes.

Elitza Mileva, also a World Bank economist focused on China, notes that “as in the past, robust economic growth that creates jobs and boosts household incomes will remain important for shared prosperity.”

Equally important, though, Mileva adds, is that “policy, both revenue and spending measures, can be effective in promoting more equitable income distribution among China’s population.”

Economist Sophie Wieviorka at Crédit Agricole notes that the “problem is that China doesn’t currently wield the right drivers for public policy in these areas.”

“As of now, intervention is focused on purely Keynesian measures – including vouchers to pay with at local stores – for short-term use instead of developing a real social safety net, which could be implemented by the central government since it still has some room for maneuver with regard to debt,” she adds.

Chinese authorities, Wieviorka says, “are caught in the middle” in part because of the “problem with over-indebtedness, which also partly explains the limited response of authorities regarding the budget.”

Wieviorka adds that “aware of its limited resources, China is painstakingly shedding its growth model, which is extensive – and based on an accumulation of labor and capital, and intensive – based on the optimization of existing resources. It’s a necessary move, but not always a winning strategy, as the middle-income trap is never far behind.”

So, building a better network of social safety nets has never been more important, as Ding’s arrival seems to suggest.

It’s more complicated than that, of course. As economist Brad Setser at the Council on Foreign Relations think tank observes, “China’s high domestic savings rate allows it to sustain higher debt levels than most emerging economies. No need for imported capital, and the state system can avoid internal confidence crises most of the time.”

China needs its consumers to save less and spend more. Photo: Facebook

Yet Japan reminds Asian peers about the evils of excessive savings. Zhu Min, a former deputy managing director of the International Monetary Fund (IMF), notes that China needs to fix the confidence gap to prod households to spend more. That, Zhu says, means better social safety nets by improving pensions and health care.

“I understand there is a lot of fear,” Zhu said. “We need really to take the fear away, rebuild the confidence. This is the most important thing.”

Current IMF economist Thomas Helbling notes that “expanding social safety nets, for example, by further increasing the adequacy and coverage of social assistance benefits and introducing a dedicated unemployment benefit system, would help enhance the automatic stabilizer role of fiscal policy.

“A comprehensive tax reform over the medium term to broaden the tax base is imperative to provide a stable source of revenue to meet long-term spending needs while ensuring fiscal sustainability.”

In general, Helbling says, the “prioritization of spending on households over investment would also deliver larger stabilization benefits. For example, means-tested transfers to households would boost aggregate demand 50% more than an equivalent amount of public investment. To ensure consistency across policies, fiscal policy should be undertaken within a medium-term fiscal framework.”

Helbling argues for “an ambitious but feasible set of reforms can improve these prospects, importantly in a way that is inclusive by raising the role of household consumption in demand.

“Reforms such as gradually lifting the retirement age to increase labor supply, strengthening unemployment and health insurance benefits, and reforming state-owned enterprises to close their productivity gap with private firms would significantly boost growth in coming years.”

As these vital reforms begin in earnest, Pan now has an opportunity to tap into what he recently termed China’s “rich experience” in responding to economic shocks using “plentiful macro-prudential tools.”

Initially, markets will be expecting Pan’s promotion to signal a “clearing of the way” for fresh stimulus moves, notes economist Hao Hong at GROW Investment Group.

Yet markets are also unclear about the big-picture meaning of Pan’s appointment. One source of confusion: does his relatively modest Communist Party ranking mean the PBOC is being downgraded in terms of its role in overall policymaking?

Already, the PBOC reports to Premier Li and the State Council, requiring their approval on managing the yuan or setting interest rates. Yet, on the other hand, indications are that Pan is on track to be both party chief and governor of the central bank. This, Eurasia’s Ashton notes, “will mark a return to the ‘single-head’ leadership structure that was the norm at the PBOC prior to 2018.”

From 2018 to 2023, she notes, current Governor Yi Gang and outgoing PBOC party chief Guo ran things as dual heads: Yi as governor and deputy party chief and Guo as party chief and deputy governor.

People's Bank of China Deputy Governor Yi Gang. Photo: Reuters, Aly Song
Governor Yi Gang shared power at the PBOC. Photo: Agencies

“Re-merging the roles of party secretary and governor,” Ashton says, “concentrates decision-making power and would ensure Pan greater authority within the central bank system.”

Either way, Pan seems a solid choice. PBOC leadership could do worse than being led by a Western-trained and battle-tested economist – one with in-the-trenches experience working at some of China’s ‘Big Four’ state-owned commercial banks. This includes experience at the Agricultural Bank of China.

And it includes an important changing of the guard at China’s social security apparatus that dovetails with new leadership at PBOC central. And by all past and present indications, both staffing moves bode well for China’s financial and economic reform prospects.

Follow William Pesek on Twitter at @WilliamPesek

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Yellen’s Beijing trip won’t stop ‘cold war’

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During US Secretary of Treasury Janet Yellen’s attend to Beijing later this year, top-level formal meetings between China and the US will be held. In the short term, neither party anticipates a substantial improvement in connections, but there is cause for optimism that they may eventually come to terms with one another’s differences.

According to China’s Ministry of Finance, Yellen may travel to Beijing from July 6 to July 9. This decision was made following a conversation between the two nations. The original Fed Chairman is regarded as a US politician who is reasonably cordial with China.

