How Xi Jinping is taking control of China’s stock exchange By using listing and trading rules to direct capital into sectors that fit his priorities, the president wants the market to serve the state. Hudson Lockett and Cheng Leng Sep 29, 2023 https://www.afr.com/policy/foreign-...rol-of-china-s-stock-exchange-20230926-p5e7nc When Jilin Joinature Polymer made its debut on the Shanghai Stock Exchange on September 20, it became the 200th company to float on China’s domestic markets this year. Collectively they have raised more than $US40 billion ($62 billion), more than double the amount raised on Wall Street and almost half the global total. Yet the country’s benchmark CSI 300 index is down 14 per cent since January, having fallen by a fifth last year. It has underperformed other major markets such as Japan and the US, as worries mount about China’s slowing economic growth and a liquidity crisis in the real estate sector. Chinese President Xi Jinping wants to use domestic equity markets to reduce dependence on property and infrastructure development to drive growth. But his “new whole-nation system” prioritises party policy above profit. David Rowe The highly unusual situation of a seemingly stagnant market welcoming hundreds of new companies is a consequence of significant policy shifts in Beijing that have ramped up over the past year. President Xi Jinping is intent on boosting investment into sectors that fit with his priorities for control, national security and technological self-sufficiency, and is using stock exchanges to direct that capital with the aim of reshaping China’s economy. “The old playbook of whenever there’s growth weakness, you stimulate the property market or build infrastructure – that’s no longer relevant,” says Kinger Lau, chief China equity strategist at Goldman Sachs. “Meanwhile, the IPO market remains quite vibrant, and clearly there’s a policy incentive to direct capital to areas that are deemed strategically important to China.” Lance Noble, head of China Reality Research at investment bank CLSA, says the new approach centres on the top-down co-ordination of resources from government, industry, finance, universities and research labs to accelerate technology breakthroughs and help reduce China’s reliance on the West. But making markets serve the state’s priorities is a big departure from past administrations and the pro-market position initially espoused by Xi after he became party leader in 2012. “These measures and reforms are running up against the previous mindset of setting up a relatively market-oriented market mechanism, and there’s a huge gap between the policy guidance and market expectations,” says Zhang Jun, dean of the School of Economics at Fudan University in Shanghai. Nor is there any guarantee that convincing China’s IPO investors to enthusiastically back new listings, or leaning on large asset managers and insurers to become long-term investors in chipmakers or electric-vehicle manufacturers, will result in the kind of job and wealth creation for ordinary Chinese that property and infrastructure investment previously did. The big idea Roughly a year ago, Xi told top leaders assembled in Beijing that China needed to mobilise a “new whole-nation system” to accelerate breakthroughs in strategic areas by “strengthening party and state leadership on major scientific and technological innovations, giving full play to the role of market mechanisms”. That “new” in “new whole-nation system” and the reference to “market mechanisms” distinguish Xi’s vision from that advanced under Mao Zedong, who ruled China from 1949 to 1976. Mao’s original “whole-nation system” entailed Soviet-style top-down economic planning, delivering technological advances including satellites and nuclear weapons, but not prosperity for the masses. Xi’s calls for innovation co-ordination at higher levels of government came after a string of disastrous venture capital-style investments in regional chipmakers by local governments and allegations of corruption at the National Integrated Circuit Industry Investment Fund, a key player in China’s semiconductor strategy. The NICIIF had generally sought to balance policy goals with investment returns, reinvesting profits across the industry. But it had come under criticism for frequently funding low-cost and profitable chip design companies while failing to help higher-end Chinese chip manufacturers catch up with Korean, Taiwanese and other foreign rivals. The government wants other electric car companies to follow BYD’s lead and list on the stock exchange. Getty Noble says high-profile references to this “new whole-nation system” in Xi’s speeches and articles published in top Communist Party journals were “clearly blinking signals that this is a big priority ... and very important in terms of what China’s science and technology future will look like.” Whereas Mao shut down China’s stock exchanges, Xi wants to use domestic equity markets to reduce dependence on property and infrastructure development to drive growth. But his “new whole-nation system” prioritises party policy above profit. This helps explain why the party’s top cadres have been fast-tracking IPOs but remain reluctant to deploy large-scale property and infrastructure stimulus to reinvigorate economic growth. In their eyes, returning to the old playbook would only postpone an inevitable reckoning for debt-laden real estate developers and delay the planned transition to a new Chinese economy. Key to that shift, Goldman’s Lau says, is getting companies in sectors such as semiconductor manufacturing, biotech and electric vehicles to go public. With sharemarket investors backing them, they can scale up and help drive the growth in consumer spending needed to fill the gap left behind by China’s downsized property market. Red light, green light Xi’s administration was already channelling hundreds of billions of dollars from so-called government guidance funds into pre-IPO companies that served the state’s priorities. Now it is speeding up IPOs in Shanghai and Shenzhen while weeding out listing attempts by companies in low-priority sectors through the launch of two intertwined systems. The nationwide “registration based” listings system, rolled out in February, made China’s formal process for stock market listings more transparent and ended an often lengthy process of official vetting by the China Securities Regulatory Commission for every IPO application. Just as important is a behind-the-scenes “traffic light” system, in which regulators instruct Chinese investment banks informally on what kinds of companies should list. Companies such as beverage makers and cafe and restaurant chains get a “red light”, in effect prohibiting them from going public, whereas those in strategically important industries get a “green light”. The CSRC did not respond to a request for comment on the traffic light system. But a director at one large Shanghai-based brokerage says officials are clearly “trying to push those strategic sectors like high-tech manufacturing, renewables and other new economy-related industries to list and raise capital and flourish”. Listings in those sectors proceed quickly while companies that do not align with policymakers’ priorities find themselves without the investment bank backing needed to go public, the director adds. This approach could run into difficulty if shares in those companies going public are sold down immediately by investors hoping to cash out at a profit when prices rise appreciably in the first few days of trading. Regulators have guarded against that risk by extending “lock-up” periods, during which Chinese investment banks and other institutional investors who participate in IPOs are not permitted to sell stock. “Keeping these investors locked in for longer keeps share prices