Commentary on Political Economy

Wednesday 19 June 2019


Uighur author dies following detention in Chinese 're-education' camp

PEN America condemns death of Nurmuhammad Tohti, who had been held in a Xinjiang internment camp, as a grave example of China’s violations of free expression
Nurmuhammad Tohti, sitting at a scholarly gathering in Urumqi, capital of Xinjiang, China. Photo courtesy of Abduweli Ayup.
 Nurmuhammad Tohti, pictured in Urumqi, the capital of Xinjiang. Photograph: courtesy of Abduweli Ayup

The death of the prominent Uighur writer Nurmuhammad Tohti after being held in one of Xinjiang’s internment camps has been condemned as a tragic loss by human rights organisations.
Radio Free Asia reported that Tohti, who was 70, had been detained in one of the controversial “re-education” camps from November 2018 to March 2019. His granddaughter, Zorigul, who is based in Canada, said he had been denied treatment for diabetes and heart disease, and was only released once his medical condition meant he had become incapacitated. She wrote on a Facebook page for the Uighur exile community that she had only learned of his death 11 days after it happened because her family in Xinjiang had been frightened that making the information public would make them a target for detention.
Another granddaughter, Berna Ilchi, told Voice of America that she did not know if Tohti had died inside the camp or at home because her family feared their phone was tapped. “The truth is that they put a 70-year old man with diabetes and heart disease inside a concentration camp and they cannot deny this,” she said.
Tohti’s grandson Babur Ilchi confirmed on his Instagram account – now deleted – that his grandmother had told him the news, reported Radio Free Asia. “Shortly after the call, my grandma received a message from the Chinese government saying she had answered a foreign call and that that was a dangerous decision. What did she do other than tell us he had passed away? Why should that be met with consequences?” he wrote.
“He was a respected writer; no affiliation with terrorism, which is what the Chinese government claims these concentration camps are fighting against. He deserved better, and so do the MILLIONS of Uighurs who are suffering in these camps.”

China initially denied the existence of the camps in the far western region of Xinjiang, which is home to about 12 million Muslims. But last year, it began rebranding them as “free vocational training”; a BBC report on Tuesday showed a teacher describing inmates as “affected by religious extremism”, and saying that the purpose of the camps was “to get rid of their extremist thoughts”. It is estimated that a million Uighurs and other Muslims are currently detained.
PEN America’s director of free expression programmes, Summer Lopez, said: “The inhumane treatment reported at the internment camps is a grave illustration of the severity of China’s violations of free expression. Tohti’s death is a tragic loss to the Uighur literary community, at a time when the government is attempting to abolish their cultural and intellectual life.”


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China orders Vienna hotel name change over ‘foreign worship’ Dispute in tourist hotspot Hainan sparks stand-off with country’s largest hotel group Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Share Save Save to myFT Topic Tracker Tom Hancock in Shanghai 3 HOURS AGO Print this page52 Government officials in the Chinese tourist hotspot of Hainan have told popular hotel chain Vienna International to change the name of its branches because their reference to the European city reflects a “worship of foreign things”, sparking a stand-off with China’s largest hotel group. The civil affairs bureau in the island province — sometimes referred to as China’s Hawaii because of its beaches — has issued a list of dozens of businesses with names that should be “rectified” because they suggested “worship of foreign things”. Among them were establishments named Victoria Hotel, Heidelberg Hotel and 15 branches of the mid-range chain Vienna International Hotels. The Vienna brand’s hundreds of outlets in China are majority owned by Jinjiang Group, China’s largest hotel operator, which operates more than 10,000 hotels worldwide and owns a majority stake in US group Radisson Hospitality.  “The country is now culturally confident. China has thousands of years of culture. Is it appropriate to use these foreign names on Chinese territory? Isn’t this hurting the feelings of the nation?” a civil affairs official told a state-run Hainan newspaper.  State-owned Jinjiang responded in a social media post this week saying that it had lodged a formal objection with Hainan’s civil affairs bureau. The company said it had registered Vienna Hotels as a trademark until 2022 and had a right to use the name. It declined to comment further. The Hainan government also ordered changes to business with “feudal” names such as “Coral Palace” and “Imperial Garden District”, ostensibly because they refer to China’s imperial past, as well as names they judged to be “incomprehensible” or “strange”. The Hainan government official, who the state-run newspaper quoted but did not name, said the province’s effort were part of a national campaign.  The dispute comes as companies from the US and Canada have complained of punitive measures in China due to the trade war and diplomatic dispute over Chinese company Huawei, which have soured Beijing’s relations between the two countries. Recommended Global Brands How does the US-China trade war hurt carmakers? In most cases the measures taken, such as extra customs checks, slower approvals and audits, reflect the efforts of zealous local officials rather than any formal orders from Beijing, according to businesspeople.  Chinese property and hotel projects are often named after foreign cities or regions. A 2017 survey of projects in 137 Chinese cities found that Paris, Venice, Versailles, California, Rome, Champs-Elysées and Victoria were among the most common names used. Local governments have periodically clamped down on the practice over the years. In 2017 officials in a district of the city of Xi’an in central China criticised the names of several buildings for being too foreign. They included a residential complex named after France’s Seine river and California City Plaza, a shopping mall. It was not clear if their names were later changed.


