Elon Musk tears up the decoupling script in China

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As the global economic intelligentsia debates how to “decouple” or “de-risk” from China, Elon Musk clearly didn’t get the memo.

The Tesla founder was feted like a returning king in Beijing this week. From the moment his private jet arrived on Tuesday, Musk is reportedly being called “Brother Ma,” putting him in rarified league with Alibaba billionaire Jack Ma.

There are many takeaways from Musk’s first China visit in three years. One is that not everyone is decoupling from China, least of all the globe’s most influential electric vehicle (EV) evangelist and owner of Twitter. Another: the future of EV production and innovation is shifting toward Asia’s biggest economy.

Yet the most important one may be how Beijing is putting out a huge welcome mat for foreign chieftains – from Musk to JPMorgan Chase’s Jamie Dimon – to signal that China really is open for business again.

The perception that China is becoming hostile toward foreign capital intensified after Ma ran afoul of Xi Jinping’s regulators in late 2020.

In March, China’s leader installed a new premier, Li Qiang, to take the lead in changing that narrative. And what better way than Musk visiting China and reaffirming his commitment to producing more Teslas in mainland factories?

Of course, Li and Ma go way back. It was Li, back in his days as Shanghai party boss, who lobbied Musk to open a Tesla “gigafactory” in the city. The facility, which opened in April 2022, was Tesla’s first outside the US.

Now, here is Musk, controversial as he is, hinting at an even bigger production presence in China. In 2022, Tesla contributed roughly one-quarter of Shanghai’s overall total automotive production.

The next objective for local governments around China: angling for closer ties with Tesla to win some of those jobs as Musk looks to expand his autonomous driving fleet and sales to Chinese consumers.

It’s just what Li’s image makers might have hoped for as Tesla looks to “aggressively focus on building out its China footprint,” says analyst Daniel Ives at investment firm Wedbush.

Even though China has its own promising EV companies, including BYD Co, Musk understands that Xi’s nation has become “the golden goose EV market,” Ives says. As such, Tesla’s mainland plant is now the “heart and lungs” of Musk’s global production.

Musk is also giving Xi and Li a big public relations win in another way. At his meeting Tuesday with Foreign Minister Qin Gang, Musk gave the thumbs down to Washington’s decoupling from China strategy. Musk said, effectively, that the relationship between the two biggest economies is too symbiotic to fail.

Elon Musk thinks the US-China relationship is too big to fail. Image: Twitter / Screengrab

This is music to Li’s ears as China welcomes a who’s-who of multinational company chieftains. In recent days, top officials from Starbucks Corp, Jardine Matheson, Franklin Templeton and UK chip software giant Arm Ltd dropped by. Later this month, Nvidia Corp CEO Jensen Huang is reportedly coming to town.

The frenetic pace of these meetings comes as China’s foreign direct investment experiences an ill-timed U-turn. In the first three months of the year, roughly US$30 billion zoomed away from China. Stock investors are pivoting elsewhere, too. Since its 2021 high, the MSCI China Index has lost more than half of its value.

On the debt side, China “suffered outflows” in April to the tune of $3.8 billion “as the positive effect of the Covid reopening fades away,” says economist Jonathan Fortun at the Institute of International Finance.

Hence the urgency to dispel the gathering notion that China’s leadership is in an anti-foreigner sentiment phase. Xi chose Li to lead the China-is-open-for-business repair effort.

First, there’s a matter of improving the odds of reaching a 5% economic growth rate this year. Analyst Kelvin Wong at OANDA notes that the latest reading from China’s Purchasing Managers Index (PMI) data “further reinforced an increasing slowdown in external demand and lackluster internal domestic demand ex-post re-opening from Covid-19 stringent lockdowns.”

On closer inspection, Wong notes, the data “indicated a risk of a deflationary spiral at play.” The input cost – main raw material purchase prices – sub-component of the manufacturing PMI declined at the fastest pace in May since July 2022 – 40.8 versus 46.4 – while the output cost sub-component fell for the third consecutive month and recorded its steepest decline for ten months in May to 41.6 from 44.9.

The bottom line, Wong says, is Beijing needs to halt the narrative about “the risk of the deflationary spiral in China.”

Economist Lu Ting at Nomura International added that “the sharper contraction in the manufacturing PMI suggests that the risk of a downward spiral, especially in the manufacturing sector, is becoming more real.”

Others are more sanguine. Some economists argue that China Beige Book data shows that manufacturing activity may be perking up.