stable,” says Xia Mi’ang, an analyst with Pacific Securities. “It will push listed companies to focus on improving profitability, and make [IPO] investors bear investment risks while letting them enjoy dividend returns.” Regulators have also restricted the ability of company insiders – be they directors, pre-IPO backers or so-called anchor investors – to sell their shares, especially if a company’s shares fall below their issue price or it fails to pay dividends to its shareholders. The day after these changes were announced, at least 10 companies listed in Shanghai and Shenzhen cancelled planned share disposals by insiders. An analysis of the new rules’ impact by Tepon Securities showed that almost half of all listed companies in China now have at least some shareholders who cannot divest. Market discipline This new and co-ordinated approach to capital markets is already resulting in disruption that officials are scrambling to contain. One big concern is that the flood of new listings has dragged down valuations of existing stocks, because individual investors often sell shareholdings in companies that are already listed to raise the money they need to bid for shares in new arrivals. The downward pressure on the wider stock market from this year’s listings glut has been so great that China’s securities regulator recently announced plans to slow the pace of new listings to “boost capital market investor confidence”. But that effort has so far had little visible impact. Even a surprise move to boost turnover by slashing trading fees managed to push the market only about 2 per cent higher the day it was announced. By comparison, a reduction in trading fees in 2008 caused shares to rise by 9 per cent. With the market failing to respond in the way it once did, authorities are encouraging a wide range of domestic institutional investors to buy and hold shares in strategic sectors to prop up prices. The latest such move came earlier this month, when China’s insurance industry regulator lowered its designated risk level for domestic equities in an attempt to nudge normally cautious insurers to buy more stocks. Such measures show that Xi’s stated plan to give “full play” to the role of markets comes with an important rider: those markets will take explicit and frequent direction from the party-state. “They’re listing the firms and they’re making them attractive because they have government subsidies or enjoy low taxes,” says Thomas Gatley, an analyst at Gavekal Dragonomics. “The strategy is market driven, but not fully market driven – the government’s thumb is on the scale.” Risky business Not everyone is thrilled by the enhanced role of the state in China’s stock markets. For those who can still freely cash out of Chinese stocks – namely foreign investors – there has been little hesitation to do so this year. Last month, offshore investors trading through a market link-up between Hong Kong and mainland stock exchanges sold a record $US12 billion of Chinese equities, according to Financial Times calculations based on stock exchange data. Fund managers say the country is in the middle of a structural derating, whereby international investment funds permanently reduce the proportion of capital they judge prudent to allocate to China’s stock market. That undermines longstanding efforts, including initiatives launched early in Xi’s tenure, to persuade foreign fund managers to take up larger positions in Chinese companies. Back then, the belief that international capital would help dampen share price volatility – largely stoked by the country’s trend-driven retail traders – helped push pro-market reforms that resulted in Chinese securities being included in the global benchmarks used by large index-tracking funds. Now, as foreign funds are dumping their holdings, traders and strategists say China’s “national team” of state-run investors is busy buying in as part of an effort to prevent a more serious market rout. “For government-related entities, their participation in the equity market has gone up quite a bit over the past few months,” says Lau at Goldman. “And what they’ve been buying is very much in line with long-term strategic sectors.” But veterans of Chinese finance say this approach is unsustainable, and warn that parking money in strategic stocks just to support valuations is a waste of capital that could be put to more effective use elsewhere. “Rather than changing market expectations through altering supply or demand, [policymakers] are guiding buy-and-hold funds into the market ... which cannot work in the long term,” says an investment banker at one of China’s largest brokers. “Money should not be spent like this,” the banker adds. “The reason they’re doing it is because it’s the easiest option.” Costs of control Some investors are warning that the ever-expanding system of state controls over equity investment could do lasting damage to Chinese stocks’ domestic and global appeal. Jerry Wu, a fund manager at London-based Polar Capital, says that “at a minimum, investors want to see a consistent and persistent trend in policymaking that shows Chinese policymakers are pragmatists again, that they care about economic growth and private businesses”. But Zhang, at Fudan University, warns the tensions between the “previous market-oriented path and the current new whole-nation approach ... may continue for the foreseeable future”. Even if the disruption to China’s stock markets eventually fades and policymakers’ plan to transition to a consumer-focused economy powered by heavy investment in companies that serve Xi’s policy priorities succeeds, there are reasons to question whether the results will live up to his vision. Economists say the tech sectors being favoured for listings by Beijing – semiconductors, EVs, batteries and other high-end manufacturing – are simply not capable of providing the scale of employment opportunity or driving the levels of consumer spending anticipated by top Chinese leaders. The tech sector is a hot investment ticket now, but economists say there are problems with Beijing favouring it for listings. Bloomberg “There’s two problems with focusing on investing in tech,” says Michael Pettis, a finance professor at Peking University and senior fellow at Carnegie China. “One is that tech is very small relative to what came before [from property and infrastructure], and two is that investing in tech doesn’t necessarily make you richer – it’s got to be economically sustainable.” Rising share prices could create a powerful wealth effect for China’s middle classes in the same way that rising house prices once did. But the government’s inability to engineer a stock market rally this year has further undermined retail investors’ confidence. If Chinese equities continue to lag other markets over the long term, that could start to weigh on household spending and further hobble growth. Fraser Howie, an independent expert on Chinese finance, points out that China is not the only country where artificial intelligence, semiconductors and electric cars are the hot investment ticket. “A year ago, everyone was talking about how China was the global AI leader. Then ChatGPT came along and everyone went: ‘Oh, well, maybe markets aren’t as stupid as we all thought’,” he says. He points to a global rally in AI-related stocks that has largely excluded Chinese companies and the listing of British chip designer Arm in New York. That IPO generated $US5 billion for Arm’s parent company SoftBank, more than any single listing in China has raised this year. “Xi Jinping wants all these things, but he wants them in a particular way because self-sufficiency and political control are very important to him,” says Howie. “That comes with limits. It’s like saying, ‘you must do all of this with one hand tied behind your back’.”