Overheard in the Long Room: corporate China

It's been a breathless year for China-watchers.
If the news flow from Trump's ongoing trade war with the People's Republic wasn't enough to wrap your head around, there are also re-emerging concerns over slowing growth, a bubbly real estate sector and a depreciating currency. Oh, and some stuff in Hong Kong.
But away from the noise, how are Chinese corporates faring?
discussion in the Long Room drew our attention to GavekalDragonomics annual “China Inc” report — a chartbook “based on two major data sources: the nationwide survey of 374,000 industrial firms, and the financial reports of 3,230 listed non-financial firms”. 
Below is a compressed glimpse of a few of the charts, which perhaps tie in with some of the concerns listed above. (Right-click charts to embiggen.)
Sales growth is rolling off . . .
So sales by consumer-facing firms -- car companies, food-producers and the like -- have begun to slow, while IT and healthcare firms, bar semiconductor-manufacturers, have at least maintained growth.
The southbound lines in the left-hand chart speak to an ongoing struggle in China: its tanker-like pivot to becoming a consumption, rather than investment, driven economy. As flagged by our colleague James Kynge, and ex-Alphavillain Matt Klein, China's consumptive spurt since 2007 has been fuelled by debt, rather than income:
More recently, Allianz found that in 2017, household debt hit a record 49.1 per cent of GDP, 19.2 percentage points higher than 2012's figure.
News over the summer of a wave of defaults in China's $190bn peer-to-peer lending industry — shadow-banking platforms which divert short-term savings to households — perhaps signals the brakes slamming on this trend. But, as Matt argued, with workers earning a much smaller share of non-financial corporate value than other countries, circa 40 per cent versus two-thirds elsewhere, consumers now have few other means to grow their spending power. Coupled with trade fears, one wouldn't be surprised to see this trend continue.
Debt servicing is on the up, well for corporates anyway
Two diverging trends here. China, on a national level, is requiring more and more cash to service its debts. Not good news for those concerned about the Republic's burgeoning debt burden, estimated to be anywhere between 300 to 350 per cent of GDP, depending on who you ask and what mood they're in.
This hasn't deterred bond buyers however, as the IMF recorded a circa $40bn flow into yuan-denominated bonds over the second quarter of this year, according to Brad Setser at the CFR:
But on a corporate level, China has become better at meeting its interest payments, maintaining a coverage ratio of 4, up from below 3 in 2015. On a sector basis however, concerns still persist about corporate debt. For instance in real estate, despite core profit margins expanding 12.3 per cent in the first half of the year, the ratio of developers' cash to short-term debt declined from 2.4 to 1.8 times, according to research by China Merchant Securities.
These forking trends — total interest coverage declining, but on a corporate basis improving — suggests debt simply shifting across economic sectors, rather than improving on a net basis.
China's exporting corporates require a lot of labour
This chart shows revenue per worker versus a percentage of sales from exports in China's corporate sectors.
One clear takeaway from this chart is electric machinery and equipment (and, to a lesser extent, straightforward machinery) is going to be the sector-to-watch as the trade war deepens. Of course, protecting America's machinery sector has been a key objective of the Trump administration because a) there are still around 1.6m workers making machines and tools in the US and b) the sector has resumed growth under Trump. Just check out this chart from Brendan's post a few weeks back:
If Trump's tariffs begin to bite, we could therefore see a disproportionately negative effect on employment in these sectors, which, coupled with tightening credit conditions, would not be good news for household incomes.
So consumption looks set to remain repressed. How is China going to maintain growth then? More debt of course! Just last week the People's Bank of China cut reserve requirements for commercial banks, in effect sanctioning a further $109bn of credit creation. We've seen this playbook before; whether it is consistently repeatable, is another matter:
Related Links:China wants to make machines and tools, too — FT Alphaville
Chinese real estate, charted
 — FT Alphaville
More trade war charts
 — FT Alphaville