Goldman Sachs China economist Hui Shan says recent trends in China’s emerging industries PMI seem a “tentative sign that manufacturing activity may begin to stabilize.”

At the same time, a “loss of economic momentum amid weakening demand both at home and abroad” is getting harder for Premier Li’s team to ignore, says economist Carlos Casanova at Union Bancaire Privée.

Li, Casanova notes, has “vowed more targeted measures to expand domestic demand and stabilize external demand earlier in May, in an effort to promote a sustained economic rebound, but it remains to be seen whether these will be effective.”

Li Qiang is trying to show the world that China is back open for business. Image: Screengrab / NDTV

Yet Li is also focused on structural reforms needed to restore investor confidence. Here, Musk’s timing could not be better.

In recent weeks, Beijing basked in the glow of global headlines over China surpassing Japan as the world’s biggest exporter of autos for the first time. Some of that dynamic reflects China’s embrace of EVs, while Toyota Motor and many Japan Inc peers stick with hybrid vehicles.

The narrative shift followed an earlier Li era victory: a move to break up Alibaba Group into six units – and founder Ma’s return to China after a long absence. Alibaba’s structural shakeup was a win for reformers and a vital gesture to reassure global investors that the regulatory crackdown on Big Tech is finished.

Since then, analysts like Kelvin Ho at Fitch Ratings have noted how “this could boost Alibaba’s credit strength if capital is freed up from businesses that generate little cash and deployed in stronger cash-generating businesses or used to pay down debt.”

The hope, too, is that Alibaba’s example could become a model for other internet giants in harm’s way, including Baidu, ByteDance, Didi, Tencent and others. If so, it would unlock value in China’s biggest service sector companies, enticing global investors.

Both Xi and Li surely appreciate Musk’s firm rejection of the idea that the US and China can thrive economically separately.

As economists at Allianz argue in a note to clients: “The economic implications of a further decoupling between the West and China could be far-reaching,” noting that the fallout for China’s economy could be “far from negligible.”

“China,” they argue, “could retaliate by curtailing the supply of critical raw materials in which it has a dominant position, which could severely disrupt global supply chains. But this is unlikely as it already applies some forms of outbound investment restrictions and is still looking towards economic pragmatism.”

At the margin, though, Musk’s doubling down on China and offering an alternative to the loud decoupling debate have given Beijing one of the best weeks of global headlines it’s had in some time.

Follow William Pesek on Twitter @WilliamPesek

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Japan to issue special bonds aimed at supporting childcare

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TOKYO: Japanese Prime Minister Fumio Kishida said on Thursday (Jun 1) that the government would issue special bonds aimed at filling a projected funding gap as it boosts childcare support towards 2030. Speaking at a government panel meeting, Kishida also said the government would not take on additional financial burdensContinue Reading

Japan to issue special bonds aimed at supporting child care

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TOKYO: Japanese Prime Minister Fumio Kishida said on Thursday (Jun 1) that the government would issue special bonds aimed at filling a projected funding gap as it boosts childcare support towards 2030. Speaking at a government panel meeting, Kishida also said the government would not take on additional financial burdensContinue Reading

A deeper look at the Belt and Road in Africa

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China is an important economic player in Africa. In 2021 alone, China accounted for nearly US$5 billion in foreign direct investment in African countries. The rapidly increasing Chinese presence across Africa has become a contentious issue both for Beijing and African governments.

In particular, mega-projects funded by China have resulted in public controversies about the relationship between external investments and public debt. China is Africa’s biggest bilateral lender.

In 2020, it held over $73 billion of Africa’s public debt and nearly $9 billion of its private debt. Due to this, US Treasury Secretary Janet Yellen has accused China of leaving countries “trapped in debt.”

Kenya has been no exception. China’s involvement in the construction of Kenya’s Standard Gauge Railway is a typical example of controversies brought by China-supported investments.

These include issues of increasing socio-economic inequalities between different population groups advanced by large-scale investments, local labor mistreatment by Chinese managers, accusations of neo-colonialism, and the long-term sustainability of loans issued by the EXIM Bank of China for projects.

In 2022, with a total debt of $6.8 billion, China was Kenya’s biggest bilateral creditor. Out of this amount, $5.3 billion was advanced by the EXIM Bank of China to finance the Standard Gauge Railway.

It is against this background that our study asked if Chinese actors indeed determined how mega-infrastructures are realised in African countries. We examined the specific ways in which Chinese state-owned enterprises are involved in the construction of Kenya’s Standard Gauge Railway. We analyzed how infrastructure development was realized on the ground and how Chinese construction companies shaped the process.