Crew members of China’s South Sea Fleet taking part in a drill in the Paracel Islands. Photo: AFP China, Saudi Arabia to Hold Joint Naval Drills Next Month: Beijing Staff Writer With AFP September 28, 2023 https://www.thedefensepost.com/2023/09/28/china-saudi-arabia-naval-drills/ China and Saudi Arabia will hold their second-ever joint naval drills next month, Beijing’s defense ministry announced Thursday, as China forges deeper ties with the Middle Eastern power. The drills, dubbed “Blue Sword 2023,” will take place in China’s southern province of Guangdong in October, Beijing said. “This joint training focuses on overseas maritime counter-terrorism operations, conducting exercises on sniper tactics, boat driving, helicopter landing, and joint rescue,” defense ministry spokesperson Wu Qian told a press briefing. The two countries previously held joint naval drills in 2019, according to the official Saudi Press Agency. They are “aiming to deepen practical and friendly cooperation between the two militaries and improve the level of practical training for the troops,” Wu said. The exercises come as Beijing forges deeper ties with Riyadh and plays peacemaker in the Middle East. This year, China brokered a deal that saw longtime regional rivals Saudi Arabia and Iran agree to restore ties and reopen their respective embassies.
Chinese sailors feared dead after nuclear submarine gets stuck underwater: reports Western intelligence reports say 55 Chinese sailors are dead after a nuclear submarine became trapped underwater — but China denies it. Harry Goodwin – The Sun October 4, 2023 https://www.news.com.au/technology/...s/news-story/f6ea0d7644e43915a4d176e5651f98cb There are 55 Chinese sailors feared dead after their nuclear submarine reportedly got stuck underwater. A report by UK intelligence experts said the sub hit a “chain and anchor” trap intended to snare Western vessels lurking off China’s Shandong province. The crew reportedly suffocated after a “catastrophic failure” of the 107m sub’s oxygen system, The Sun reports. It is not clear whether the trap mangled the oxygen system, or if the crew had already suffocated before the sub sank and became stuck. The vessel is believed to be a cutting-edge Type 093 equipped with torpedoes and silent “ghost” engines. A classified briefing obtained by the Mail reads: “Intelligence reports that on 21st of August there was an on-board accident while carrying out a mission in the Yellow Sea. Beijing has claimed the reports of the sub’s destruction are ‘completely false’. Picture: VCG/VCG via Getty Images “Incident happened at 08.12 local resulting in the death of 55 crew members: 22 officers, 7 officer cadets, 9 petty officers, 17 sailors. “Dead include the captain Colonel Xue Yong-Peng. “Our understanding is death caused by hypoxia due to a system fault on the submarine. “The submarine hit a chain and anchor obstacle used by the Chinese navy to trap US and allied submarines. “This resulted in systems failures that took six hours to repair and surface the vessel. “The on-board oxygen system poisoned the crew after a catastrophic failure.” The British Royal navy declined to comment. Beijing claimed the news of the sub’s destruction is “completely false”, further deepening the mystery. This article originally appeared on The Sun and was reproduced with permission
It’s official: The era of China’s global dominance is over https://www.businessinsider.com/chi...l-estate-debt-bust-american-companies-2023-10 We've reached the end of an era for the Chinese economy. For the past three decades, China has been on the upswing of a supercycle that saw an almost uninterrupted expansion of the country's capacity to manufacture, appetite to consume, and ability to project power across the world economy. The Chinese Communist Party relentlessly pursued economic development over all else, even when that single-mindedness pushed the party to make debilitating policy mistakes — creating a massive bubble in the property market, saddling provinces with loads of debt, and failing to transition away from an overreliance on investment. There was no time to stop for corrections while China's mind was on money alone. This era of expansion was not only a boon for Beijing, it also helped fuel global demand. Countries relied on China's hunger for speedy modernization and industrial might to supercharge their own development. Even American companies saw China as the next great global market — and made bets accordingly. They lost those bets. President Xi Jinping has shifted the CCP's raison d'être to national security over the economy. Getting rich isn't China's big project anymore; the project is power. As a result, both the government's priorities and behavior have changed. In the past, whenever it seemed like a recession was on the horizon, the CCP came to rescue. There's no hefty stimulus coming this time. Nor will the explosive growth that experts once expected from China return. Beijing's relationship with the outside world is no longer guided by the principles of economic rationality, but rather its yearning for political power. "This isn't about the economy anymore, it's all about advanced technology and weaponry," Lee Miller, the founder of the Chinese economic surveyor China Beige Book, told me. In response, American businesses need to consider how else Beijing's decision-making may now be flipped on its axis. For everyone from American farmers to pharmaceutical companies, this means shrinking demand and unstable supply chains. For policymakers, it means a China that is harder to mollify when conflicts arise. For the rest of us, it's a more precarious world. A spent economic system The Chinese economy has been bending under the weight of its structural problems for almost a decade now, but since the end of Xi's COVID-lockdown policy, it's become clear that its growth model is well and truly broken. Beijing's story so far has been to claim that, like other economies on the mend from the pandemic, China will in time resume its normal growth pattern. Instead, it looks like the economy is falling behind. Let's start with the country's real-estate market, the importance of which cannot be overstated. Not only is it the biggest source of wealth for Chinese households, real estate is also the mechanism through which local governments are financed. Instead of property taxes, municipalities sell large swaths of land to property developers and then use the revenue for basic social services like fixing roads and paying out pensions. Cities like Shanghai and Beijing get a lot of attention, but they make up just a fraction of the property market. Property firms did the most building in third-tier cities where people aren't as wealthy. This is where you'll find China's infamous ghost cities. It's been clear for years that the Chinese real-estate market has been in trouble. China has a population of 1.4 billion, but it has built housing for a population of 3 billion, according to expert estimates. Many of the mega-developments became empty monuments to Beijing's insatiable desire for growth. In Shenyang, farmers have taken over a development of empty mansions for cattle grazing. Worried that the sector would implode, Beijing attempted on multiple occasions to limit the credit that was fueling the bubble. But because real estate played such a vital role as a government-funding mechanism, China had to keep building, despite these troubles. Authorities didn't want to change the way local governments funded themselves or allow Chinese household finances to crumble, so they could not let prices fall. That credit addiction remains. But this system, supported by speculation and easy money, is starting to break down. Country Garden, China's largest real-estate developer, is on the brink of collapse. In a sign that Beijing has grown tired of this game, Xu Jiayin, the chairman of Evergrande, another embattled real-estate behemoth, has been detained by authorities. Money-starved provinces are being forced to ask for bailouts — which the federal government doesn't want to give — and sell assets that the local governments claim are illiquid. The country's massive, opaque shadow-banking sector, which