China’s policy direction will to a large extent be clarified, or not, at the Third Plenum, scheduled for next month. People are reading tea leaves between the lines and trying to figure out what’s coming, and the best indicator this week was an article in the People’s Daily from a senior official named Qiu Jin whose description of the balance between national security and economic development very much indicated security up, economy subsidiary. The goal, he said, is to “achieve high-level security to serve high-quality development, and ensure the new security pattern to guarantee the new development pattern.” Extraordinary—China watching has returned to the same exact methods of the 1960s and 1970s, trying to divine the meaning of obscure phraseology in People’s Daily articles.

In other news, some Chinese AI chip companies are now designing less powerful processors to retain access to Taiwan Semiconductor Manufacturing Co (TSMC) production in the face of US sanctions, Reuters said, yet again stressing the crucial role played by this company on the island. Meanwhile, China’s ocean freight rates rose sharply this week as exporters push out shipments early due to concerns about US tariffs and disruptions to container traffic near the Red Sea. And finally, PwC’s business in China seems to be seriously in danger after news of an alleged financial fraud tied to China Evergrande.  

But basically, we’re waiting for direction from the Center as the economy apparently continues to wallow. Have a pleasant weekend in the meantime.

Mr Xi met with business leaders last week and made all the right noises about the importance of economic development. He is also reported to have told officials across the country to emphasize job creation. The Third Plenum cometh (in July), and the dire state of the economy is apparently beginning to sink in. The problem is that so many of the contributing factors are deeply structural. The stock markets of Shanghai and HK and the RMB exchange rate are the closest things we have to reliable barometers of the extent of the situation—Shanghai stocks continue to move around the 3,100 level, and there is a sense that in the absence of National Team support the index would quickly fall back below the magic 3,000 mark. There is also growing, but of course unsubstantiated, talk of a possible sudden devaluation of the RMB. Factory activity also unexpectedly slowed in May.

Another comment from Mr Xi was a question about how come China is not birthing as many unicorns these days—that is, non-listed private companies with a market value of at least one billion US dollars. This could be a great opportunity for possibly unicorny companies to grab cash from state VC funds. “Just following orders!” But would such investments be properly structured? Would they have the desired outcome? Or would it be just a money sink, a bit like much of the investment into semi-conductors in the previous cycle?

But the big news of the week was the conviction of Mr Trump on 34 criminal charges. It’s a pity this isn’t followed next week by the documents case down in Florida, because that’s the one where it gets really categorical. How does the conviction play into the November election? Hard to say. It probably makes him less electable, to some extent, but the GOP, having sold its soul to this guy and having tied him albatross-like around its neck, now has no choice but to field him as its candidate.

Enjoy the weekend.

There is not much going on in the news in China this week and our view would be this is because on one side everyone has decided the economy is NOT GOOD and they know Those in Command are busy working on the package aimed at restoring confidence that will be unveiled in July at the Third Plenum. We got a hint of similar concerns from the Center on Thursday, with Mr. Xi delivering his most pro-business message in a while at a meeting with SOEs, private entrepreneurs and overseas investors.

But what exactly the plan will be is, of course, not yet clear. When it’s announced the thing to watch is how many empty apartments are going to be bought up at what price, what they declare they will do with all the debt in various parts of the property market, and how they plan to balance off economic development and national security. Big stuff. Then we will see whether people buy it. So in the meantime, we will refrain from further speculation and move on.

Of what did happen, the standouts were that overall tax revenue slipped 2.7% in the first four months of this year compared to last year, which means less money to spend on buying apartments for a start. And the once-high flying consumer electronics company Suning defaulted on a debt payment and so lost control of Italy’s top football team, Inter Milan. Own goal.

Have a great weekend.

At the heart of China’s current economic problems is the property market. There are so many empty and unfinished apartments out there across the country, and the question is what to do about them, given the overall lack of confidence in the future of China’s real estate overall, along with the long-term slow moving, demographic trend towards fewer people. There is also a web of debt that has entrapped local governments, banks and developers, as well as the ordinary consumers who have put money down to buy the apartments that remain unfinished. A major problem, so what is the solution?

