Welcome back, Europe

driving the day

1. Beijing thumbs nose at US HK sanctions

On Monday, the Ministry of Foreign Affairs (MoFA) announced that it was sanctioning 11 American officials and other individuals.

The lucky few:

Senators Marco Rubio, Ted Cruz, Josh Hawley, Tom Cotton, and Pat Toomey
Representative Chris Smith
The presidents of the National Endowment for Democracy, National Democratic Institute, International Republican Institute, and Freedom House
The executive director of Human Rights Watch

The move was retaliation for the US sanctioning of 11 Chinese officials on Friday (see yesterday’s Tip Sheet).

Get smart: These sanctions are directly proportional to the US sanctions – and have little to no practical effect. That’s because Chinese leaders are looking to contain the deterioration in the bilateral relationship.

But on Monday, Beijing also sent a clear signal that it will continue to do what it wants in Hong Kong:

Hong Kong media mogul and democracy activist Jimmy Lai was arrested under the national security law.
So was Agnes Chow, the 23-year old democracy activist and founder of the (now-disbanded) Demosistō political party.

Get smarter: For Beijing, stamping out dissent in Hong Kong is a political imperative. US actions will have little to no influence on Beijing’s approach to the city.

The bigger picture: Strap in for an intense three months in the run up to the US election. The Trump administrationlooks set to continue to lobbing policy bombs at China.

The Chinese will look to bat them away, rather than lobbing bombs back– for now, at least.

finance economics

2. Bank profits tank in Q2

The banking regulator (CBIRC) dropped the latest stats for the banking system on Monday.

The headline:As you might expect, bank profitability dropped through the floor in Q2 2020 (Caixin).

“China’s commercial banks reported a 9.4% decline in first half net profits to 1 trillion yuan ($143 billion), reflecting the impact of the Covid-19 pandemic.”
“The CBIRC didn’t provide a breakdown of the quarterly profit figure, but a Caixin calculation based on previously released figures showed that the second-quarter profit of commercial banks dropped 28.4% from a year ago.”

Ouch.That hurts – but it’s not unexpected.

Despite slashed profits, banks did what authorities asked by keeping the money flowing to businesses.

Total bank asset growth came in at 9.7% y/y in Q2 – up a touch from the 9.5% from growth in Q1.

And they were even able to get a substantially increased amount of credit to SMEs (CBIRC):

“By the end of the second quarter of 2020, the balance of loans for small and micro enterprises…reached RMB 40.7 trillion, including RMB 13.7 trillion of loans for…enterprises with a total credit of RMB 10 million or less, an increase of 17.7% over the beginning of the year.”

Why it matters:We’ve been warning for a while that the pandemic-related hit to bank profitability would worsen the industry’s capital shortfall.

What to watch:Regulators are going to have to foot the bill for banks in the coming months.

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CBIRC:银保监会发布2020年二季度银行业保险业主要监管指标数据情况

Caixin:Commercial Banks Post 9.4% Profit Drop in First Half as Pandemic Bites

politics policy

3. Zhang Yiming’s last stand

ByteDance is going all out in its fight against the Trump administration’s decision to force the sale of the US operations of its wildly popular video app, TikTok.

Some context: On August 2, the Trump administration said ByteDance had 45 days to sell the app or it would be banned from the US market (see August 3 Tip Sheet).

But that sale is now in question (SCMP):

“[An anonymous source] said the probability of Microsoft buying TikTok is ‘not higher than 20 per cent’ since the initial price offered by [Microsoft] was akin to ‘robbing the owner when his house is on fire.’”

Instead, ByteDance CEO Zhang Yiming looks set to fight the decision tooth and nail.

According to the anonymous source:

“[I]f [Zhang] is set to lose TikTok in the US market either by selling it to a potential competitor or a forced exit…he will try every possible way to fight back.”

ByteDance is reportedly preparing to mount a legal and public relations campaign to pressure the administration to reverse course.

Get smart: ByteDance has come under fire domestically in China for “capitulating” to US bullying. Fighting the administration’s decision may get the company back into the nation’s good graces.

Get smarter: A legal challenge has a non-trivial shot of succeeding in US courts.

4. US sanctions bite Huawei

Last Friday, Huawei Consumer Business Group CEO Yu Chengdong talked about the effect of US sanctions on Huawei at an industry event.

Some context: In May, the US government blocked companies using American-made hardware and software from designing or producing chips for Huawei (see May 18 Tip Sheet).

According to Yu, the sanctions have crippled some of Huawei’s business(cnBeta):

Due to chip shortages, the company’s smartphone shipments in 2020 arepredicted to fall short of the 2019level of 240 million units.

The bigger blow: The sanctions have thwarted Huawei’s ambition to develop chips itself.

By September, Huawei will have to stop the supply of its self-developed high-end chip, Kirin.

Sick of US obstructions, Huawei is looking to cut US technologies out of its future products entirely.(Qianlong)

To this end, Huawei recently launched a new project called “Nanniwan” – to promote products that have not yet been affected by US sanctions, like laptops, smart television displays, and home automation products.

Party history fun fact: Nanniwan is a gorge south of Ya’an, Shaanxi, whereParty officials previously tried to establisheconomic self-sufficiency – by producing opium – during the blockades by the Imperial Japanese Army and the Kuomintang in 1941.

Get smart: Huawei’s troubles have made it abundantly clear that standing on the shoulders of foreign tech is no longer an option for Chinese businesses. Self-sufficiency is the only way forward.

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cnBeta:
余承东演讲全文来了：华为高端芯片遗憾绝版

Qianlong:
华为启动“南泥湾”项目，以加速实现供应链的“去美国化”

5. Welcome back, Europe

This morning, the National Health Commission (NHC) dropped the latest COVID-19 numbers.

On Monday, China reported 44 newly confirmed cases – down from 49 on Sunday (NHC):

31 were imported from abroad – down from 35 on Sunday.
The other 13 were all domestically transmitted in Urumqi, Xinjiang – down from 14 on Sunday.

In addition, on Monday (NHC):

China reported 17 new asymptomatic cases – six of which were imported from abroad.

And get this:Confident in theirability to quickly contain any virus outbreak, Chinese officialshavedecided to open theborders, which havebeen mostly closed to foreigners since March 28.

It’s a semi-exclusive affair.

On Monday, the Chinese Embassy in Denmark announced that citizens from some European countries who hold Chinese residence permits may apply for visas to re-enter China.

The lucky few:

Albania, Ireland, Estonia, Austria, Bulgaria, North Macedonia, Belgium, Iceland, Bosnia and Herzegovina, Poland, Denmark, Germany, France, Finland, Netherlands, Montenegro, Czech Republic, Croatia, Latvia, Lithuania, Luxembourg, Romania, Malta, Norway, Portugal, Sweden, Switzerland, Serbia, Cyprus, Slovakia, Slovenia, Spain, Greece, Hungary, Italy, and the United Kingdom.

Get smart: We’ve said that China would soon relax its entry ban for foreigners – but this came sooner than expected.

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