Following Blinken’s visit on June 18 – 19, Yellen will arrive before an anticipated meeting between Chinese President Xi Jinping and US President Joe Biden. The best topics on the agenda for the upcoming Xi-Biden dialogues will continue to be Taiwan problems, the Ukraine War, and US device export bans.

Foreign observers claimed that because Washington formally began a Cold War with China, it is doubtful that the US will soon stop putting new restrictions on China’s high-tech industry. & nbsp,

Professor of global relations Zhang Weiwei of Fudan University claimed on a TV programme on June 26 that the US, which refused to acknowledge that China is rising, was to blame for the Sino-US conflict. Additionally, he claimed that the US’s assumption that it could prevent China from rising was a grave error.

But, he added, the circumstance appears to be getting better. & nbsp,

Zhang cited the Elizabeth Kuebler-Ross stages of grieving in psychology as evidence that the US appears to have moved past the first two stages — denial and anger— and is now moving on to the third stage, which refers to” partial acceptance and bargaining ,” after failing to defeat China in the trade and technology wars. The terms” depression” and” acceptance” refer to the fourth and fifth stages, respectively.

He continued by saying that China has not yet resumed defense negotiations with the US in an effort to reassure the latter of its lack of military apprehension.

In a statement released on Sunday at US time, the US Treasury Department stated that Yellen will meet with representatives from the People’s Republic of China in Beijing to explore” the importance for our countries- as the two largest economies– to properly manage our relationship, communicate immediately about areas of concern, and work up to address worldwide challenges.”

The Treasury Department stated in a statement Yellen gave in April that the US will work to” safe its regional security interests along with those of our friends and to protect human rights through targeted activities that are not intended to gain financial advantage.”

According to the statement,” We seek a good financial relationship with China that promotes socially beneficial growth and innovation and expands financial option for American workers and businesses.” Additionally, we want to work together to address urgent global issues like loan stress and climate change.

a few contexts

Before much of that does happen, there is a distance to travel. On June 19, Blinken was given a seat across from Chinese diplomat Wang Yi when they first met in Beijing, with Xi occupying the center seat. The sitting program, according to Chinese pundits, was intended to demonstrate to the world that China was instructing the US.

On June 19, 2023, US Secretary of State Antony Blinken meets with Chinese President Xi Jinping, who is seated at the head of the table in Beijing’s Great Hall of People. Pool / Leah Mills

On June 20, Biden fired back, claiming that Xi was unaware of the Chinese balloon’s presence when he ordered its shoot-down over US aircraft in first February during an event in California. He claimed that it was” tremendous humiliation for rulers when they did not know what happened.”

The Chinese ambassador in the US formally protested Biden’s remarks to the White House on June 21.

Biden met Xie Feng, China’s fresh adviser to the US, in the White House on June 30. The voice got a little bit better.

Biden accepted the Letter of Credence of Xie and welcomed the ambassador, who had taken office on May 23, to his new position, according to a statement posted on the website of the Foreign embassy. They had a discussion about the Sino-US connection. The speech displayed two images, in which Biden shakes Xie’s hand twice and is positioned very close to the latter and his family Wang Dan.

It will take more than that for the two nations to significantly lessen the mistrust and hostility that permeate standard lines and public opinion on both sides.

Liu Yong, a military journalist based in Hubei, writes in an essay published on Monday that” Yellen’s visit to China may not have taken into account Chinese problems.” Yellen stated that she wants to reestablish contact with China. She is, however, claiming that the US wants China to make concessions and uphold British objectives. “& nbsp,

He claims that” US debts is one of the centers among China – US economic subjects.” Since China has been disposing of US Treasury Bonds repeatedly in recent years, the US has grown concerned. Yet if China purchases more, it won’t be nearly enough to appease the US.

He continues by saying that during Yellen’s attend, Washington is likely to put pressure on Beijing by using Taiwanese problems.

China had$ 867.1 billion in US Treasury bonds as of last year, down from$ 1.12 trillion at the end of 2018. During the same time period, Japan’s holding of US Treasury securities increased from$ 1.04 trillion to$ 1.08 trillion, while the UK saw a growth in its having from$ 288 billion to 654.5 billion. & nbsp,

Despite Beijing’s vehement resistance, nine US politicians traveled to Taiwan between June 27 and 29. & nbsp,

tech outlaw

Due to rising US-China political tensions, the two sides have never held standard talks since US Secretary of Defense Lloyd Austin and Chinese Defense Minister Wei Feng met in Cambodia last November. Austin and Li Shangfu, the innovative Chinese Defense Minister, shook hands on June 2 in the Shangri-La Dialogue in Singapore, but there was no formal meeting between them.

In a presentation on June 28, Liu Pengyu, the Chinese Embassy’s official in Washington, stated that if the US wants to continue high-level military negotiations with China, restrictions may be lifted. & nbsp,

The US will make sure that China doesn’t use American technology to create fast weapons or violate human rights, according to Blinken, who claimed to have told his Taiwanese rivals during his trip to Beijing on the same day.

The French government announced on June 30 that in order to trade specific DUV lithography tools, ASML will need to use for licenses starting on September 1. According to ASML, the ban will have an impact on China’s imports of its Twinscan NXT: 1980Di, which may produce 38 millimeter chips in a single coverage.

According to an unknown spokesperson for China’s Ministry of Commerce on Saturday,” In recent years, the US has consistently generalized the concept of regional security, abused export control measures, and sacrificed the interests of its allies to force and earn over various countries to suppress and contain Chinese semiconductor industry in order to maintain its international hegemony.”