served as the backbone for the real-estate boom, is also under pressure. At least one $87 billion money manager, Zhongrong Trust, skipped payments to investors this summer, sparking protests. "We've not been in a situation where so many developers are defaulting and consumers are questioning whether or not they should prepay for an apartment," Charlene Chu, the managing director and senior analyst at Autonomous Research, told me. "Before they were thinking, 'Prices are rising so fast, I need to get in.' Now prices are declining and the urgency to buy has vanished, so they're waiting." Official data has shown relatively modest price declines so far, but like a lot of official economic data coming from Biejing these days, it's hard to take those numbers seriously. Private data shows prices falling by 15% in metropolises like Shenzhen and Shanghai. In tier-two and tier-three cities, prices have fallen by as much as 50%, according to Bloomberg. "Eighty percent of all sales by area are in tier-three and below cities," Chu said, adding that many of these places are facing long-term structural problems. "If their market doesn't come back, the entire market doesn't come back." Little fires everywhere all at once The real-estate sector is the most visible sign of China's fading star, but other key parts of the economy are showing strain as well. While the rest of the world is battling inflation, China is still in deflationary mode. August CPI came in at 0.1%, up from minus-0.3% the month before, showing an overall lack of domestic demand. Exports — which make up 40% of the country's GDP growth — hit their lowest level in three years in July, falling 14% from the same time a year before. August export figures showed some improvement but still came in down 8.8% from the year before. Overall, Autonomous expects China's exports to slow 8% compared to last year. Chu — who has been called the "rock star" of Chinese debt analysis — told me that this weakness is not just a result of a cyclical downturn; it's a part of a more permanent shifting of supply chains caused by trade tensions with Europe and the US. These are powerful forces that are not easily reversed. Once multinational corporations no longer see China as a source of steady growth, they could begin changing their plans to invest. At the same time, domestic anxiety about shrinking employment may change the basic consumer behavior that powered China's rise. This can create a vicious, self-reinforcing cycle that keeps investment out and spending low. Chu started the year with one of the weakest growth outlooks for China on Wall Street, and the second half is looking worse. Autonomous' proprietary growth index for China, the Real Autono Economic Activity Composite, projects the country's economy to grow by 3.8% for all of 2023, down from its original 4.2% projection in January — and worse than Autonomous projected during the depths of China's COVID lockdown. Beijing is projecting 5% growth — and given how tightly the CCP likes to manage expectations, officials will stick to that number come hell or high water. It's a far cry from the double-digit growth policymakers used to demand and a signal to the Chinese people that Beijing is not going to direct its banks to spew credit to get the economy moving faster again. Victor Shih, an associate professor and the director of the 21st Century China Center at the University of California San Diego, told me that when people ask him if there will be a financial crisis in China, he tells them that China "is constantly in a financial crisis." It's like the authorities are playing a game of whack-a-mole, trying to contain any shocks to the financial system because they fear social instability. That means there can be no correction, but if there's no correction, there's no deleveraging, and if there's no deleveraging, the moles will only multiply. Zombies in the Middle Kingdom The economy has put Beijing in a bind. There's too much for the Chinese Communist Party to do, and not enough money or time to do it. Allowing a property-market correction, bailing out local governments, creating a new funding mechanism for them, developing a social safety net for the people through all this instability — all of it costs money. And even if the capital were there, policymakers fear what this disruption could do to their grip on power. Falling property prices and shrinking exports would weigh on the Chinese people's wealth, and the government is concerned that a meaningful correction would cause unrest. "Every time there are severe property-price declines, Beijing views it as a risk to social stability," Chu said. Plus, Beijing may need to conserve its firepower for other concerns coming down the pipeline. In the long-term, the CCP has to worry about China's demographics. Thanks to government mandates like the one-child policy, the country's population is rapidly aging — and even started to decline in 2022. The workforce will soon begin shrinking: Right now there are three working-age adults for every retired person in China, according to data compiled by J Capital Research, and by 2050, that ratio will hit one to one. Without booming property prices or continued growth, the growing pool of retirees will put a heavy burden on China's threadbare social safety net. GDP per capita is currently about $12,800. When Japan started struggling in 1991 with a similar dynamic — aging population, sky-high debt, and slowing growth — its GDP per capita was more than triple that amount, at $41,266 in today's dollars. China will get old before it gets rich, placing the task of growing the economy on fewer and fewer people as time goes on. "What's really a shame is that China never seized the opportunity on the way up to build a comprehensive social safety net where people feel they don't have to save a lot of money for a rainy day — for healthcare, education, what have you," Chu told me. "Most Chinese people do not feel they are covered for everything they need … This is what's going to make moving to the domestic, demand-driven model difficult." Unless dramatic action is taken, the future of China's economy is looking less like a young dynamo and more like an old, slow-moving blob. Last week, Bloomberg reported that policymakers are considering a modest $137 billion stimulus — just enough to meet its already comparatively low annual growth target, and nothing in the way of reform. "There are healthy parts of the economy, it's just the zombie parts that have to be dealt with," Shih said. "It doesn't look like they are doing that now, but it will be a bigger and bigger drag on growth. I think the slow growth will cause such a serious employment and capital-flight problem, there could be political instability." But again, that's could, not will. And because its priority is now power — where gains are much more idiosyncratic — it's a risk that Beijing has shown it is willing to take. A new, more dangerous era The idea that Chinese policymakers connect political stability and economic growth is dogma in the West, but what we're witnessing now suggests that's not the case — at least not in practice. Beijing has not spent money on — or talked about raising money for — social programs for its aging population, nor has it made any attempts to tackle the cost of living for young families. If economic modernization was the most important thing, these would have been on the docket years ago. But they're not. Policymakers don't want an implosion, but they're not pushing for warp-speed development anymore either. "All the policies are now determined by Xi Jinping himself, and his priorities are spending money to engage in a technology and national-security race with the US," Shih explained. Once upon a time, infrastructure and property were the big beneficiaries of Beijing's largess, now it's the military. US government estimates put China's annual defense budget at about $700 billion, much higher than independent NGO estimates of about $290 billion and just shy of what the US spends on defense annually, $800 billion. "If we're talking about the economic relationship between the US and China, there just isn't that much going on," China Beige Book's