Tuesday 18 June 2019


Chinese regulators made fresh attempts to calm frayed nerves in the country’s financial sector, as bank liquidity remained tight by some measures three weeks after authorities took over a struggling city lender.
On Sunday, securities regulators summoned a group of large Chinese brokerages and asset-management firms to a closed-door meeting in Beijing and asked them not to cut off trading and other dealings with smaller banks and financial institutions, according to a meeting summary circulated among industry participants Monday.
Cost ConsciousYields on bank negotiable certificates ofdeposits with lower credit ratings haveclimbed after Chinese authorities took over astruggling bank on May 24.
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The memo said there had been some defaults in the repo—or repurchase agreement—market, where banks, brokers and other financial firms borrow cash for short periods by pledging securities against short-term loans.
It said some institutions in the debt markets had placed certain trading counterparties on a “blacklist” and demanded they post higher-quality collateral against their borrowings. In other instances, some firms were cut off from trading because of worries that they would not repay their obligations, it said.
“If such mistrust is allowed to continue to spread, it will eventually become systemic financial risk,” the memo said, adding that mutual funds and brokers need to provide liquidity support to each other. It also said the China Securities Regulatory Commission and People’s Bank of China are closely monitoring the situation.
Chinese authorities are trying to contain the market fallout from their seizure of Baoshang Bank Co., a bank based in Inner Mongolia, on May 24. The commercial bank had been controlled by a missing Chinese financier.
Following the takeover, interbank lending rates in the country climbed, as did yields on lower-rated negotiable certificates of deposits—a common tool used by smaller banks to raise short-term funding. Issuance of these CDs also dropped, indicating that buyers of the debt have become more risk-averse and worried about defaults.
Banking authorities have stepped in to protect the interests of Baoshang’s individual depositors and are guaranteeing the bulk of its liabilities to companies and financial institutions.
China’s central bank has sought to assure the market that the Baoshang takeover was an isolated incident and ease banks’ funding strains.
Last Friday, it provided 300 billion yuan in additional liquidity support for small and midsize banks through lending facilities that institutions can tap by pledging bonds and other debt as collateral.
The central bank last week also said it would provide a financial backstop for CDs issued by Bank of Jinzhou, another midsize commercial lender. The Hong Kong-listed Chinese bank on May 31 disclosed that its auditor, Ernst & Young, had resigned, causing prices of its U.S. dollar bonds to plunge. It has since replaced the firm.
On Sunday, the People’s Bank of China said that even though a small percentage of Baoshang’s clients didn’t receive a full guarantee on what they are owed, the takeover has helped prevent systemic financial risks and maintain social stability.
If regulators had provided a 100% guarantee on all the bank’s liabilities, that would have used up a lot of public funds, the central bank said. That could lead to a moral hazard problem, it said, which could “encourage the market to act aggressively.”