Guan Xiansen, a poet from Guangdong, writes in an article that was published on Sunday,” While Blinken promoted Yellen’s visit to China, the weakening of his approach was cursory.” He made an effort to downplay the fact that the US is actively repressing and controlling China, claiming that its sanctions just apply to regions that do not serve its objectives.

He” made conspiracy theory conclusions that China may” improperly use” some essential systems without any supporting evidence.” According to Guan, this unfounded claim demonstrates how the US evaluates some based solely on its own experiences.

The US will quickly tighten its sanctions against China, despite Chinese commentators’ continued optimism that China may ultimately defeat the US.

Following Yellen’s trip to China, Washington will forbid Nvidia from exporting its artificial intelligence ( AI ) chips, such as the A800 and H800, to the country, according to a report in the US media last week. At the end of July, Biden will also sign an executive order prohibiting US funds from investing in high technology industries in China.

Study: AI device bans obstruct US-China trade negotiations

At & nbsp, @ jeffpao3 is Jeff Pao’s Twitter account.

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Pakistan’s ‘imbalance’ of payments

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The International Monetary Fund ( IMF) announced a staff-level agreement with Pakistani authorities on June 29 as Pakistan struggles with an import backlog and declining export volumes, steadily depleting its precarious foreign exchange reserves.

A nine-month Stand-by Arrangement ( SBA ) worth 2,250 million special drawing rights( equivalent to roughly US$ 3 billion, or 111 % of Pakistan’s IMF quota ) is included in this agreement.

The current account deficit ( CAD ) reached an astounding$ 17.4 billion in the fiscal year 2022, a sizeable increase from the$ 2.82 billion gap seen in FY21. The government encountered various difficulties following the devastating floods of 2022, which resulted in a decline in forex reserves and the loss of creditors’ confidence.

In response, the government soon put in place austerity measures to prevent a possible default on international debt and import restrictions on all goods aside from basic food and medical supplies.

Despite the president’s work, the nation saw a significant decrease in CAD earlier this month, reaching stumbling lows of$ 242 million in January. This drop was accompanied by a drop in forex reserves to just$ 3 billion, making the economy vulnerable to economic shocks.

Pakistan’s Current Account Balance( in US billions ) is shown in Figure 1.

The World Bank is the cause.

In order to maintain production, local companies rely on imported input, with 53 % of total imports coming from intermediate goods. The president’s mercantilist policies and trade restrictions caused them significant disruption. Higher attrition rates, decreased export productivity, and major disruptions in the commodity chains were the results of this.

international financial investments

Deficits in the current and capital accounts worsen the balance-of-payments ( BoP ) situation and impede Pakistan’s economic development. Foreign direct investment ( FDI ) has decreased as a result of the unreliable and hostile business environment.

It has consistently been difficult for foreign investors to fund private enterprises due to high tariff rates, political uncertainty, criminal concerns, strict duty and interest-rate regulations, and demanding security clearance requirements.

Labor output growth has been impacted by the reduction in FDI and insufficient technology transfer, which has resulted in lower production increases and impractical economies of scale for the past 20 years.

Due to favorable regional and external factors, there was a noticeable increase in FDI flows between 2003 and 2007.

To improve stability and increase investor confidence, the government took a number of actions. These included privatisation activities, liberalizing and deregulating the economy, streamlining administrative procedures, and fostering private-sector expansion. Both domestic and international participants found this to be an attractive investment opportunity.

During this time, the foundation for the China-Pakistan Economic Corridor( CPEC) was established, along with increased investments from China and various local nations. However, Pakistan’s energy crisis, political unrest, infrastructure bottlenecks, and the US-led financial crisis of 2007 – 2008, which stifled foreign investments, all hampered economic growth.

Figure 2: Foreign Direct Investment( percentage of GDP ) in Pakistan

Sources: Author’s unique, World Bank data

BoP limitations

The small investment and savings routine, which drains foreign currency from Pakistan’s resources, is to blame for the drop in imports. Also, Pakistan’s limited involvement in the international and regional economies is a major deterrent for foreign investors.

Lack of industrialisation reduces producers’ productivity and competitiveness, shifting local use preferences toward imported goods and increasing the trade gap. The ability to increase exports in the face of a steadily declining currency reflects the general lack of efficiency across sectors.

In comparison to other emerging markets, Pakistan’s export capacity is still sluggish. The treatment of Pakistan’s BoP will be significantly hampered by this, necessitating ongoing changes to bring it down to acceptable levels.

Pakistan appears to follow a BoP-constrained growth model, which predicts that any growth-rate development will be accompanied by an immediate decline in the physical balance. Adjusted for its BoP and structural parameters, the projected growth rate of the nation is 3.8 %.

Different trade and diplomatic measures must be taken in order to break free from this period. Readjusting trade ability, diversifying and growing the industry base, and prioritizing efficiency over profit subsidies are all important steps.

It’s important to take lessons from nations like the Philippines and Vietnam, which have outperformed Pakistan in terms of business accessibility. In order to spur economic growth and increase foreign exchange reserves, Pakistan may increase the range of exported goods beyond textiles and grain, improving industry openness.

In order to accomplish this, Pakistan should think about diversifying its international purchase ties beyond its existing allies, such as China, Saudi Arabia, the United States, Britain, and the U.A.E. Pakistan may increase capital outflows and improve its economic prospects by forging new diplomatic ties and building strong ones.