The study showed that the decisions of Chinese state-owned enterprises in Kenya do not necessarily present a grand Chinese strategy. Instead, they result from changing political and economic circumstances in China, and reflect both state and private Chinese interests.

Acknowledging these dynamics is important because it demonstrates how narratives about China’s involvement in mega-infrastructure development might overemphasise the power of the Chinese state.

Simultaneously, this highlights that African governments have more power to influence their industrial development and the sustainability of large-scale projects than mainstream narratives acknowledge.

Flagship projects

Alongside other large projects, such as the Lamu Port-South Sudan-Ethiopia Transport Corridor, the Standard Gauge Railway is central to Kenya’s national development program Vision 2030. This is supposed to industrialise the country and advance socio-economic development.

But the sustainability of the railway project and its contribution to government debt has been widely debated. In 2022, according to the National Treasury, Kenya’s debt stood at KSh9.15 trillion ($74.1 billion), equivalent to 67% of the country’s GDP. There are also concerns whether Chinese contracts protect national interests.

We took a closer look at the project to see if these fears were well founded. Between May 2019 and September 2020, we conducted interviews during multiple visits to Chinese construction camps alongside the railway construction sites.

We interviewed managers and employees in construction and operational departments of China Road and Bridge Corporation, the main railway project contractor. We interviewed informants from the public sector in Kenya, including from Kenya Railways Corporation and Kenya Ports Authority. We also spoke to local government workers, private sector representatives, lawyers and scholars.

Our research is unique because we directly engaged with the Chinese actors that built Kenya’s new railway. Their perspectives have been lacking in both public and academic debates. This is because public engagement of Chinese contractors is usually strictly guarded due to the state ownership of these enterprises.

Our interviews revealed that in Kenya, China Road and Bridge Corporation constantly shifted its strategies. It also adapted to local circumstances in the country and across East Africa, rather than only imposing its strategic priorities.

This compromised its own interests of economic productivity and its public image. Our finding runs counter to any grand visions of transformative infrastructure development, the lens through which Kenya’s rail project has been interpreted.

The trade-offs

We found that the Chinese entity had adopted a method called the “Early Entry Scheme” to resolve issues of delayed land compensation. This involved direct, case-by-case negotiated payments to landowners. As a result, owners vacated land for project construction before the land settlement was officially approved by the National Land Commission of Kenya.

This is uncommon among international contractors. Land compensation for a national infrastructure project is usually a responsibility of national governments. But with the delayed national compensation process, the China Road and Bridge Corporation resorted to the Early Entry Scheme.

In Kenya, this scheme was driven by various concerns. Cost-saving was one. The Chinese company had learnt from the first phase of the project that the late delivery of even a small parcel of land could raise the cost of the project if labour and equipment were idle.

Another concern was political. For a flagship project funded by the Chinese government, on-time delivery was crucial to promote China’s image as an efficient development partner.

Another interesting aspect of the project was how the Chinese company became the main operator of the Standard Gauge Railway – not just the construction contractor. According to our interviews, operating the railway would not benefit the company financially.

But the stakes were too high to leave it to chance. Operational challenges that a new company could experience might have affected the public image of the project, as well as the corporation itself. Therefore, the company had to balance its short-term financial interests with long-term reputational concerns.

So far, there hasn’t been clear evidence of the Standard Gauge Railway contributing to Kenya’s national economic development. The current investment in the railway between Mombasa and Naivasha (120km away from Nairobi) is not enough to boost the economy.

This could only be realised if the railway connected global maritime trade to the hinterland of East Africa, to accelerate transport efficiency at a regional scale. But the Kenyan and Ugandan governments did not manage to agree on financing terms to extend the project.

For this reason, in 2018, the Exim Bank discontinued funding for extending Kenya’s railway line to Uganda. This shows that Beijing’s strategies of infrastructure development are not set in stone but change, and can even be reversed, due to shifting circumstances in overseas regions.

Still, there are clear winners. Though the long-term profitability of Kenya’s Standard Gauge Railway remains in question, China Road and Bridge Corporation managed to enhance its global market position.

In Kenya alone, despite the controversies that surround the new railway, the corporation was given new tenders to complete other key national projects, such as the Nairobi Expressway.

As we show in our study, this is not necessarily an outcome of a grand strategy in Beijing. Instead, this is a result of dynamic and ever-changing efforts of Chinese companies that try to align multiple demands between their own economic interests and various political priorities in China and across Africa.

