Oct 26, 2018

Axios China

Happy Friday!

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1 big thing: Xi's 2018 Southern Tour

Xi Jinping walks during a ceremony on the eve of National Day on Sept. 30 in Beijing, China. Photo: Lintao Zhang/Getty Images

Chinese President Xi Jinping went to Guangdong this week for what some were hoping would be a New Era version of Deng Xiaoping's 1992 Southern Tour that unleashed a new wave of reform following nearly 3 years of repressive policies in the aftermath of the June 4, 1989, student crackdown.

While Xi again expressed support for reform and opening and private firms, it looks from the propaganda reports so far that Xi just reiterated support for the policy trajectory China is already on.

Xi also emphasized again the need for self-reliance (自力更生) and the control of core technologies, an increasingly common theme from him.

But, I may be too cynical. This South China Morning Post editorial, for example, is more far more positive in its appraisal of the tour:

President Xi Jinping’s resolve to overcome the challenges China faces at home and abroad was apparent during his latest inspection tour of Guangdong. Each stop was loaded with meaning, being chosen to send a strong message about the way forward in countering the trade war initiated by the United States and handling the economic slowdown.
There was no more timely moment or better place; the province was the testing ground and launch pad 40 years ago for the nation’s economic reforms and opening to the world.
The leadership has made clear that those same fundamentals will continue to be the basis for unlocking potential, navigating the nation through the current uncertainty and driving it to even greater heights...
Some may be disappointed that Xi did not unveil further tangible reform measures, but his trip was about setting directions, not announcing concrete plans. Nor is a comparison with late paramount leader Deng Xiaoping’s landmark tour of Guangdong in 1992 fair; circumstances are markedly different.
The scale and scope of Xi’s trip showed the difficulties faced and that the leadership recognises what needs to be done and is committed to moving purposefully forward.

Go deeper:

2. A warning on yuan's stability

Image: Sefa Oze/iStock/Getty Images Plus

The Chinese yuan has continued its slow depreciation towards 7 to the U.S. dollar, going as low as 6.9647 per dollar on Friday.

What's happening: Pan Gongsheng, deputy head of the People's Bank of China, said on Friday that the recent volatility in the exchange rate is due to "factors including the U.S. Federal Reserve interest rate hike, a stronger U.S. dollar, international financial market volatility and trade frictions."

  • Pan also had a warning for people who are shorting the RMB in the expectation it will continue to drop, according to SCMP.
  • The report says he said the State Administration of Foreign Exchange, which he heads, had “accumulated rich experiences and developed multiple policy tools” in defending the yuan, after the offshore exchange rate weakened to 6.97 on Friday.
  • “As for those forces trying to short the yuan, we have engaged directly a few years ago and we know each other very well. ... I think our memories should still be fresh,” Pan told a press briefing in Beijing.
  • Pan also "reiterated that China will not engage in competitive currency devaluation or use the exchange rate of the yuan as a tool to address external disturbances such as trade frictions."

The U.S. Treasury declined earlier this month to name China a currency manipulator but said it may change how it determines if a country is a manipulator, which could lead to China's listing.

Ministry of Commerce spokesman Gao Feng on Friday also weighed in on the RMB:

"The International Monetary Fund already has an authoritative method to assess whether a country manipulates its currency and whether the exchange rate is reasonable, and has concluded recently that the RMB exchange rate is consistent with economic fundamentals," Gao said.
"[We hope that] the country concerned can respect the laws of the market and respect objective facts, and not politicize the exchange rate issue or place its own standards above international rules."..
"As a responsible country, China has reiterated time and again that it will not engage in competitive devaluation and will not use the RMB exchange rate as a tool to fend off external disturbances, such as trade disputes."

My thought bubble: Beijing does manage its currency, both in the way it sets the market for it and in its draconian capital controls, and obviously in the past did manipulate the value to help its exporters.

  • But Washington now should be careful what it wishes for, because if China were to drop the capital control and let the market fully determine the RMB price, we could easily see a sudden drop below 8 or lower, which could be massively destabilizing to global markets and trade.

Go deeper: Reuters says Beijing will defend the 7 level:

Two sources involved in internal policy discussions, but who are not the final decision-makers, said that a defense of the yuan at 7 per dollar would be mounted to show investors that the authorities wouldn’t allow a runaway market.
“If the yuan falls through 7, there could be a rapid depreciation of the exchange rate”, said one policy insider. “In order to avoid such a passive situation, the authorities are likely to step in the market to stabilize the yuan.”
3. Peking University gets a new leader

Qiu Shuiping is the new party secretary of Peking University, one of China's most important schools. Qiu replaces Hao Ping, who is replacing Lin Jianhua as the new president of the school.

