Happy Friday! Today was supposed to be the deadline for the U.S.-China trade talks to succeed or new and increased tariffs would kick in. President Trump dropped the deadline and now we wait for Trump and Chinese President Xi Jinping to meet, probably in the fourth week of March.
Situational awareness: Canada announced it will start extradition proceedings to send Huawei CFO Meng Wanzhou to the U.S.
1 big thing: China's stock market is surging
The growing bullishness for Chinese stocks is in sharp contrast to the gloom over the recent economic data. Investors betting that the credit taps are about to fly open should read this from Caixin (subscription).
What's happening: Axios' Dion Rabouin writes that while U.S. trade negotiators continue to push for a trade deal with China that includes "significant structural changes" to its economic model, investors are putting the trade war behind them, pushing forward into Chinese assets and being rewarded handsomely.
- Onshore Chinese A shares have nearly doubled the performance of the S&P 500 so far this year, rising more than 21%.
Why it matters: There's a growing chorus of investors who don't see this as a short-term theme, but as the beginning of a new cycle where the growth dynamics in countries like China, India and others in Asia, Africa and Latin America drive not just the lion's share of the world's gross domestic product but also its market performance.
- "Going forward, I see the U.S. getting something like 4% or 5% annual returns, while EM returns 8% or 9%," Lance Humphrey, a portfolio manager on USAA's global multi-asset team, tells Axios.
Between the lines: China, specifically, is making major strides in refining its economy, but not because of the trade war.
- Exports as a percentage of Chinese GDP have already shrunk from 36% in 2008 to just 18% today, says Henry McVey, head of global macro and asset allocation at investment firm KKR. And the Chinese economy is still growing at a 6% clip, turning to services and other domestic industries.
- "Maybe more importantly, we believe that exports as a percentage of GDP could be headed into the low double digit range or below that of the U.S. over the next five to seven years — almost irrespective of which way the trade negotiations turn out."
- "China made a conscious decision to internalize much of its end demand following the Global Financial Crisis — long before the election of President Donald J. Trump."
And that's just the tip of the iceberg, global strategists at Wells Fargo Investment Institute say. They expect to see Chinese urbanization rise towards 80%, moving some 400 million people from rural to urban areas, and buffeting an already growing middle class.
- Read more of Dion's piece and sign up here for his Axios Markets newsletter.
- Bonus: A shares vs S&P 500 (Axios)
- MSCI to quadruple weighting of China A-shares in global benchmarks (CNBC)
My thought bubble: There is an ongoing debate about how much the government will stimulate the economy.
- I do not think we will see anything like what we saw in 2008, but given the state of the economy, the risks the Chinese Communist Party itself has articulated, and the especially sensitive year given the big anniversaries, I am more than comfortable betting that the party will do whatever it needs to minimize economic risks this year.
- That point may seem obvious but I am always surprised by how many economic analyses of China leave out the politics.
The bottom line: The politics are in command, and will be even more so this year.
2. China's global governance ambitions
China has developed inside a global governance system that has an architecture designed with minimal input from China.
The country justifiably wants a bigger say now, but its increasing authoritarianism is raising concerns about its efforts to reshape global governance.
From the American perspective: Earlier this week, the Center for American Progress issued a report on China's global governance ambitions. Among the highlights...
The current global governance system is rules-based, and it privileges liberal democratic values and standards; Beijing’s alternative vision is a system based on authoritarian governance principles in which nations negotiate issues bilaterally instead of following common rules and standards.
From a liberal democratic perspective, if Beijing succeeds in bringing about that vision, the world will be less free, less prosperous, and less safe.
This report aims to provide a deeper and more nuanced perspective on China’s real global governance intentions by mapping what President Xi and other Chinese leaders are saying to their domestic audience and how Chinese foreign policy scholars interpret those statements...
Deeper analysis indicates that there is ample reason for concern. China’s stated goals include watering down liberal democratic principles and either replacing or augmenting them with authoritarian ones. At the same time, this analysis also reveals that liberal democracies have powerful levers for shaping China’s actions in the global governance space.
From the Chinese perspective: The Feb. 27 People's Daily had a page one article titled "Participating in the transformation of the global economic governance system (参与全球经济治理体系变革)." The article is the fifth in a series that the Communist Party's most authoritative newspaper is running on "grasping the new implications of developing our nation's important strategic opportunities." Some excerpts...