Pakistan’s economy is caught up in a vicious cycle of unequal BoPs, and any growth rate growth is accompanied by an ongoing decline in the exterior balance. Detailed business and diplomatic measures are required to overcome this obstacle.

By reviving its import power, diversifying its business center, and prioritizing performance, Pakistan can break free from this period.

Pakistan’s economic development will be aided by emulating successful models from nations like the Philippines and Vietnam and growing international funding alliances through effective politics. This will also strengthen foreign exchange reserves and lay the groundwork for long-term sustainable growth.

& nbsp, Debt ad Infinitum: Pakistan’s Macroeconomic Catastrophe is the title of an article by this author that is more in-depth.

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Pakistan’s struggle against currency depreciation

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In October 2022, the Pakistani rupee showed promise by appreciating 3.9%, reaching 219.92 per US dollar. This positive trend was fueled by anticipated foreign-currency inflows from the International Monetary Fund (IMF) and foreign investors.

However, the Finance Ministry failed to foresee the ensuing volatility that would soon disrupt the market. Subsequently, in February 2023, the rupee experienced a sharp decline, hitting 275.5 per dollar and causing significant market disruption.

Currency crises have plagued economies since the 1960s because of fixed exchange rates under the Bretton Woods system. However, in the case of Pakistan, it was the inherent domestic structure of the economy, rather than the exchange-rate regime, that contributed to the rupee’s collapse.

The country found itself exposed to an increasingly volatile domestic situation, exacerbated by a fixed exchange rate, international tensions, and the impact of the Covid-19 pandemic. These factors pushed Pakistan into an inevitable currency crisis.

Figure 1:  Pakistani Rupee per US$ (2010-February 2023)

Source: Council on Foreign Relations

Rising prices of essential imports, including fuel, edible oil and pulses, have burdened the government, leading to an inflated current-account deficit and mounting fiscal challenges. This has resulted in cost-push inflation that has escalated the costs of inputs, making it unviable for local producers to continue production.

Adding to the predicament, Pakistan’s foreign-exchange reserves are rapidly dwindling, and with no visible assistance from the IMF in sight, the country’s citizens are confronted with a humanitarian crisis of significant proportions.

Persistently high current-account deficits (CADs) are unsustainable and often lead to major balance-of-payment (BoP) difficulties. A high CAD attracts speculators who anticipate a fall in forex reserves, leaving the central bank incapable of defending the currency.

Furthermore, the deleterious effect on the scale of indebtedness weakens the country’s finances, making it increasingly difficult to access international credit.

The removal of the ceiling on the dollar-rupee exchange rate in January was part of efforts to revive the IMF loan program. This move led to a significant decline in the rupee, reaching a record low.

The devaluation of the Pakistani rupee against other major currencies such as the US dollar, the euro and the Indian rupee has been an ongoing trend since early 2018 when the Pakistani unit transitioned from a managed exchange-rate system to a free-floating exchange rate against the dollar.

While IMF lending can provide temporary relief, Pakistan should exercise caution regarding excessive borrowing, as large capital inflows can undermine the viability of the BoP in the long run.

It is likely that the funds will be utilized to boost consumption and meet existing debt obligations rather than enhancing the productive capacity. Such utilization of funds does not add to the productive capacity, and the inefficiency leads to low returns.

In the long run, it becomes increasingly difficult to procure external funds as the failure to generate foreign exchange earning capacity establishes the country as a defaulter.

Crisis upon crisis

Hence any further debt taken on by the government should be utilized while paying acute attention to the productive capacity of the sectors.

The rupee has undergone a series of depreciations since 2021. It fell to 176 from 160 rupees against US dollar by the end of 2021. A major reason was the collapse of the banking system in neighboring Afghanistan after the withdrawal of US forces in August that year.

Pakistan’s reliance on imports for essential commodities further pressured the currency. In 2022, the devastating floods and political upheaval worsened the foreign-exchange crisis.

With exchange rates fluctuating in the 200-rupee range, Pakistan faces a struggling currency and subsequent increase in imports, leading to soaring inflation and rising poverty levels.

The Consumer Price Index (CPI) in Pakistan rose by 27.5% year on year in 2023, with an average inflation rate of 25.4% for the first seven months of the fiscal year 2022-23, compared with 10.3% during the corresponding period of the previous year.

Furthermore, Pakistan has been grappling with a severe wheat crisis, leading to hoarding and stampedes in some provinces as the government struggles to provide subsidized flour supplies at 160 rupees per kilogram.

The demand-pull inflationary tendencies have been at play due to high demand and low supply, with imports held up at ports, exacerbating the shortage of dollars in the country. This situation contributes to rising inflation and puts strain on consumers’ income and savings.

Figure 2: Pakistan’s National Headline Inflation (Y-o-Y) before and after Covid-19

Source: The World Bank

To combat rising inflation and stabilize the currency, the State Bank of Pakistan has increased the interest rate by 300 basis points, resulting in a cumulative increase of 1,050 basis points since January 2022. However, by early 2023, the country’s foreign-exchange reserves plummeted to a 10-year low of US$3.09 billion.

External debt repayments came to a halt, and import payments were suspended until appropriate fiscal measures were determined to address the dire situation.