This highlights that African countries are not passive recipients of Chinese-funded projects. They have an important role to play in counterbalancing Chinese actors to shape how these projects are realised on the ground.

Gediminas Lesutis, Marie Curie Fellow, University of Amsterdam and Zhengli Huang, Post-doctoral Researcher, Tongji University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Pet supplies e-retailer Perromart becomes insolvent, gets new owner amid dozens of complaints

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SINGAPORE: Perromart, a popular pet supplies e-retailer, has been sold to a new operator after customers lodged nearly 200 complaints with Singapore’s consumer watchdog over the last five months.

Perromart’s previous sole owner, 25 Holdings, became insolvent and was placed under receivership in March, its new receiver and manager Farooq Mann told CNA on Monday (May 29).

This means it was unable to meet its debt payments on time. Companies can take several routes to rescue the business and avoid bankruptcy, including receivership – a court-appointed tool to help creditors recover funds they are owed.

Perromart – which branded itself as Singapore’s largest online pet store – first came under fire in January when customers turned to social media to air their grievances over delayed or unfulfilled orders.

At the time, its co-founder Roy Lim told CNA the company was unable to catch up on orders and support tickets due to supply chain disruptions and manpower issues stemming from the Christmas, New Year and Chinese New Year holiday periods.

Mr Lim said these were “not excuses” and that Perromart would improve its processes and operational turnaround time, as well as “launch new services that include predictive delivery based on respective products”.

However, in March, Mr Mann was appointed receiver and manager of Perromart after it became insolvent.

It has since been sold to an operator in the same industry, but Mr Mann said he was not at liberty to disclose the buyer’s name at the moment.

“The incoming owner-operator of the business is confident that the new business will be able to provide excellent customer service to all existing and new customers,” added the managing partner of Mann & Associates PAC.

The new owner-operator intends to continue operating at Perromart’s new warehouse in Kallang. Perromart had announced in February that it was in the midst of moving there.

Mr Lim did not respond to further queries from CNA on the receivership.

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A glacial Sino-American thaw

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US President Joseph Biden announced a thaw in China’s ties with the US. However, there is much more ice than meets the eye in this “thaw.”

When the US Secretary of Commerce Gina Raimondo returned from China last week, she declared that the US “won’t tolerate” China’s ban on Micron chips. Still, from Beijing’s perspective, why should China tolerate restrictions on tech supplies?

Then what will happen to China’s purchases of US Treasury bonds, for decades a cornerstone of bilateral ties and now extremely important because of the US budget crisis? Will they go ahead, or will China stop buying them or buy less? How will it impact the US and the global economy?

The urgency of Raimondo’s pressing to meet the Chinese side, the rush with which Secretary of State Antony Blinken and Treasury Secretary Janet Yellen moved in the following hours, told China that the US was in big trouble over the budget.

Speaking of a thaw and US government officials knocking on Beijing’s door to talk could give the impression in China that America is eager to mend fences with China because it feels weak.

Until a couple of months ago, all the messages coming from Washington were of fire and brimstone. Then, in March and April, the US budget crisis began and a problematic agreement had to be found between Democrats and Republicans to deal with it.

A not insignificant part of the budget goes into defense spending and generally to support domestic development plans aimed at national growth against Beijing.

It all looks very odd from Beijing, where people wonder: there is tension, but you want our money; what is it, a show?

Indeed, China has more than one reason to ask what’s happening and bargain with Washington. The US, keen on China’s bond purchases, has conceded something, although it is unclear how much.

In any case, China’s bond purchases have apparently muffled the recent saber-rattling. In the near future, the impression is that American allies will restrain controversial moves on Taiwan and elsewhere.

Meanwhile, Beijing will follow the problematic, divisive US election campaign with two candidates who are both weak on paper.

The Republican Donald Trump, more controversial than ever, is hounded by lawsuits and denunciations that make him a martyr to his follower base. The democratic Joseph Biden is cast by his foes as tired, fatigued and unable to handle the stress of the presidency.

Things should be under control for the next 18 months; there shouldn’t be a major bilateral crisis, Beijing seems to figure.

Central Asia’s moves

But politically, there is a lot of movement around China.

Tehran, on May 28, announced that talks have progressed between Iran and the US on releasing Tehran’s frozen assets in Iraq and South Korea, and an agreement on general terms will likely be achieved in the coming days. It could spin the political calculus of the area in a different direction.

Just two months ago, on March 10, China announced it had brokered a historic deal between Iran and Saudi Arabia. It inserted China into delicate Middle Eastern politics and seemed to sideline the US, recently battered in the region by the ruinous wars in Afghanistan and Iraq.