Why it matters: This change is interesting for several reasons, starting with the official announcement...

  • The English press release led with Hao becoming president, followed by Qiu replacing him as party secretary.
  • The Chinese release from the Ministry of Education led with Qiu taking over as party secretary, in a clear sign of who really is in charge of the school — 邱水平任北京大学党委书记 郝平任北京大学校长.
  • Qiu is a long time Beijing official with deep experience in the politics and law system, including a stint as the party secretary of the Beijing bureau of the Ministry of State Security.
  • The Peking University leadership roles are so politically important that the changes were announced at a meeting by the deputy minister of the organization department Zhou Yi, Minister of Education Chen Baosheng and Wei Xiaodong, the head of the Beijing Municipal Organization Department, according to the university release — 邱水平任北京大学党委书记 郝平任北京大学校长.

My thoughts: Amidst the broader tightening inside China, 2019 is a year of momentous anniversaries of student movements — the 100th of the May 4 Movement and the 30th of the Tiananmen Square protests — and Peking University was at the center of both.

  • It certainly looks like this move may be part of the broader ideological hardening underway at Peking University and at educational institutions in general.
4. Report: Richest getting richer and more Chinese

The number of billionaires in China grew by 67 in 2017, with those surveyed saying it was due to a "combination of geopolitical stability in Greater China, rising Chinese real estate prices, infrastructure spending, the growing middle class and buoyant commodity prices."

By the numbers: Per the fourth edition of the UBS/PwC Billionaires Report:

  • China now has a total of 318 billionaires while the U.S. has 563 and Europe 637.
  • The average age of a Chinese billionaire in 2016 is 55, compared to 66 in Europe and 67 in the U.S.

My thought bubble: It can be tough being a Chinese billionaire. Political and financial fortunes in the PRC are volatile, as we have seen from several downfalls over the last few years. According to the UBS/PWC report, 34 Chinese billionaires dropped out of the ranks in 2016.

Buzz: The Wall Street Journal reported Thursday on the end of a Manhattan real estate buying binge after the disappearance of Chinese billionaire Ye Jianming into government custody.

Go deeper: Move Over America: China's Billionaires Are Taking Over (Caixin)

5. Wang Jianlin's dreams of Hollywood may end

China's Wanda Movie Park, owned by Dalian Wanda Group, has been closed for renovations. Photo: Zhang Peng/LightRocket via Getty Images

Speaking of billionaires, Reuters reports that Dalian Wanda Group, run by billionaire Wang Jianlin, may be selling off its Hollywood and sports assets, as part of Beijing's campaign to reduce leverage and rein in the financial risks from huge conglomerates knowns as "grey rhinos."

Details, per Reuters:

The company, led by billionaire Wang Jianlin, once had dreams of developing a China-Hollywood film nexus, had a stake in top-flight Spanish football club Atletico Madrid and owned prime property developments in Sydney and London.
Wanda paid $3.5 billion in early 2016 for Hollywood studio Legendary Entertainment, maker of “Pacific Rim” and “The Great Wall”.
It is now exploring the sale of a minority stake, two sources with direct knowledge said, similar to Wanda’s recent stake sale in AMC Entertainment (AMC.N), the world’s largest cinema operator.

Wanda told Reuters that its report was "seriously inconsistent with the facts."

My thought bubble: The forced dismantlement of Wanda's overseas media empire, if true, would seem to go against the idea of a concerted strategy in Beijing to buy up Hollywood assets to better control messaging and content about China.

  • In fact, the Chinese Communist Party does not need to own overseas film/TV assets to shape the content, as the lure of the Chinese film market, the 2nd largest in the world currently, is enough to lead most content creators to self-censor to keep Beijing happy.

Go deeper: In China, Herd of ‘Gray Rhinos’ Threatens Economy (NYT, 2017)

6. China’s push to become robot superpower
Expand chart
Reproduced from International Federation of Robotics; Chart: Axios Visuals

Axios' Kaveh Waddell writes ... China bought 36% of all factory robots in the world last year, more than any other country including the U.S., and intends to ramp up its own production of them — another sign of its determination to be the pre-eminent technological superpower.

Why it matters: The U.S. and China are locked in a race to master artificial intelligence and quantum computing, with robotics being the third, quieter realm of competition. Mastery of the 3 technologies is seen as key to geopolitical and economic power in the coming decades.