In conclusion, Pakistan’s rupee volatility has been a tumultuous journey toward currency depreciation. The country’s inherent domestic structure, coupled with a fixed exchange rate, international tensions, and the Covid-19 pandemic, have pushed Pakistan into a currency crisis.

Rising prices of essential imports, persistent CADs, and dwindling forex reserves have further exacerbated the situation. It is crucial for Pakistan to exercise caution in managing its finances, avoid excessive borrowing, and focus on enhancing productive capacity to achieve long-term stability and economic growth.

A more detailed article by this author can be found here: Debt ad Infinitum: Pakistan’s Macroeconomic Catastrophe.

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Are markets dead wrong about China?

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Many investors couldn’t help but suspect Premier Li Qiang had lost the plot when he declared that China will easily reach his government’s 5% economic growth target for 2023.

“From what we see this year, China’s economy shows a clear momentum of rebound and improvement,” Li told the audience on June 27 at the World Economic Forum’s annual meeting in the coastal Chinese city of Tianjin.

That’s news to economists at Bank of America, Goldman Sachs, JPMorgan, UBS and other investment banks scrambling to downgrade their earlier more optimistic forecasts for China’s 2023. 

Yet Li’s confidence raises a tantalizing question: what if global markets are completely wrong about where China is headed economically over the next six months?

Count former International Monetary Fund bigwig Zhu Min in the camp that believes that negativity about China’s prospects is overdone.

“There are a lot of expectations on the Chinese government to have more stimulus policies,” Zhu, who until recently was the IMF’s deputy managing director, told the Tianjin forum. “I don’t think this is real.”

Sure, China may face some fiscal constraints, Zhu admits. Beijing, he points out, “has very high debt already,” as evidenced by a record debt-to-GDP ratio. Local governments, meantime, are scrambling to repay debt to ensure the overhaul doesn’t imperil China’s US$55 trillion banking system.

And a $2 trillion section of China’s local bond market is under strain as issuers struggle to refinance maturing debt. In the fourth quarter of 2022, net financing for China’s local government financing vehicles, or LGFVs, turned negative for the first time since 2018.

Analyst Laura Li at S&P Global Ratings speaks for many when she warns “there may be more debt repayment crises or even public bond defaults” if Beijing isn’t careful.

Yet, as Zhu explains, it’s also the case that Asia’s biggest economy doesn’t need additional stimulus jolts to confound the skeptics. As such, Zhu expects a choosier, more deliberate and reform-minded approach that boosts consumption while also accelerating China’s transition toward high-tech sectors and more green growth.

The most likely policy approach, Zhu said, is ensuring that household incomes grow faster than GDP this year while building better social safety nets via improved health care and pension systems for the longer run.

“I understand there is a lot of fear,” Zhu, the former IMF official, said. “We need, really, to take the fear away, rebuild the confidence. This is the most important thing.”

If Li and Zhu are right, it’s clear Beijing is doing a poor job on communications. Yet their efforts to convince global investors and mainland households alike should be more about showing than telling. 

A Chinese investor looks at stock index and prices of shares at a stock brokerage house in Hangzhou city, east China’s Zhejiang province. Photo: Shan he / Imaginechina / Imaginechina via AFP

China, in other words, “is in need of a credible economic recovery plan to boost confidence” that it can “revive animal spirits before labor market conditions deteriorate further,” said strategist Fiona Lim at Maybank.

In a report to clients this week, Citibank analysts said it’s high time Beijing addressed the “weak confidence prevalent across households, corporates and investors in China.”

Here, Kelvin Wong, analyst at OANDA, noted that Li this week “stopped short of revealing any details on the highly anticipated new fiscal stimulus measures” that the State Council discussed two weeks ago.

But, Wong said, Li’s “confidence boosting” speech “triggered a broad-based rally in key China’s proxies benchmark stock indices that snapped five consecutive days of losses.”

It makes investors wonder, too. This could be overconfidence or mere spin by a newish premier under pressure to regain the macroeconomic narrative. It also could be a sign that worries about China’s second half will prove unwarranted.

As such, it remains unclear whether this week’s market gains can be sustained. “Without any clear indication of the scope and implementation timing of the new fiscal stimulus measures,” Wong said, uncertainty may “dampen the short-term bullish mood and trigger another bout of downside pressure in China and Asian ex-Japan equities in general.”

Li, though, claims the Communist Party is on top of all things economic.

“We will launch more practical and effective measures in expanding the potential of domestic demand, activating market vitality, promoting coordinated development, accelerating green transition, and promoting high-level opening to the outside world,” Li said.

At the same time, Li urged world powers to lower the temperature. Since Li’s recent visit to France and Germany, sharp rhetoric toward China from European governments has only heightened tensions.

“Everyone knows some people in the West are hyping up this so-called ‘de-risking,’ and I think, to some extent, it’s a false proposition,” Li said. He added that the “invisible barriers put up by some people in recent years are becoming widespread and pushing the world into fragmentation and even confrontation.”

The bottom line, Li said, is that “we firmly oppose the artificial politicization of economic and trade issues.”

Yet Li’s relative optimism — and Beijing’s lack of haste so far to crank up major stimulus—has economists wondering what his team knows that markets don’t. Does the conventional wisdom about massive new stimulus moves require revision?

“Economic growth in China is likely to reach 5% this year, which is in line with government targets and consensus forecasts,” says analyst Aaron Costello at Cambridge Analytics. 