Still, at the beginning of April, CIA director William Burns visited Riyadh to confirm bilateral ties, as the US guarantees security to the Saudi court.

Now, the Iranian announcement could also pave the way for historic and new relations between Saudis and Israelis, which had been in the offing for years. Moreover, Iran’s new posture could turn the country to a new approach with Israel.

Wang Yi, China’s top diplomat (center), in Beijing on March 10, 2023, with counterparts Musaad bin Mohammed Al Aiban of Saudi Arabia and Ali Shamkhani of Iran. Image: China Daily

Certainly, nothing is set in stone but the US-China rivalry has extended to Central Asia and the Middle East, and it might have an overall positive spin for everybody.

China’s recent inroads in the region could have started a complex reassessment. This created a new Chinese presence and role in the area and spurred America to be more active, possibly taking Israel along.

China is not marginalized in this game, but certainly neither is the US. The two countries seem ready to play in the region according to different rules. This may change the political geography of the area, and no one is clear who will be the winner in the end.

Besides, the G7 met in Japan, inviting India, Indonesia, Vietnam, Australia and Brazil. It found unity on a platform against China. However, there is no longer talk of “decoupling” but rather “de-risking.”

Among America’s allies, there is no agreement to decouple economically from China. It may seem like a step forward from Beijing, but it may be more complex.

There is an agreement to take away the Chinese risk, which is already factored into companies’ budget plans. Those inflate all ventures dealing with China.

The new costs, sanctions and restrictions budgeted in China’s companies’ plans make all foreign enterprises in the country less convenient. In recent years, burgeoning tensions and drastic anti-Covid measures have pushed foreign investors to isolate their China operations from the rest of the world; new costs make it less convenient to operate in China altogether.

Still, if processes are still active in the country, the promising Chinese markets are no place to flee. But new operations are less attractive.

While the G7 was convened in Hiroshima, China invited the five former Soviet republics in Central Asia (the five Stans) to Xi’an, its ancient capital. The five Stans occupy a territory about half the size of China, with just over 70 million inhabitants.

The signal was against the G7 and Moscow, the former ruler of the region. With the extension of its reach into the Stans, Beijing projects to the Caspian Sea, i.e., the Caucasus, i.e., the Black Sea and to the great Mediterranean.

It claims that the G7 resolution is weak and that Russia’s eventual defeat in Ukraine does not harm Beijing. On the contrary, it allows China to extend its impact where it had never gone before, bringing closer border contact with Iran and the Saudis.

There are reasons to be not so gloomy in Beijing. The urgency of US talks on bond purchases suggests more generally that there is something very wrong with the US economic situation and model.

China may have its own internal economic difficulties: the crisis in the real estate sector, the problem in the trusts sector and the challenges of local governments. Still, without full currency convertibility, the central government can better manage its economic affairs, and thus political bargaining, than Washington. Or can it?

It is time for observation and thinking about the extensive framework that still holds bilateral ties together. Here, constraints are very tight for Beijing.

A two-way surplus

Over 30 years ago, the US and China established a framework that constrained both countries. This framework is presently under duress, but it is still there.

The US is still giving China its largest surplus. Last year, it was about $700 billion. Without the G7, China would not have a surplus; it would have a deficit. The domestic economy would not be the same.

If there were a trade deficit, China should export its currency or change its entire trade strategy. Both options, however, are problematic.

With the currency export option, there would be a foreign RMB (freely-traded abroad) and a domestic RMB (with a rate adjusted by the central bank), and their exchange rates would differ. It would lead toward the free exchange of the RMB, which the government doesn’t want.

Changing Chinese trade is not easy either, because developing countries do not have much purchasing power to acquire so many Chinese goods.

Furthermore, factories will close once China does not have today’s surplus, and workers will lose their jobs. Then, there will be a social and political crisis.

China uses part of its surplus to buy US debt. The United States needs China to buy its debt to buy Chinese goods. The whole process, though, has stopped being cost-effective for the United States.

Photo: Reuters/Jason Lee
China is a big buyer of US Treasury holdings. Image: Agencies / Facebook

The United States buys hundreds of billions worth of goods yearly, so the total deficit with China in many years is many trillion dollars. But China buys only $1 trillion in US Treasury bonds.

By some accounts, the United States has transferred trillions of dollars to China in 30 years. This calculation is simplistic and partial, but reflects something visible in the two countries: China is bridging the economic gap with the US and has grown much faster than America in the past 40 years.