Miller told me over the phone. "The worry we have is not that Chinese consumers will do even less. It's that all the global supply chains are intermixed in industries like pharmaceutical and green tech. If things get too tense, it's potential supply-chain snarls that coil and screw up US business." Miller told me that multinational corporations are not only unsure of where to go next, they also lack full transparency as to where China impacts some supply chains. "It's not just that we have a problem," he said, "it's that we don't even know how big the problem is." China has never been a big consumer of American imports, but certain sectors will get hurt as our trade relationship is reset. A faltering Chinese economy will suppress demand for commodities like oil seeds and grain, hitting US farmers especially hard. It will also eat into corporate profits for companies such as Nike and Starbucks that made large bets on Chinese consumers. US restrictions on technology exports — created to counter new national-security concerns — threaten the more than $50 billion of revenue that US chipmakers generate selling to China. Wall Street doesn't have to go home, but it can't stay here. The WSJ reported that foreign executives are jittery about visiting China, afraid they'll never be allowed to leave. The great traveling circus that is hot money and adventure capitalism is already scouring the world for its next opportunity in countries like Mexico and Vietnam. These are forces bigger than Beijing. Earlier this month, the House Select China Competition Committee held a hearing in New York City, calling on witnesses to describe what risk looks like with a Chinese Communist Party that's less committed to the free flow of capital and more concerned with flexing its muscles within its region. In her testimony, Anne Stevenson-Yang, the founder of J Capital Research, said that the US — especially its Midwest industrial heartland — isn't invested in China because of market demand. It's invested there for the outsourcing of mechanical goods and labor. For the US economy, China as a workshop is much more important than China as a consumer. Companies will need to scour their supply chains for potential vulnerabilities and consider their exposure accordingly. When Beijing is focused on national security, rules can change at the drop of a dime. Foreign businesspeople who once sought efficiencies going in may find it cumbersome to get out. "The biggest risk there is the currency," Stevenson-Yang explained. "As companies make more money and want to move it to the US, they run into currency controls and they might not be able to get dollars out." It's time to imagine a future where China does not become rich but may remain powerful — building its army and continuing to develop its domestic technological capabilities. History has shown that economic privation need not impede China's technological achievement. During the depths of the Maoist purges, the CCP was still able to develop the atomic bomb, the hydrogen bomb, and its own intercontinental ballistic missiles. Xi has warned China to prepare for "great struggles" on the road to glory. Now that China's economic supercycle is over, that may be the cycle we're about to witness. It will be a painful adjustment.
A spooked and lonely Taiwan looks for new friend 16 October 2023 https://www.bbc.com/news/world-asia-67063197 Image source, Getty Images Image caption, President Tsai Ing-wen will step down in January when the island elects a new leader By Rupert Wingfield-Hayes in Taipei The words "democratic Taiwan" appeared more times in the island's national day celebrations this year than any other - by far. "We have brought the international spotlight to Democratic Taiwan," declared President Tsai Ing-wen last week, in her last national day address before she steps down as the first democratically elected female president. "The people of Taiwan will remain a democratic and free people for generations to come," she added. It was both an assertion of the island's identity and a call for the world to take note and not allow this vibrant and open society to disappear. The head of Taiwan's legislature, You Si-Kun, had touted those same credentials in his opening remarks: "The UK's Economist Intelligence Unit ranks Taiwan the number one democracy in Asia and number 10 in the world." The importance of these words to Taiwan, which feels increasingly threatened by Chinese claims to its territory, cannot be overstated. "Democratic Taiwan" has become its brand - its pitch to the world for why this self-governed island of 23 million people matters, and why it should be protected from being gobbled up by China. And yet for an $800bn chip superpower Taiwan has very few official friends. There was a time when Taipei had a military alliance with the United States and a seat on the UN security council. It was run as an anti-Communist dictatorship and could count on support from like-minded regimes from Seoul to Santo Domingo, Pretoria to Panama City. Now those Cold War-era friends are almost all gone. The threat to Taiwan is more severe than ever and Taipei is in desperate need of new allies. That challenge was on sharp display at Tuesday's ceremony. It's just not official "Please welcome our honoured VIP guests to today's celebrations," announced the master of ceremonies. And along the red carpet came the president of Nauru, a Pacific micro-state of just 10,800 people. Next came the governor general of St Kitts and Nevis, a Caribbean state of 47,000 people, and finally the governor general of St Vincent and the Grenadines, a relative giant by Caribbean micro-state standards, with a population of 110,000. The front row of diplomatic seats was taken up by ambassadors from Guatemala, Paraguay, Haiti and Eswatini. The first two remain fragile democracies, battling unrest and corruption, while surging gang violence has claimed thousands of lives in Haiti this year alone. Eswatini is Africa's only remaining absolute monarchy, and Taiwan's only remaining African ally. Last month President Tsai flew all the way to the tiny kingdom to meet King Mswati III and mark the 55th anniversary of its independence. These are among Taiwan's 13 official diplomatic allies - all that remains of its Cold War-era alliances. When he retreated to Taiwan from China in 1949, Generalissimo Chiang Kai-shek's regime in Taipei held on to big allies like the US and Japan all the way through the 1950s and 60s, when Mao Zedong's Communist China was cut off from the world. But then in February 1972 President Richard Nixon sat down with Mao Zedong in Beijing. It was an enormous moment that began the opening of Communist China to the world. It unleashed a cascade of diplomatic recognition for Beijing. Tokyo was among the first to switch. Washington followed in 1979. Chiang Kai-Shek died in Taipei in 1975, his dreams of retaking the Chinese mainland unfulfilled. But he'd handed power to his son and the island remained a one-party dictatorship that tortured and imprisoned its opponents. For most countries the argument for maintaining relations was gone. Those that did were on the whole equally nasty regimes, including the generals of South Korea, apartheid South Africa and the right-wing dictatorships of Central America. Increasingly Taipei relied on its chequebook to hold on to a dwindling list of allies, mainly in the form of aid and investment. But today China's cheque book is bigger than Taiwan's - and its economy vastly more important. The allies that remain are tiny and of little help in protecting Taiwan from an assertive China. Of course this doesn't mean there are none. Perhaps it's no surprise that at Tuesday's national day celebrations the biggest applause was reserved for two visiting marching bands. One was from Tokyo and the other from Los Angeles - Japan and the US, which are still the two countries Taiwan cares about and needs the most. Even after switching recognition, Washington continued to quietly support Taiwan, selling billions of dollars worth of weapons to the island. Its unofficial embassy in Taipei is a vast compound euphemistically called "The American Institute in Taiwan". Image source, Getty