“Following a stronger-than-expected first quarter, recent economic data has softened, disappointing investor expectations of a sharper recovery after last year’s Covid-19 lockdown, but the Chinese economy is not on the verge of relapsing into recession.”

That’s not to say Chinese officials are sleeping on the job. Economist Wei He at Gavekal Research noted that “officials have whirred into action to bolster the slowing economic recovery, cutting rates and pledging more support to come.”

Yet, he added, “constraints will lead them to target support to favored industries and probably dial up infrastructure investment. Those measures are likely to underwhelm. Investors should buy the rumor, sell the fact.”

China’s yuan is gaining ground as an international currency. Photo: Facebook

Last week, President Xi Jinping’s Cabinet pledged to “take more effective measures to enhance the momentum of development, optimize the economic structure, and promote the sustained recovery of the economy” — and to do so “in a timely manner,” Wei noted.

In the meantime, odds are that the People’s Bank of China will continue to play the leading stimulus role. “Weak investments data suggest that authorities are unlikely to stop at the monetary easing we saw” last week, said economist Louise Loo at Oxford Economics.

Zhiwei Zhang, economist at Pinpoint Asset Management, added that “credit growth is weak, which is not surprising as other economic indicators such as purchasing managers’ indexes and exports also sent consistent signals. This explains why the PBOC cut the reverse repo rate … It is a small step in the right direction. I expect more policy actions to follow in coming weeks.”

Earlier this month, PBOC Governor Yi Gang said the central bank will enhance “counter-cyclical” policy adjustments to hasten growth in the real economy via policy tools that lower funding costs.”

In a note to clients, economists at Nomura wrote that “we believe these comments suggest that Beijing has now become seriously concerned over the potential for a double dip, and the PBOC may respond by stepping up stimulus measures in the near term.”

But, as Li’s team suggests, any government stimulus also will involve upgrades to China’s microeconomic structure. That includes moves to stabilize the fragile property market and alter incentives to reduce the risks of boom-bust cycles.

Lauren Gloudeman, analyst at Eurasia Group, observed that the National Development and Reform Commission, China’s economic planning body, indicated that “more effort will be spent on boosting auto sales, constructing charging facilities and renovating the grid for new energy vehicles.”

And “the supply side,” she added, “China’s financial regulators have pledged to provide more tax rebates and reduce transaction costs. In the property sector, Beijing is likely to take a differentiated approach across cities, including by significantly lifting administrative restrictions on home purchases and reducing associated costs such as down payment requirements to stimulate sales in cities with sluggish market conditions while maintaining restrictions elsewhere.”

A worker at the construction site of Raffles City Chongqing in southwest China’s Chongqing Municipality. Photo: AFP / Wang Zhao

In the upcoming weeks, Gloudeman said, these ministries are expected to develop specific policies that outline how to implement these ideas. 

Again, though, Beijing’s communication game needs work. It’s clear that Li’s team favors “more targeted support directed at weak spots, including real estate,” said economist Arjen van Dijkhuizen at ABN Amro.

What’s less clear, though, is that global investors trust that this more surgical approach to stimulus will get China to 5% GDP growth, as Li insists is in the offing. Perhaps Li is right. But it’s high time Beijing worked harder to convince international investor skeptics.

Follow William Pesek on Twitter at @WilliamPesek

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The real risk of China’s presence in Cuba

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The Wall Street Journal reported this month that the People’s Republic of China has heavily invested in a cash-strapped Cuba in exchange for access to an electronic intelligence collection (ELINT) facility, and negotiated an agreement to train Chinese soldiers on the north side of the island.

These developments have been met with great concern in Washington, particularly due to the strategic threat that the PRC’s presence in the region poses.

China’s history of US intelligence collection through Cuba can be traced back to 1999 when Cuba granted the PRC access to facilities at Bejucal, a city just south of the capital, previously operated by the Soviet Union, to collect intelligence on the United States.

More recently, the Biden administration’s response to the WSJ’s report confirmed that the Chinese had indeed been operating an intelligence facility in Cuba for some time, and had only upgraded it in 2019. This ran counter to presidential spokesman John Kirby’s characterization of the reports of China’s “building” of the base.

However, the dialogue left unclear exactly how much money the PRC has invested towards the 2019 upgrade and whether or not it was included as part of the debt restructuring and investment credits awarded by the PRC to Cuba this past November.

By contrast, the possible rotation of People’s Liberation Army (PLA) military personnel through the island for training crosses a small, if important, threshold with respect to an enduring Chinese military presence close to the US mainland.

Regardless of the minutiae involved, both developments showcase an increased disposition by both Cuba and the PRC to take risks through explicitly US-focused military initiatives, in ways that suggest it’s willing to take similar risks in other areas as well.

This has significant implications for the United States, necessitating an appropriate, and carefully crafted response from Washington to both current and future events involving both parties.

In the case of Cuba, the government’s willingness to host military threats to the United States has remained consistent since the 1962 missile crisis.

That being said, the regime’s willingness to permit PRC military operations on the island, with the added risk that they might be discovered by US counterintelligence, more greatly highlights the regime’s current desperation for resources amid increasingly severe shortages of food, fuel and medicine – which have prompted a growing exodus of refugees from the island and inspired scattered protests that led the government to temporarily shut down the internet.