This week there was the hint of a significant step towards movement in the overall state of the situation. It is difficult to say improvement, but at least movement. The proposal as reported by a number of media outlets, is that the Center is planning to announce the purchase by local governments of millions of the apartments that are currently empty or unfinished. This would be a bold step and would definitely change the dynamics of the market. It would indicate that the Center is taking responsibility for the overall real estate market. But it similarly raises all sorts of questions.

First of all, where does the money come from? Second, who gets the money—the property developers, the ordinary consumers with mortgages but no apartment or the banks who loaned the money out to the property developers? And third, at what price level would the purchases be made? If they are priced high, then the bill is huge. But if they if they are priced low, the overall valuation of property across China will fall. It’s all the result of decades of misallocation of funds and short-term thinking, and the chickens were always going to come home to roost at some point. And, as always in these situations, the most likely player to end up bearing the brunt of the cost for resolving the problem is the ordinary consumer, in one way or another.

In other news, there was an important visitor this week—Mr. Putin visited for the first time since the Beijing Winter Olympics in February 2022, just before the start of the unpleasantness in Ukraine. It was an opportunity for both parties to reiterate their mutual support. China has become a significant supporter of the Russian economy and military effort, and Russia is an increasingly important source of fossil fuels to keep China’s economy running. So much hangs on how the Ukraine war is resolved.

Meanwhile, the Shanghai and HK stock markets are holding up well, with Shanghai still above the magic 3000 mark. Various announcements, including the possible impending purchase of millions of apartments by the government, could well be part of an overall effort to keep sentiment as buoyant as possible in the run up to the absolutely crucial Third Plenum in July, at which the overall economic plans for the future are going to be laid out. How the markets react to that will depend to some extent on the state and level of the markets at that point, and some preparation work would appear to be in progress.

Apart from all that, enjoy the weekend.

The most interesting news of the week was a meeting Beijing between Mr Xi and the former president on the island, Ma Ying-jeou, but it is hard to say what significance it has. Ma represents the opposition party on the island, and the whole issue of Taiwan’s future is up in the air and clouded in mystery. The hints provided at the meeting, following on from the vibe at the Xi-Biden meeting in San Francisco last November, are that: 1. Independence is a no-no; 2. We’re not planning anything any time soon; 3. We’re happy to talk to anyone not in favor of independence.

Where does that leave things? On the assumption that the goal is maintenance of the status quo, then the best-case scenario is that meeting may have bought some time. Meanwhile, China’s military expansion continues. But the single biggest issue that impacts on this situation, overshadowing everything else, is the US presidential election. If Trump wins, all bets are off on everything all over the world, including the island, in our view. If Biden wins, then we would be inclined to believe the status quo is sustainable for the foreseeable future. There is always the possibility, discussed many times here and elsewhere, that they have made their decision and chosen a deadline and it’s just a matter of timing. But there is also the possibility, depending on how things go in the US election and in the Ukraine War and Gaza, that the pressures to leave things alone and not take the risk will be overwhelming. For this year, our prediction remains—no change.

So, how is the Chinese economy doing? The government is working hard to send out welcome messages for foreigners, and there are some more coming in, it’s true. But it’s a trickle compared to 5 or ten years ago. The moment passed. Meanwhile the credit agency Fitch downgraded a slew of Chinese companies in the face of the difficult economic situation. Goldman Sachs, on the other hand, issued a fairly positive assessment of economic prospects, but we at least discount that. The bulls of Wall Street have little credibility in the China field.  

Lastly, there was a report that China bred an average of one new unicorn each week last year, largely due to growth in the AI. The nation reportedly added 56 unicorns—start-ups valued at more than $1 billion—in 2023, trailing only the US, which minted 70 unicorns. Listing is the next challenge for these companies. May they all succeed!

Have a great weekend.