America thinks China should be grateful for this. It isn’t; it’s rather unhappy with America.

China can spin a story at home about addressing the issue, but abroad there is a growing consensus that something is wrong with how China handles its trade.

Then, would China be prepared to handle a long-term trade deficit? It would have to bear its costs. China can manage a trade surplus easily; a trade deficit is far more complicated.

Managing a long-term deficit requires convincing other countries to accept your currency in exchange for real goods. Therefore, it also entails two elements:

  1. Long-term internal reliability and stability (a fairly transparent political system, a military, accepted diplomatic and cultural clout, etc)
  2. Allowing other countries to make money in China and quickly removing the hurdles. It would need an advanced stock market and the development of new technologies that can create new markets and drive global growth, which can be exported to other countries. The new markets will bring new opportunities to prosper.

The United States and its old “buddy” Britain have both elements. Others are different. Even Germany and Japan rely on exports.

If the framework is not rapidly fixed, it will fall apart after the present lull and America and its allies will have established a new framework with other countries. China certainly has plans and is preparing, but of course, it’s unclear whether they will work.

Here time is of the essence. Is time on China or America’s side?

China may think that the longer I have, the better I can prepare for the coming conflict; a bigger economy can withstand the pressure, while American divisions will rip it apart over a longer time.

America may think the longer I have, the better I can consolidate my alliances and the weaker Russia becomes, surrounding China with more problems that will come for China’s sputtering domestic economy.

But, in the meantime, the crux of the matter might be different as both sides bide their time and draw the wrong conclusions about the other side’s weakness. The thaw doesn’t seem set to last and brewing troubles will get bigger and possibly come back with a vengeance.

Moreover, is the lull real? Aside from any rational calculations, the world around China is exceptionally volatile and many things can blow up, irrespective of Beijing’s intentions.

US domestic strife can find a sudden unity for any given incident, coalescing against China, the common denominator of the nation. Then, the issue of China’s bond purchases could vanish. Chinese assets abroad would be seized or frozen, as the same would happen to Western holdings in China. It was already the case with Russia.

Meanwhile, can there be a systematic solution to avoid a war? And what will be the price for peace? At the moment, not many seem to think about that.

This essay first appeared on Settimana News and is republished with permission. The original article can be read here.

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Deflation risk stalking China’s economic recovery

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China’s central bank is pushing back with growing regularity on market worries that Asia’s biggest economy may be sliding toward deflation.

In April, China’s consumer price index rose just 0.1% year on year, putting the economy on the edge of negative territory but not yet deep into the problem.

Indeed, China may currently be experiencing “disinflation” rather than a long-term trend toward deflation. Yet if Japan taught policymakers around the globe anything it’s that deflation concerns can quickly take on a life of their own. 

That’s a problem that China must not take lightly, economists say. And it’s high time People’s Bank of China Governor Yi Gang shut down – and firmly – a narrative that Beijing hardly needs as market worries mount about the health of China’s post-Covid economic recovery.

Strategist Vincent Chan at Aletheia Capital speaks for many when he warns that China is at the “borderline of deflation.”

That same goes for analyst Kelvin Wong at OANDA. “To address this ongoing growth slowdown in China that may lead to a deflationary spiral, which in turn can potentially trigger an adverse impact on countries that export goods and services to China such as Singapore, the Chinese central bank needs to switch away from its current conservative stance to loosen its liquidity tap further to stimulate growth,” Wong argues.

Long-time Japan observers may detect some troubling echoes as Fu Linghui, spokesperson for China’s National Bureau of Statistics, insists that there’s “no deflation” in the economy. And if there is, it’s “transitory.”

This last word might trigger PTSD from similar assurances emanating from Tokyo in the late 1990s. Or their mirror image — “don’t worry, inflation is transitory” — coming from Washington these last two years.

As Nikkei Asia points out in an investigative report this week, consumer prices in mainland provinces Jilin, Shanxi, Guizhou, Liaoning, Anhui, Henan and Shanghai turned negative in April. Data from Chinese research company Wind Show corroborate Nikkei’s findings.

The question, of course, is what to do. A key Xi priority has been to reduce leverage and debt — from local government balance sheets to property developers.

Yet if the focus is on debt reduction while nothing is done to fix the housing sector, then that could be a recipe for deflation.

For now, says economist Raymond Yeung at ANZ Research, the “core view is that China’s economy is deflationary.”

Others argue it’s too early to know where China’s price trends will be six months from now.