Cuba is a poor country selling low-priced commodities in order to import industrial products. It exports sugar, tobacco and nickel to China; China sells machinery, electronic goods and medicines to Cuba. Photo: Morning Star

Such desperation is consistent with Cuban government behavior surrounding shortages, such as offering Russian investors notable tax breaks, long-term land leases, and options to repatriate profits, in exchange for investments aimed at addressing deficiencies in the country’s petroleum supply, rum and food production.

As for the PRC, the willingness to host anti-US-focused military capabilities for both intelligence collection and training in proximity to the continental United States is a stark departure from the PRC’s otherwise restrained military engagements in the region.

Previous PRC military engagements in the region consistently focused on hospital ship visits, participation in the United Nations Peacekeeping force in Haiti (MINUSTAH), training and professional military exchanges and institutional visits.

Even if the PLA electronic intelligence presence in Cuba is not new, the 2019 upgrade suggests a decreased concern over alarming or upsetting the United States, which may be, in part, a move emboldened by Xi Jinping’s government’s growing military power and confidence as well as growing military tensions with the United States.

It suggests a growing PLA willingness to construct military operations against the United States in the Western Hemisphere, which will surely fuel a reassessment of the interpretation of its security, people-to-people and commercial activities in the region.

The presence of the PLA is ever-expanding. The intelligence operations at Bejucal are probably not a game-changer in terms of capabilities. However, they pose a dangerous complement to the expanding array of other PRC operations to act on and use against the United States in both peace and wartime.

These include numerous Chinese commercial facilities close to US shores, from Hutchinson-operated ports in Mexico, the Bahamas and Panama to hundreds of PRC-owned business facilities in Mexico, Central America and the Caribbean, which could be used to “host” PRC Ministry of State Security personnel.

PRC options to use against the United States also include the numerous Latin American military, police and other government officials who regularly travel  to mainland China for “people-to-people diplomacy,” some of whom may be used to provide insights to the Chinese and be labeled by them as friends or “paid consultants.”

As seen by the practices of PRC “police stations,” other options include ethnic Chinese in the region who may be induced by the PRC to cooperate in the interest of familial ties. In addition, the PRC capabilities may also be supplemented by those of Cuban intelligence and those of other anti-US regimes, with personnel in both the United States and throughout the region.

Beyond its facilities and human intelligence capabilities and options, the PRC also has the ability to capture data relevant to US security in the region through its vast and expanding digital footprint there. This is because any Chinese company operating within the United States, under the 2017 PRC National Intelligence Law, is required to turn over any data that may be relevant to security to the PRC.

Some of these architectures, such as Huawei, ZTE, Xiaomi, Oppo and others in the region’s telecommunications infrastructure, can utilize exploitable sensitive data against Latin American government officials and political entities. For example, Huawei uses cloud computing, along with “Smart” and “Safe Cities,” which utilize surveillance technology. Didi Chuxing, a ride-hailing application, has been known to collect trip data on its users.

These are but a few examples of Chinese companies operating within the region that deal with sensitive data that can be subject to exploitation.

In the event of war between the United States and China over Taiwan, anti-US countries close to the United States like Cuba, Venezuela, and Nicaragua would likely be too vulnerable for the PLA to base in them traditional forces such as aircraft and ships for attacks against the United States.

The Castros are still celebrated in Cuba, as seen at the University of Havana. Photo: People’s Dispatch

Still, Cuba and other such countries could serve as key staging areas from which the Chinese could observe and disrupt US deployment and sustainment flows, along with other war-critical operations, which would put the United States and its allies at risk.

Both the presence of the Chinese-operated electronic intelligence facility and the development of a PLA training operation on the island will certainly help the PRC to create favorable conditions to counter the United States.

While it is true that the United States and other democratic states conduct international waters and airspace operations under the freedom of navigation principle (FONOPs), the United States cannot simply tolerate an intelligence collection facility 100 miles from its shore operated by its principal geopolitical rival, nor the rotations of PLA military personnel through the island. Such acts of espionage go beyond the simple characterization of “what rivals do” and should be met with a response.

Besides military strikes or other extreme measures that would ultimately be counterproductive for the relationship with the region, the United States most likely can neither persuade nor coerce Cuba and the PRC into abandoning their US-focused military cooperation.

However, this should not prevent the United States from exploiting all other available means to maintain pressure on, and isolate, the Cuban regime and China. Doing so helps limit the ability to extend both anti-US intelligence collection and other capabilities elsewhere.

It also strongly signals to others that the United States draws the line, and will extract a high price, for explicitly collaborating with extra-hemispheric rivals in ways that threaten US security.

Evan Ellis ([email protected]) is Latin America research professor with the US Army War College Strategic Studies Institute. The views expressed here are his own.

This article was originally published by Pacific Forum. Asia Times is republishing it with permission.

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AI chip bans cloud US-China trade talks

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Top Chinese and United States economic officials may meet in Beijing in early July but the potential meeting is now clouded by chip ban threats from both sides.

Treasury Secretary Janet Yellen said in a TV interview on Wednesday that she hopes to visit China and re-establish contact with new leaders despite differences between Beijing and Washington. As of Thursday night, Beijing had not yet confirmed Yellen’s trip.

China’s May sanctions against Micron have not helped smooth the fraught relationship.

Meanwhile, the US is mulling strengthening of its export bans to prevent China from using its AI chips to make weapons or abuse human rights, media reported.