"If you are an industrial robotics supplier, China is a short-term sales opportunity, but a long-term competitive threat."
Gregory C. Allen, Center for a New American Security

China’s robotization has unfolded extremely quickly. The number of industrial robots in the country nearly doubled between 2015 and 2017, according to the International Federation of Robotics.

  • Still, China lags in "robot density," or the number of industrial robots per 10,000 workers, according to IFR stats. But that, too, is changing fast.
  • The trend has been driven in part by rising wages, which have made it more expensive for companies to manufacture in China, says Allen, an adjunct fellow at the Center for a New American Security.
  • The other main factor is China’s push to get into manufacturing sectors that require advanced robots, like building semiconductors, he says.

Because of the speed of these changes, China has been importing robots in huge numbers. But if all goes according to Beijing’s plan, the flood will only be temporary.

  • China intends to crack the top 10 most automated industries by 2020, according to the IFR, which writes in its 2018 World Robotics report that "a huge increase in local production of industrial robots is anticipated."

China's ascendancy to a robotics giant would represent a significant global shift.

  • "The geopolitical implications of China dominating AI and robotics are powerful, even corrosive," says Eleonore Pauwels, a researcher at the United Nations University and director of the AI Lab at the Wilson Center.
  • "The new world order will be defined by a country’s capacity to harness the convergence of AI, robotics and other emerging technologies to achieve economics and security dominance," Pauwels adds.

Go deeper: Read the full piece here.

7. Trump's strategy is isolating the U.S.

Treasury Secretary Steven Mnuchin heading to the U.S. embassy in Beijing for trade talks in May 2018. Photo: Greg Baker/AFP via Getty Images

FutureMap founder Parag Khanna writes for Axios ... The Trump administration remains determined to double down on its China trade strategy by escalating tariffs from 10% to as much as 25% on consumer goods, electronics and automobiles by the end of the year.

The strategy aims to further reduce America's $500 billion in annual imports from China.

The big picture: While this may cost China as many as 2 to 3 million jobs, it's not clear that it will reduce China’s overall exports. In fact, President Trump’s trade war is exacerbating the trade deficit.

Perhaps most troubling for long-term U.S. economic growth, it's steering Asian countries — and their billions of consumers — toward non–U.S. trading partners.

Between the lines: Rather than disciplining these trade partners, Trump’s policies are encouraging them to increase trade that bypasses the U.S. Some examples...

  • Trump withdrew the U.S. from the Trans-Pacific Partnership last year, but Canada promptly ratified a revised version of the agreement — and recently announced a major new liquefied natural gas plant that will directly compete with U.S. gas exports to Asia.
  • Trump’s trade strategy may not have its intended effect in the automotive sector either. His 11th-hour deal with Canada and Mexico to update NAFTA expanded “rules of origin” requirements, but these quotas will actually benefit cheaper steel and auto-part manufacturers, particularly from Asia.
  • The same pattern is occurring in the tech industry. Trump claimed a victory in blocking companies like Qualcomm and Google from selling components to Chinese telecom giant ZTE to thwart China’s “Made in China 2025” initiative. But most of China’s high-tech imports don't come from the U.S. in the first place.

The bottom line: The more Trump tries to isolate China, the more other countries will move to capture the U.S. market share in China and Asia more broadly. "America First" cannot succeed when the world economy and global supply no longer bow to the U.S.

Go deeper: Read the full piece here.

8. Worthy of your time

Darren Byler for ChinaFile — China’s Government Has Ordered a Million Citizens to Occupy Uighur Homes. Here’s What They Think They’re Doing

Speech by Christopher Ashley Ford, Assistant Secretary of State — Why China Technology-Transfer Threats Matter

The Washington Post — Chinese-owned company qualifies for Trump’s anti-China farm bailout

Bloomberg — Bytedance Is Said to Secure Funding at Record $75 Billion Value

WSJ — China Cuts Iran Oil Purchases Ahead of U.S. Sanctions

People's Daily "Zhong Sheng" — Op-ed: It is the US who is wild about meddling in others’ domestic affairs

Reuters — North Korean general gets warm welcome in China as ties improve

AP China, Japan show united front on 'free and fair' trade

Center for Advanced China Research — Party Watch Annual Report 2018

MacroPolo — The Rise, Fall, and Restoration of the Kingdom of Bicycles

The New York Times — A ‘People’s Pig’ in China Could Be Headed to Upstate New York

Lawfare — A Chinese Perspective on the Pentagon’s Cyber Strategy: From ‘Active Cyber Defense’ to ‘Defending Forward’

Recorded Future — Shifting Patterns in Internet Use Reveal Adaptable and Innovative North Korean Ruling Elite

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