Images Image caption, People cheer during national day celebrations in Taipei Walk down any back street in Taipei and you can't help but notice the astonishing number of Japanese restaurants, filled with Japanese businessmen. Japan's westernmost island - Yonaguni - is just 110km (68 miles) from Taiwan's east coast. Tokyo cares deeply what happens to Taiwan. During a recent speech in Taipei former Japanese Prime Minister Taro Aso called on the international community to "wake up" to the threat from China. These relations remain "unofficial" - even at the parade they were relegated to the shadows, much like their friendships. How to make new friends Spooked by China's incessant military drills and left out of key alliances, Taiwan is looking to make new friends - not just to trade with, but for support in powerful international bodies, in particular the European Union. Proof of one new friendship is easily visible in Taipei's supermarkets, which now sell something that is quite uncommon in Asia: Lithuanian-made India Pale Ale. Imports of the brew, along with Lithuanian rum and chocolate, have soared in Taiwan in the last few years, and Taipei has even announced a $10m investment in Lithuania in the most prized Taiwanese product - chips. Why Lithuania? Perhaps the most fertile ground for making new friends is in the young democracies of Eastern Europe, places that once fell under the control of Moscow, but are now part of Nato and the EU. During his speech to the national day crowds, the head of Taiwan's parliament warned of authoritarian regimes "rolling back freedom, from Ukraine to Hong Kong, Myanmar to Afghanistan". Image source, Getty Images Image caption, Russia's invasion of Ukraine drew protests in Taiwan in March 2022 From the Czech Republic to Poland, Georgia to Lithuania, there are many countries that fear a resurgent Russia and perhaps feel a kindred spirit for a small democracy living next door to a huge authoritarian state that claims it should not exist. In 2021 Lithuania allowed Taipei to set up an office in Vilnius using the name "Taiwanese Representative Office in Lithuania". Beijing was apoplectic and sent Lithuania's ambassador to Beijing home. Further intimidation has followed. But the government in Vilnius has refused to back down. It has gone further, describing its relations with Taipei as a "strategic priority". "Lithuania is seeking to enhance practical co-operation with Taiwan, a like-minded democracy, and an important economic and technological partner in the region," it says. While the IPA on Taiwanese supermarket shelves may seem like a small thing, it is an indication of where Taiwan wants to go. It is not looking to dump its old allies. The president of Nauru will still be welcome at national day 2024. But if Taiwan had a Tinder profile it might read: "Young democracy, with open society and thriving high-tech economy, looking to make new strong friendships with like-minded partners. Next door neighbour, a problem."
Global intelligence chiefs lash China’s ‘sanctioned’ theft of intellectual property By Farrah Tomazin October 18, 2023 https://www.smh.com.au/world/north-...of-intellectual-property-20231018-p5ed3f.html Palo Alto, California: Intelligence chiefs from Australia and around the world have lashed out at China for what they say is the most sophisticated program of intellectual property theft in history, warning that Beijing’s espionage is so widespread it requires an unprecedented global response. Appearing publicly for the first time with other nations from the Five Eyes intelligence alliance, Australian Security Intelligence Organisation director-general Mike Burgess also took the rare step of rebuking China even as Prime Minister Anthony Albanese prepares to visit later this year in a bid to ease friction with the nation’s biggest trading partner. ASIO Director-General of Security Mike Burgess says Beijing is engaged in “the most sustained, sophisticated and scaled theft of intellectual property and expertise in human history.”Credit: Alex Ellinghausen Citing Albanese’s own remarks when it comes to Beijing – that Australia would “cooperate where we can; disagree where we must” – Burgess said China’s economic espionage went far beyond “traditional” spying because it had been sanctioned by the state over many years to the detriment of other democratic countries. “The Chinese government are engaged in the most sustained, sophisticated and scaled theft of intellectual property and expertise in human history,” Burgess said. “I’ve been talking about espionage and foreign threats in Australia for a long time; I generally don’t mention countries but this is one where China is worthy of mentioning because Chinese government, Chinese intelligence services are an instrument of the state that have actually sanctioned the wholesale intellectual property theft over a good number of decades. “That behaviour must be called out and must be addressed.” Burgess’ comments came during a major Five Eyes summit in California designed to tackle the problem, which he described as “an unprecedented event in response to an unprecedented threat.” The Five Eyes alliance – involving the US, the UK, Canada, New Zealand and Australia – was created in the aftermath of World War II to share intelligence and coordinate security efforts. But this was the first-ever joint public appearance of intelligence leaders from the alliance, who travelled to Palo Alto, the so-called “Birthplace of Silicon Valley,” at the invitation of FBI Director Christopher Wray. “That tells you what you need to know about how unprecedented the threat itself is,” Wray said. “The scale of the threat from China is so unprecedented that not only is no single solution going to be enough; no single country can be enough to try to adequately safeguard against them.” The FBI has seen a 1300 per cent increase over the last several years in investigations related to China’s attempts to steal intellectual property or other secrets. In one example, a US wind turbine company entered into a joint venture with a Chinese state-owned enterprise, which recruited an insider to steal the company’s trade secrets. Company shares plummeted, resulting in scores of employees being laid off. In another case closer to home, China was able to steal the intellectual property of a successful Australian company by downloading malware into a staff member’s laptop at an overseas conference. Counter-intelligence agencies say the areas being targeted by Beijing align with the “Made in China 2025″ initiative announced in 2015. This plan seeks to make China the world’s top manufacturer in 10 areas, such as robotics, artificial intelligence, new synthetic materials and aerospace. In a bid to address the issue, the Five Eyes alliance launched its first ever Emerging Technology and Securing Innovation Security Summit on Tuesday (local time) to discuss how to mitigate the threat with industry leaders. The summit kicked off with a fireside chat hosted by former US Secretary of State Condoleezza Rice involving all five members: Burgess, Wray, Canadian Security Intelligence Service Director David Vigneault, UK’s MI5 Director General Ken McCallum and New Zealand Security Intelligence Service Andrew Hampton. More than 400 businesses also took part, including a handful of Australian firms and start-ups. But the conference at Stanford University’s Hoover Institution comes at a delicate time for some of the allied countries, with Albanese expected to go to Beijing within months, in the first visit for an Australian Prime Minister in seven years. It is understood that the Prime Minister was aware Burgess was attending the event, which was in the pipeline for some time, but did not know what he was planning to say. The White House has also begun making plans for a November meeting in San Francisco between US president Joe Biden and Chinese leader Xi Jinping in a bid to stabilise the relationship between the world’s two most powerful countries. But the intelligence chiefs warned that the stakes were high and greater awareness was needed to ensure emerging technologies were protected. “We all need to be aware, and respond, before it’s too late,” McCallum said.
