Driving the Day
1.Huawei pushes back
On Monday, Huawei founder and president Ren Zhengfei gave an interview to the BBC.
Some context: The US is urging countries to ban Huawei equipment in new 5G infrastructure, claiming that it will enable Chinese spying. The famously reclusive Ren gave this interview to try and push back against the US narrative.
Ren was adamant that the company would not aid Chinese spying:
- “We won’t install backdoors.”
- “We’re not going to risk the disgust of our country and of our customers all over the world.”
- “Our company will never undertake any spying activities.”
- “If we have any such actions, then I’ll shut the company down.”
And he was adamant that the US could not stymie the company:
- “There’s no way the US can crush us.”
- “The world cannot leave us because we are more advanced.”
- “If the lights go out in the West, the East will still shine.”
- “America only represents a portion of the world.”
Ren got some great news on Monday (FT):
- “The UK National Cyber Security Centre has determined that there are ways to limit the risks from using Huawei in future 5G ultra-fast networks.”
The bigger picture: Technological competition between China and the US is just beginning, and could lead to a bifurcated global technological ecosystem.
2.Distressed property debt in vogue
As China’s slowdown continues to deepen, one sector is in particular focus – property (FT).
- “A slowdown in [property] sales and falling prices in some large cities have sparked concerns of a deeper downturn if economic growth continues to stutter.”
We’ve been writing for a while that 2019 will be a tough year for developers.
But not everyone is losing. The slowdown is driving consolidation in the industry:
- “China’s economic slowdown has…resulted in record sales of bad debt, with Rmb1.75tn ($259bn) in non-performing loans sold off to distressed asset investors last year, the most in nearly two decades.”
- “Within that mountain of debt, loans backed by property have become a hot commodity on the market for bad assets.”
- “Property developers are among the most indebted companies in China, with Rmb385bn in bonds set to mature in 2019.”
- “The move by some of the country’s largest developers to scoop up the bad debts of peers in the industry is driving consolidation in the sector.”
Get smart: The consolidation process will be slow, and the industry downturn will be protracted.
FT: China developers snap up distressed real estate debt
3.Autos – the hits just keep on coming
Another industry getting hammered– autos.
The Tip Sheet has been tracking this sector over the past six months, so these woes won’t come as a surprise to regular readers.
The latest data show that the industry continued to perform horribly in January (Caixin):
- “The number of vehicles manufactured and sold in China in January saw a two-digit year-on-year decline, according to an official summary Caixin acquired from industry observer the China Association of Automobile Manufacturers (CAAM).”
- “This marks the start of another tough year after the China market reported overall annual negative growth in 2018, the first decline since the 1990s.”
- “Last month, 2.37 million vehicles (including both commercial and passenger vehicles) were manufactured, a 12.05% decline compared to the same period last year. Only 2.37 million vehicles were sold, a 15.76% drop year-over-year.”
Get smart: Big, important chunks of China’s economy are clearly struggling as the year kicks off. That is further evidence that macro growth has yet to bottom out.
Get smarter: If you are running a business in China, your top-line projections for 2019 should be cautious – especially after 2017 and 2018 were so good to many MNCs in China.
Caixin: China’s Car Sales Fall Further
4.Han Zheng urges tax cuts – again
On Monday, Executive Vice Premier continued his tour of government agencies to make sure that everybody is clear on policy priorities for 2019.
Some context: Han visited the National Development Reform Commission and the Ministry of Finance last week (see February 13 and 18 Tip Sheets).
On Monday, Han visitedthe State Administration of Taxation.
He had a familiar message:
- “Cutting taxes and reducing fees is an important part of proactive fiscal policy, and is a strong and effective measure to combat downward economic pressure.”
- “[We] must implement well policies to cut taxes and reduce fees…and give companies and the masses a real sense of gain.”
Get smart: This is what fiscal stimulus looks like in 2019. It’s not about large spending projects, but rather abouttax cuts – particularly for small businesses.
Our thought: This will put pressure on local government finances. It’s not clear how the government squares the circle of imposing fiscal rectitude on local governments while also impeding their ability to collect revenues.
5.Greater Bay Area plan released
The Party center and the State Council finally released the development plan for the Greater Bay Area (GBA) yesterday.
Some context: The GBA includes nine cities in Guangdong, Hong Kong and Macau. The area ishome to around 70 million people and has aGDP ofover USD 1.5 trillion.
The plan lays out goals through 2035.
It’s all about integration:
- “[We should] promote the convenient and orderly flow of personnel, materials, funds, and information.”
To that end, the plan will look to better link up transport, energy, and information infrastructure.
The plan acknowledges that there are hurdles:
- “Guangdong, Hong Kong and Macau have different social systems and legal systems.”
- “They also belong to different customs territories.”
There is a logical division of labor between Guangdong and Hong Kong:
- Guangdong will focus on upgrading its manufacturing capabilities and promoting high-tech industries.
- Hong Kong will play a large role in the services sector, particularly financial services.
One outcome: We expect more connectivity between financial markets in Hong Kong and Guangdong.
What to watch: The respective governments of Guangdong, Hong Kong and Macau will release more detailed plans.
Gov.cn: 中共中央 国务院印发《粤港澳大湾区发展规划纲要》
6.Beijing is becoming a police state
On Friday, Beijing Daily, published an article about efforts to install police officers in grass-roots Party cells throughout the city.
Nectar Gan at the SCMP has a good summary:
- “In Tongzhou district alone, 239 police officers had been appointed deputy party chiefs of outlying villages and urban communities.”
- “The authorities began a pilot programme of the policy in 2012 and plan to have it in place citywide this year.”
- “By July, every village and residential community in Beijing will have a community police officer doubling as its deputy party chief to ‘strengthen grass-roots management.’”
It’s not just Beijing:
- “A similar programme is under way in Shanghai.”
Some important context:
- “The policy is hailed as a golden example of the ‘Fengqiao experience’ – a Mao-era experiment in social management to ‘mobilise the masses’ [against] the people’s ‘enemies’ without the need to hand them over to higher authorities.”
- “The phrase – which had fallen out of use by Chinese leaders – has come back to life under President Xi Jinping, who vehemently supported it as a tool for social management and stability.”
Get smart: The Party wants the police to be more proactive in identifying and neutralizing threats to social stability before they metastasize.
Beijing Daily: 通州首批民警兼任村党组织副书记
SCMP: Police embedded in grass-roots Communist Party cells as security grip tightens on Beijing