China’s price trends could break either way in the coming six months. Photo: Facebook

“While claims that China has entered a deflationary period are excessive, the data indicate that China’s economy continues to be hamstrung by low effective demand,” says economist Yu Yongding, who served on the PBOC’s Monetary Policy Committee from 2004 to 2006. “Official figures also support the claim that China’s GDP growth has been below potential for some time.”

Yu notes that Xi’s government seems reluctant to shoot for a higher growth target than this year’s 5%, in part out of fear that it might exacerbate China’s debt imbalances. At the same time, though, Yu says there’s a risk of a “self-fulfilling prophecy, by weakening confidence and failing to exploit growth potential fully.”

Some of Beijing’s policy options, including cash transfers, might give household consumption an immediate lift.

But “as China’s government well knows,” Yu notes, “consumption is a function of income, a sustained, broad-based increase in incomes depends on economic growth, and infrastructure investment is traditionally the state’s most effective instrument for boosting growth when effective demand is weak. Despite past investments, China still has a large infrastructure gap that urgently needs to be closed.”

Rescuing the property sector might pay the highest dividends. Since January, Xi’s government unleashed a barrage of measures to reduce restrictions on borrowing by developers, curb risks of “capital chain breaks” in the sector as property purchase contracts fall through suddenly, extend lower mortgage rates to incentivize demand for homes and limit commissions for real estate agents.

Economists point out that easing the so-called “three red lines” policy is becoming more urgent. It establishes caps on key metrics debt-to-cash, debt-to-assets and debt-to-equity ratios. Many see this policy as the trigger for many of the biggest real estate stumbles in recent years.

Since the directive already demands that developers disclose details on their debts, it seems feasible to allow property companies to leverage up a bit and delay deadlines for debt targets without fanning new bubbles.

Other solutions include extending lower mortgage rates to first-home buyers in environments where prices of new properties are slumping. There’s also scope for once again allowing private equity funds to play a bigger role in raising capital for residential property projects.

Whatever the strategy, more attention must go toward restoring investor confidence, as strategist Winnie Wu at Bank of America Corp sees it. Since the property sector is “a key concern” for global investors, she says, revitalizing it seems crucial to restoring confidence in Chinese asset markets.

That confidence seems in short supply this month. Chinese stocks are on the precipice of bear market territory amid worries about a slowing economy, geopolitical and trade tensions and deflation fears.

Mainland shares traded in Hong Kong – as measured by the Hang Seng China Enterprises Index – are near the 20% loss threshold for the year.

The drop in profits among Chinese industrial firms, which had a rough first four months of 2023, is weighing on the broader indices. This downshift told skittish investors all they need to know about China’s slowing demand and deepening factory-gate deflation.

Data due out Wednesday – especially China’s Purchasing Managers Index for the manufacturing sector – are widely expected to signal further contraction in April.

A Chinese worker at a spinning factory in Xingtai City, Hebei province. Photo: Xinhua

Analyst Karl Shen at Fitch Ratings notes that China’s secondary-home market “has been cooling since April, with a fall in the number of listed-for-sale homes, lower asking prices and fewer transactions.”

This slowdown, Shen says, follows a “strong rebound” in the first quarter, “suggesting homebuyer confidence remains fragile amid an uncertain economic outlook and weak employment prospect.”

Shen says the drop in average asking prices is likely driven by homebuyers’ hesitation to make purchases and home-upgraders’ selling of their existing homes at lower prices to facilitate faster transactions.

The number of homes listed for sale has also decreased, indicating that many homeowners are delaying the sale amid pricing pressure, and may continue to weigh on transaction volume.

Even so, economist Wei He at Gavekal Research can’t help but wonder if the negativity is overdone.

“Markets have executed a complete volte-face on China’s growth prospects, from exuberance on an expected world-shaking boom to pricing in deep pessimism — is this reversal justified?” he asks.

“For commodity prices, the answer is probably yes. Even a strong cyclical rebound led by spending on consumer services was never going to be as good for commodities as the investment-driven cycles of the past. And the bounce in construction once expected by commodity producers has clearly not materialized, with property developers scarred by the past and uncertain about the future.”

Yet, He adds, “for Chinese government bonds and the renminbi, the recession trade has probably overshot. Recent market prices imply a growth outlook for 2023 as bad as that during the depths of 2022’s lockdowns — a fairly unlikely outcome. Despite all the bad headlines, the labor market is still recovering and companies are planning to expand. This could be a good moment to sell Chinese bonds and buy the renminbi.”