Tale of emperor whose ineptitude ended his dynasty unnerves Chinese censors History book disappears from shops and online searches are blocked as Beijing strengthens control of information flows Emperor Chongzhen, 17th ruler of the Ming Dynasty © History/Universal Images Group/Getty Images https://www.ft.com/content/1f8d51c9-6de6-49cc-ae0a-c7947fe21de2 A Chinese reprint of a book about an emperor who ran his realm into the ground before committing suicide nearly 400 years ago has abruptly disappeared from book shelves in China and searches for it have been censored online. The Book Chongzhen: the Diligent Emperor of a Failed Dynasty, republished last month, recounts how the last emperor of the 1368-1644 Ming dynasty purged senior officials and mismanaged his kingdom before finally hanging himself on a tree outside the Forbidden City as rebels closed in on Beijing. The blurb on the book’s cover declares that the harder Chongzhen worked, the faster he brought about the collapse of the empire. “A series of foolish measures [and] every step a mistake, the more diligent [he was] the faster the downfall,” it says. China has long censored anything that could be used to draw parallels with current leaders. Control of information has also increased under Xi Jinping, who has abolished presidential term limits and in March began an unprecedented third five-year stint in office. But the disappearance of a reprint of a previously published book, which would have been vetted by state propagandists before publication, is not common, publishers say. This year, Beijing has become particularly sensitive about negative reports on its stewardship of the economy, which is still struggling to recover from Xi’s severe Covid-zero policy during the pandemic that critics argue hit consumers and small businesses particularly hard. The book on the former emperor is a reprint of a 2016 publication, which carried the less provocative title: The Past of Chongzhen: The Final Scene of the Ming Empire and was authored by the late historian Chen Wutong. Searches for the reprint were censored on China’s popular Weibo app. Some users reviewing the original edition on a reading app, WeRead, complained about the move. “What exactly is there to fear? What’s wrong with taking history as a lesson?” said one commentator in a post. The cover art features a noose around the first character in Chongzhen’s two-character name — a reference to his suicide. China has a long history of trying to draw lessons from the stories of its emperors and Xi takes the study of the past very seriously himself, peppering his speeches with references to it, analysts say. “I think he believes history has a pattern and it’s meaningful and people have to get the right idea from it,” said Kerry Brown, professor of Chinese studies and director of the Lau China Institute at King’s College, London. He said some people also drew certain parallels between Xi and the emperors of the past. “This fact that he’s an imperial kind of figure and one of the ways of attacking him is through historic parallels,” he said. But he said the censorship of a relatively obscure history book, whose main problem was the blurb on the cover, probably was more of an indication of nervousness in the Communist party system at this moment as cadres tried to prove their loyalty. “The functionaries quite low down, their default is go for the most cautious kind of response,” he said. “You need a lot of knowledge to work out what was the sensitivity of this.” China’s censors quickly remove anything that could be perceived as a slight to Xi, in 2017 even blocking searches for Winnie the Pooh, the portly bear created by the English author AA Milne that some joked bore a resemblance to the Chinese leader. The Financial Times visited chain bookstores in Beijing, including state-owned Xinhua bookstore, and several independent bookshops and was informed the book was unavailable in every branch. It is also unavailable on all online booksellers. Employees at the headquarters of Sanlian Taofeng Bookhouse, one of the most renowned bookstores in China, told the FT no copies had been available since October 17. The recalling of a recently released book is rare in China because of the stringent process publishers have to go through to get a title published, including repeated checking by censors. The book’s privately owned publisher, Dookbook, and its state-owned publisher, Wen Hui Publishing, did not respond to requests for comment. The ministry of foreign affairs did not immediately respond to a request for comment.
More changes under Xi. I guess some ministers did not toe the line properly. China Ousts Defense Minister, Ending Months of Mystery Over Role Li Shangfu last made a public appearance in August in Beijing Xi has removed two top minsters since clinching third term https://www.bloomberg.com/news/arti...fu-as-defense-minister-cctv-reports#xj4y7vzkg China’s Li Shangfu became the nation’s shortest-serving defense minister, ending months of speculation over his status, as President Xi Jinping rolls on with high-profile purges that are spooking investors. The nation’s top legislative body removed the US-sanctioned general from his role without explanation, state media reported Tuesday. Li had been in the post seven months. He was also stripped of his state councilor title and membership of the government’s highest national defense body. No replacement for his role was announced. Xi has now abruptly removed two newly appointed top ministers since embarking on his precedent-defying third term in office last year. In July, Xi stunned the world by removing his handpicked foreign minister from that position without explanation — Qin Gang was also ousted from his remaining state councilor title on Tuesday. “Stripping Li and Qin of their state titles all but confirms they are being investigated for corruption or other violations of party discipline,” said Neil Thomas, a fellow for Chinese politics at the Asia Society Policy Institute’s Center for China Analysis. While there is no suggestion that Xi — China’s most-powerful leader since Mao Zedong — is facing any threat to his authority, the abrupt personnel moves have tainted his government’s image of stability. That turmoil comes as the world’s second-largest economy tries to woo investors to combat a grinding post-pandemic slowdown. Li’s removal could allow for high-level military talks with the US to resume after a suspension of more than a year. China has refused US overtures for Li to speak with American military leaders because of sanctions imposed on him during the Trump administration. Graft Probe Li, whose role made him the Chinese military’s top diplomat, last appeared in public on Aug. 29, when he delivered a speech at a forum in Beijing. He was under investigation over procurement of military equipment, Reuters reported earlier. In July, the Chinese military announced a corruption probe into the hardware procurement department Li once led for roughly the timeframe of his stewardship. That investigation coincided with Xi’s decision over the summer to remove two generals leading the secretive rocket force, which manages the country’s nuclear arsenal, without explanation. Li, 65, doesn’t have a personal history with Xi, but as an aerospace engineer he was part of the so-called Cosmos Club that the Chinese leader elevated in an attempt to catch the US in technological prowess. The son of a veteran Red Army soldier, Li became a member of the Central Military Commission at the Communist Party’s congress in October. He was the first soldier to join the body from the army’s Strategic Support Force, the branch created in 2015 to focus on space and electronic warfare in Xi’s push to modernize the military. Li’s climb to the senior defense post appeared to signal Beijing’s growing emphasis on aerospace technology. After graduating from the National University of Defense Technology, Li held posts at the Xichang Satellite Launch Center, where he oversaw China’s first lunar probe. As director of the center, Li presided over the launch of China’s first anti-satellite missile.