Nvidia, a graphic processing chip (GPU) maker, will not be able to ship its A800 and H800 artificial intelligence (AI) chips to China if the US tightens its export controls, the reports said. The company tailor-made the two products for the Chinese markets after it was banned by the US government from exporting its A100 and H100 chips to China last August.

The decision will probably be announced after Yellen’s visit to Beijing, according to the Wall Street Journal.

Chinese commentators said it’s ridiculous that the US is strengthening its sanctions against China while seeking to hold talks in Beijing. They said China should consider further penalizing US memory chipmaker Micron Technology.

“China and the US are in touch about dialogue and exchange at various levels,” Mao Ning, a spokesperson of the Chinese Foreign Ministry, said in a regular media briefing on Thursday when being asked about Yellen’s China trip.

At the same time, Mao criticised US Secretary of State Antony Blinken – who visited Beijing on June 18-19 – for smearing China in a recent speech.

“We are dissatisfied with Blinken’s remarks. Out of a wrong perception of China, the US pursues a wrong policy toward China by containing and suppressing it, discrediting it for no reason and wantonly interfering in its internal affairs,” Mao said. “The words and actions of the US side violate the basic norms governing international relations. Of course, China firmly opposes them.”

She said the US should stop making irresponsible remarks and take concrete actions to honor the promises it made.

In a review of his recent trip to Beijing, Blinken told CBS on Wednesday that both the US and China have obligations to manage their bilateral relationship responsibly and make sure that their profound differences don’t veer into conflict.

“One of the things that I said to my Chinese counterparts during this trip was that we are going to continue to do things, and say things that you don’t like, just as you’re no doubt going to continue to do and say things that we don’t like,” he said.

Investment curbs

Since US media reported in April that US President Joe Biden was set to sign an executive order that would restrict US funds from investing in China’s high technology sector, Beijing has shown more willingness to communicate with Washington.

Biden originally planned to announce the investment curbs before Japan hosted the G7 Summit on May 19-21. However, he did not do so. Nikkei reported on June 10 that the White House is still trying to get key allies on board and navigate domestic pushback in Congress and on Wall Street.

On Monday, Bloomberg reported that Yellen is planning to visit Beijing in early July and seeking to meet Chinese Vice Premier He Lifeng, who assumed his position in March. It said the Biden administration’s investment curbs are nearing completion and will be ready as soon as late July.

In early July, the US Commerce Department will announce its decision to halt chip exports “by Nvidia and other chipmakers to customers in China and other countries of concern without first obtaining a license,” according to the Wall Street Journal.

Gao Lingyun, a researcher at the Institute of world economics and politics, Chinese Academy of Social Sciences, told the Global Times that the potential expansion of chip export bans will hurt the interests of US chipmakers, which have been selling about 30% of their products to the Chinese markets.

Gao said Yellen, who has a fair understanding of Sino-US economic and trade relations, is supposed to persuade China to buy more US national debt during her trip but it’s regretful that she has been caught by broadsides from anti-China hawks in Washington.

Colette Kress, chief financial officer of Nvidia, said Wednesday that the company is aware that it may be restricted from shipping A800 and H800 chips to China.
 
“Over the long term, restrictions prohibiting the sale of our data center GPUs to China, if implemented, would result in a permanent loss of opportunities for the US industry to compete and lead in one of the world’s largest markets and impact on our future business and financial results,” she said.
 
Nvidia’s shares closed down 1.8% at US$411.17. The shares have gained 187% so far this year as the company decided to invest in AI technology. Last month, Nvidia said it will build one of the world’s fastest AI cloud supercomputers in Israel and also an AI research center in Taiwan to accelerate its Omniverse project, a computing platform that supports 3D applications.

Good cop, bad cop

A meeting between Chinese President Xi Jinping and Blinken on June 19 has eased the political tensions between China and the US but failed to stop Washington from unveiling more curbs.
 
Blinken said in a media briefing after the meeting that the US government will continue to prevent its technologies from being used against the American people – for example, in making hypersonic weapons, or in human rights abuses in China. He said more US officials would visit China in the following weeks.

A Shanxi-based columnist on Wednesday published an article with the title, “Yellen wants to visit China but Biden is busily preparing sanctions. Can the US show some sincerity?” 

“Undeniably, the US government’s moves are ridiculous,” the writer says. “The US threatens to impose more curbs in an attempt to force China to compromise in talks. This is an old trick, the same as what it did before Blinken’s China trip.”

“The US Treasury Department is playing good cop while the Commerce Department is playing bad cop. No matter what, they are pushing forward the so-called America First strategy,” he says.

He says Beijing must stay vigilant towards the coming actions of the US, which has so far remained hostile against China.

“Last month China forbade its key infrastructure operators to purchase products from Micron. If the Biden administration imposes new chip export bans on China, will the China side launch countermeasures?” Ren Chiming, a host of Phoenix TV, says in a video on Wednesday. “It’s likely that the chip war between China and the US will continue to intensify.”

Shortly after the G7 Summit ended on May 21, the Cybersecurity Review Office, a unit of the Cyberspace Administration of China, sanctioned Micron for posing network security risk. Chinese media criticized Micron for having downsized its production in China in recent years.

On June 16, Micron said it would invest 4.3 billion yuan (US$603 million) in its chip packaging facility in Xian over the coming few years. The investment is to include buying equipment from a unit of Taiwan’s Powertech Technology. 

Read: China, US resume talks but ‘de-risking’ lingers

Follow Jeff Pao on Twitter at @jeffpao3

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