Sunday 16 June 2019


US may strip Hong Kong's special status

The more that Beijing chips away at Hong Kong's civil liberties and autonomy, the more certain it is that Washington will strip the enclave of its special status.
Ambrose Evans-Pritchard
Hong Kong's survival as a global financial hub can no longer be taken for granted.
The extradition battle being fought out on the streets of Wan Chai is inextricably tied to the larger Sino-US struggle for superpower hegemony.
The more that Beijing chips away at Hong Kong's civil liberties and autonomy, the more certain it is that Washington will strip the enclave of its special status.
Once this line is crossed, the US will cease to recognise the territory as an independent member of the World Trade Organisation. It will cut off access to sensitive technologies. Hong Kong will be subject to the same painful tariffs faced by exporters from mainland China.
9News reporter Renae Henry is in Hong Kong, where violent demonstrations have taken over the city.
Many of the 1,400 US firms operating there will decamp, setting off an exodus towards Singapore. The Hong Kong model as we know it will no longer be viable.
The US has been slow to act as China systematically erodes the "one nation, two systems" model established by Britain and China in 1984. The mood has suddenly changed.
The Hong Kong Human Rights and Democracy Act introduced in the US House and Senate last week - backed by both parties - cocks the trigger on what amounts to a sanctions regime covering trade, finance, and technology.
"If all this rolls out, Hong Kong is going to be just another Chinese city," said one of the drafters.
The text links directly to the Emergency Economic Powers Act and calls for punitive action if Beijing further eviscerates the enclave's legal autonomy. For the current status quo to continue, the US administration must justify to Capitol Hill why the territory still deserves special treatment under the US Hong Kong Policy Act of 1992.
The rating agencies have begun to issue warnings. Fitch says its AA+ grade "rests on the assumption that the territory's governance standards, rule of law, policy framework, and business and regulatory environments remain distinct from that of mainland China".
Carrie Lam, Hong Kong's chief executive, suspended the extradition bill over the weekend but remains defiant. She called the legislation a necessary objective - a "good thing" - and left no doubt that the authorities are playing for time.
Swarms of demonstrators again poured out into the streets yesterday. Their goal has changed. They now demand Ms Lam's resignation. The protests carry an echo Tiananmen Square about them.
While the news focus has been on the danger of extradition to China for such offences as "picking quarrels" or "running an illegal business" - standard charges used to suppress dissent in China - Hong Kong's business elites are just as alarmed by other clauses.
The bill calls for "freezing and confiscating the assets of persons wanted for crimes in other jurisdictions". It brings the vast wealth of Hong Kong within reach of the Communist Party for the first time.
Financial centres are famously "sticky". It is not easy to destabilise a well-established hub. But political shocks can bring matters to a head.
Antwerp was Europe's thriving commercial hub and the world's richest city in 1560, a freethinking outpost of the Spanish Habsburg empire. The fall was swift once the Habsburgs began to choke its liberties and the counter-reformation reached fever pitch.
Credit Suisse says there are over 850 individuals in Hong Kong who are each worth more than $US100m ($145 million). Reuters reported that one tycoon with political "exposure" in China is already shifting sums of this magnitude to accounts in Singapore.
Paul Chan Mo-po, Hong Kong's financial secretary, issued a warning last month about capital flight but blamed the stress on large outflows from China through the Shanghai Connect link, mostly by foreign investors alarmed over the deepening trade conflict. That is unlikely to be the whole story.
The Hong Kong Monetary Authority has had to intervene repeatedly over recent months to defend the long-standing dollar peg. It forced up interbank Hibor rates last week to levels not seen since 2008, triggering a "short squeeze" to burn the fingers of speculators and shore up the currency.
Such action drains liquidity and is untenable over time. Monetary tightening by the HKMA - forced to shadow the US Federal Reserve - has slowed economic growth to a ten-year low. Retail sales contracted over the three months from February to April.
Protesters chant outside of the Office of the Chief Executive. Justin Chin
A long squeeze risks popping Asia's most overheated property boom.
The Bank for International Settlements says Hong Kong's "credit gap" - an early warning indicator for banking crises - was running at over 30 percentage points of GDP above its long-term trend as recently as early 2018. This was the most extreme reading anywhere in the world. It has left an overhang of leverage.
Hong Kong is the financial gateway in and out of China, a conduit for Chinese companies with $840bn of US dollar debt. Its banking system is 8.3 times GDP, comparable to Iceland before its system blew up in 2007. A sudden loss of confidence in Hong Kong would have global systemic consequences.
Events in Washington are moving fast.
The bill in Congress tees up sanctions against those "complicit in suppressing basic freedoms in Hong Kong". It effectively stamps the scarlet letter on the enclave's top leadership.
The bill demands a clampdown on sales of dual use technology and action to verify whether China is using Hong Kong as a back door to circumvent US tariffs.
Ultimately it is the prerogative of President Donald Trump to decide whether to suspend special status.
He has been coy on the issue, stating distractedly last week that "I hope it all works out for China and for Hong Kong". Mr Trump is unlikely to stand in the way of Congress for long. Hong Kong's protests offer him another irresistible weapon against Beijing.
One bad tweet from the Oval Office and east Asia's super-rich may take matters into their own hands.