It’s also a good moment, though, for Xi’s new premier, Li Qiang, to buttress his reformist bona fides. Since rising to the No 2 job, Li has managed to lower the temperature surrounding Beijing’s crackdown on Big Tech. Now, it’s time to recalibrate economic dynamics in China – starting with a property market in dire need of restructuring.

The lessons from Japan are to act early and boldly to stop deflationary forces in their tracks. By the time they become ingrained, it might already be too late.

Follow William Pesek on Twitter at @WilliamPesek

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CNA Explains: Why did the Singapore dollar hit an all-time high against the Malaysian ringgit?

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The currency had surged by 1.8 per cent on the day of Mr Anwar’s appointment on Nov 24 – the largest single-day gain since March 2016. 

He noted that predictably, the ringgit has not seen similar gains since. 

“In November, the ringgit strengthened primarily due to the semblance of political stability post-election. However, it has since depreciated due to external factors such as the (US Federal Reserve’s) highly aggressive interest rate hikes, the US banking crisis and geopolitical uncertainties,” said Mr Afiq Asyraf. 

Mr Hafidzi Razali, a senior analyst with strategic advisory firm Bower Group Asia, added the weaker ringgit recently can be attributed to China’s ongoing economic recovery.  

“Given that China is one of Malaysia’s largest trading partners, China’s economic recovery is important for the value of (the ringgit),” said Mr Hafidzi. 

He noted that Malaysia’s exports had contracted 1.8 per cent year on year in the first quarter of 2023, and that this could largely be attributed to the decline in exports to China. 

Domestically, Mr Hafidzi posited that Malaysia’s relatively weaker investment opportunities and impending structural reforms have held back the ringgit’s value. 

“Private investment opportunities remain relatively limited; compared to developed economies such as the US and Singapore,” said Mr Hafidzi. 

“The market is still anticipating whether impending structural reforms will be implemented (by the Malaysia government); particularly on large subsidy bills, low tax base and the ability to attract value-added foreign direct investments,” he added. 

WHAT LIES AHEAD FOR THE SGD TO MYR RATE? 

Analysts whom CNA spoke to added that the value of the Singapore dollar to the Malaysian ringgit could spike to new highs in the near term especially if the US dollar continues to appreciate.

However, some have stressed that the Singapore dollar to Malaysian ringgit value would stabilise given that the US government has agreed to raise the debt ceiling and that Congress would vote on the deal on Wednesday. 

After the agreement was announced on Saturday, US President Joe Biden said that the deal was “good news for the American people, because it prevents what could have been a catastrophic default and would have led to an economic recession, retirement accounts devastated, and millions of jobs lost”.

The tentative agreement to suspend the US$31.4 trillion debt ceiling must now get through the Republican-controlled House of Representatives and Democratic-led Senate before June 5 to avoid a crippling first-ever default.

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Commentary: Warren Buffett’s intriguing bet on Japan

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THE CURRENCY FACTOR

The foreign currency earnings of the sogo shosha, backed by hard commodities from sources around the world, set the trading groups apart from companies with revenues and costs that depend more heavily on prices in domestic markets. They create multiple ways for Buffett to profit from his investment, even if the trading companies’ vaunted plans to reinvent themselves for a world without fossil fuels do not proceed as planned.

Among the most tantalising is the fact that Buffett has bought shares in companies that earn a portion of their profits in dollars, while funding his purchase with long-term debt denominated in yen.

If the Japanese currency were to depreciate, the dollar value of Berkshire’s outstanding yen-denominated debt would fall. At the same time, the value of the sogo shosha stakes in dollar terms may not decline so much because of their foreign currency earnings. If the value of the debt falls more than the shareholdings, then Buffett could reap a profit even without much change in underlying business performance.

It is surely not Buffett’s intent to bet against the yen. And using borrowed money to buy stock in companies with significant foreign earnings is not, of course, the most practical way to do this. Set that misgiving aside, if only for a thought experiment, and you can see how a trade like Buffett’s might in theory look attractive to a very different kind of investor.

Speculators of an atavistic bent are eyeing the monetary institutions of the developed world with increasing suspicion. Gold is trading near all-time highs, and while a rupture in the systems of economic exchange may not be anyone’s base case, it lies uncomfortably close to the universe of historical possibility.

Ray Dalio, the Bridgewater founder whose investments are informed by a close reading of economic history, notices a striking pattern in the rise and fall of the “reserve currency empires” of the past 500 years.

Throughout that time, he writes, “seismic shifts always took the form of too-large debts that couldn’t be paid with real money so there was a lot of printing of money”. That, in turn, “led to big debt restructurings via writing down and monetising debt”.

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