Analysis A smiling Xi is a wolf warrior in sheep’s clothing The Chinese president’s retreat from wolf warrior to a smiling diplomat was on full display when he met Anthony Albanese, but how long will that last. Michael Smith North Asia correspondent Nov 7, 2023 https://www.afr.com/world/asia/a-smiling-xi-is-a-wolf-warrior-in-sheep-s-clothing-20231106-p5ehzz Tokyo | Xi Jinping was all smiles when he welcomed Anthony Albanese in Beijing’s Great Hall of the People. Xi hailed the exchange as a “new starting point” for Sino-Australian relations. It was a calculated move by the president, designed to show goodwill to the rest of the world at a time when China cannot afford to be further isolated economically. Anthony Albanese meets with Xi Jinping at the Great Hall of the People in Beijing. AAP Xi, China’s most powerful and ruthless leader since Mao Zedong, was forced to shelve the so-called “wolf warrior” diplomatic approach when China’s economy failed to bounce back from the pandemic. He has since been warming up world leaders and business titans, with polite handshakes and kind words. “After taking office, you’ve been working to stabilise and improve relations with China. This shows the great importance you attach to relations with China,” Xi said, beaming for the cameras with Albanese on Monday night. Experts are calling it “smile diplomacy”, a term first coined for Chinese diplomats in the 1990s and early 2000s as they charmed the world with trade deals and promises of peace. That strategy came to a halt after Xi became leader 11 years ago and started challenging US dominance. Xi will be all smiles again when he meets Joe Biden on the sidelines of the APEC economic summit in San Francisco this month. In a way, Albanese’s visit was a practice run for his meeting with the US president whose advice to Australia was “trust but verify” when it comes to dealing with Beijing. “This is ‘smile diplomacy’ engineered by Xi Jinping designed to repair China’s reputation and this will go on until at least the APEC meeting,” says Willy Lam, a senior fellow at The Jamestown Foundation. “Australia has become an important aspect of the US anti-China containment policy and Xi Jinping seems to want to show the world that despite this, business is business. This is a strategic move because of the state of the economy”. Risks remain For Albanese, it was the crowning achievement of 18 months of work to repair relations with Australia’s largest trading partner without sacrificing the country’s strategic interests, or being seen to be pandering to Beijing’s demands. On Monday, the prime minister emphasised the benefits of job-creating exports flowing back into China. But he was less keen to discuss the thornier issues of China’s human rights abuses, the fate of jailed Australian-Chinese writer Yang Hengjun or pressure from Beijing to support its bid to join the regional CPTPP trade pact. Albanese gets credit for adopting the kind of rhetoric that made it easy for Beijing to save face by blaming all its past problems with Australia on the Morrison government. But as Lowy Institute senior fellow Richard McGregor says, Labor was “pushing on an open door”. Most of the issues that led to the falling out with the Turnbull and Morrison governments still exist. Xi’s ideological position on China’s place as the dominant power in the world, its territorial claims in Taiwan and in the South China Sea and a desire to increase its influence in the Pacific have not changed. Australia remains a member of the Quadrilateral Security Dialogue and, like most of its Asian neighbours, is bolstering its defences to try and deter China from taking military action. Ailing economy What has changed is China’s economy which is being pummelled by a property crisis, falling exports, high unemployment, and geopolitical isolation. Significantly, data on Saturday showed China recorded negative foreign direct investment for the first time since 1998. This was minus $US11.8 billion ($18.1 billion) in the July-September quarter, as foreign companies pulled more money out of the country than they put in. Even Xi, who prioritises national security over the economy, would have been alarmed. “Xi Jinping himself has not changed one bit regarding ideology, but China has been alarmed by so many multinationals relocating outside of China,” Lam says. Images of Australian lobster and wine back on Chinese tables helps Beijing promote the image of a country safe to invest and trade with. Xi needs to get the Chinese economy back on track to avoid social unrest at home, which is the Communist Party’s biggest fear. But, unlike the previous visit by an Australian prime minister in 2016, big business is wary this time around. Few trust an increasingly unpredictable Beijing, at least not while Xi is at the helm. For many, it’s a calculated risk. The upside of profits from the world’s biggest consumer market, even when it is in the doldrums, outweigh the risks of future economic sanctions or nasty regulatory surprises. “It’s a significant market for Australian barley, and it’s great to see the resumption of trade flows between the two nations,” says Graincorp chief executive Robert Spurway, who was one of hundreds of Australian executives in Shanghai on the weekend for Albanese’s visit. China’s crippling tariffs on Australian barley in 2020 hardly made a dent in Graincorp’s earnings after it found other markets for its grain. For now, economic ties between Australia and China look sound and Xi may well visit Australia as he did in 2014. But huge ideological differences and the threat of a military conflict, whether accidental or not, will loom large over the relationship well after Albanese’s time as prime minister.