Today's world is once again at the "crossroads" of progress: the global governance system is undergoing profound changes and a new international order is being nurtured. As the world's second largest economy, China is fully capable of seizing new opportunities to participate in the transformation of the global economic governance system and play a more important role...
Since the international financial crisis, the trend of "east rising and west falling" and "south rising and north falling" in the global economic landscape has developed in depth.
Major emerging market countries have taken the lead in economic recovery and developing countries have contributed about 80% of the global economic growth. However, in the global economic governance, it has failed to form a symmetrical right, a matching voice and a reasonable compensation mechanism...
Why it matters: Xi and his government have an expansive agenda to reshape global systems to serve China's interests. Be wary of reports that Xi is somehow chastened and pulling back on global ambitions.
3. The demographic drag
China's National Bureau of Statistics' issued a communique yesterday that provides more data on the looming demographic challenges for the country.
By the numbers: China's employment population has shrunk for the first time ever, Caixin reports...
At the end of 2018, the number of people employed fell to 776 million, a drop of 540,000 from 2017, according to annual census data...
The working-age population, or people between the ages of 16 and 59, also shrank — for the seventh consecutive year, down a total of 2.8% from 2011 to 2018, a clear sign that China’s population is aging rapidly.
Plus, now there are more people 60 or older than under 15, the Global Times reports...
The population aged 60 and above in China has for the first time surpassed those under 15, showing how the country's demographic structure is aging.
According to the [NBS] statement ... the population of China was about 1.4 billion at the end of 2018. Among them, the number of people aged 15 and under is 248.6 million; those who aged 60 and above are 249.5 million.
Why it matters: China is getting old before it gets rich. Policymakers have woken up to the challenge but so far measures like ending the one child policy have not sparked a baby boom.
4. China's massive internet
Key stats from the latest report from the China Internet Network Information Center, per ECNS, include:
- 829 million users at the end of December;
- 648 million short video users, 78.2% of China’s total Internet users;
- National Internet availability rate at 59.6%, with 26.7% of internet users or 222 million living in rural areas;
- Cumulative mobile internet traffic increased 189.1% to 71.1 billion GB
- Average time people spent online of 27.6 hours per week;
- 610 million online shoppers, 592 million of whom used mobile phones to shop;
- 600 million online payment users.
Quick take: The latest data are just another reminder of why many U.S. internet firms are willing to work with Beijing and its censorship demands to gain approval to operate in China.
5. Lower Chinese graphite production could mean higher battery prices
Expert Voices contributor Maggie Teliska writes for Axios...
China has steadily been forcing producers of graphite — a material commonly used in smartphone and laptop batteries — to close in response to rising pollution, as mining companies fail to improve the conditions of local land and water resources.
- As demand for the material continues to grow, battery prices may rise, which would impede progress toward the $100 per kilowatt hour lithium-ion target that many companies, including Tesla and BMW, are looking to achieve.
Background: Lithium-ion batteries transport electrons through the use of cathode and anode materials, the latter of which is commonly constructed of graphite. The expanding electric vehicle market has been a major contributor to the global rise in graphite demand.
Teliska is a a technical specialist at Caldwell Intellectual Property Law, an intellectual property law firm.
6. Worthy of your time
The New York Times — China’s Communist Party Runs This U.S. TV Station. How Independent Can It Be?
Yu Yongding — China Shouldn’t Give In To U.S. Demand for Stable Exchange Rate
Xinhua —Senior CPC officials report work to CPC Central Committee, Xi
Financial Times — Huawei threat uncovers enemy within UK spy agencies
AFP — US defeats China at WTO in vast grain-subsidy case, after accusing Beijing of US$100 billion price propping
The Economist — To win minorities’ support, China offers places at boarding school
Reuters — China's envoy says Turkish Uighur criticism could hit economic ties
Yangyang Cheng — The Chinese scientist and the foreign tongue
TechNode — Employees accuse P2P lender Dianrong of unpaid wages, severance pay amid layoffs
Hollywood Reporter — 'Bohemian Rhapsody' Gets China Release
CNN — Starbucks cat paw cup sets off violent craze in China
Xinhua — "Elixir of immortality" found in central China's ancient tomb
This week's issues of my Sinocism China Newsletter