How is the Ukrainian crisis impacting China? No. 1 Document, RMB Assets, Digital Payment, Entertainment Industry, SoEs and Coffee, Special Weekend Edition of 27 Feb
Intelligence and Insights on China's government actions, foreign policy, economy, and the capital markets.
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A Letter from the Editor:
As the old dictum goes, the first victim of war is truth. We are facing mounting difficulties in deciphering the ongoing conflicts in Ukraine: fake video footage flooded the social media; hasty conclusions were drawn, and genuine calls for de-escalation gave way to bellicose hawks fueling the escalation.
Restraint has been expressed by China over the first 5 days of the Ukrainian conflict, taking neither the side of Russia nor that of Ukraine. Instead, China has condemned the US as the provocateur, the escalator of the war, responsible for driving a “major power” to the cliff.
“China remains the only permanent member of the Security Council that has yet to realize complete national reunification,” a Chinese foreign ministry spokesperson said on Feb. 24 in response to the US remarks. The reference is clearly Taiwan.
First, Chinese corporations are entangled in the turmoil, acting in discordance and confusion. The distressed ride-hailing app Didi first announced its exit from the Russian market on Monday when Russian president Vladimir Putin signed off the legal recognition of the two breakaway Ukrainian republics. The decision was only reversed on Saturday that Didi would continue to operate in Russia. With Apple and Softbank as its major shareholders, Didi’s board, just like many other multinational corporations, reflects the tussle over stance, support, and values.
Two of the Chinese largest state banks - ICBC and Bank of China- swiftly announced to restrict financing for trade with Russia, reflecting China’s financial reliance, still, on the Dollar-denominated global monetary system.
Then there is the agricultural trade. The Chinese Customs Administration, in a surprise announcement, greenlighted the imports of wheat from all Russian territories on February 24, the day the war in Ukraine broke out. Ukraine exports 30% of the corn and 28% of the barley that China imports. Together, Ukraine and Russia export about 30% of the world’s wheat. Instead of buying agriculture from the US in fulfilling the commitment of the US-China Phase One Trade Deal, China is diverting the agricultural trade to a close neighbor. The Sino-Russian close ties can be a marriage of convenience, but it addresses material concerns on the side of China. In fact, China issued the No. 1 document of 2022, focusing specifically on food security. However, the lifting of wheat import restrictions from Russia can also be read as a panic buy rather than a premeditated move to hedge the unforeseeable risks of a geopolitical earthquake.
Traditionally, China has advocated for not interfering in other countries’ internal affairs. This has been a principle of its diplomacy since the Bandung Conference in 1955. Beijing has not yet recognized the Russian military offensive as an act of aggression, just like New Delhi at the UN Security Council. Chinese ambassador to the UN Zhang Jun’s statement at the Security Council suggests it is deliberately maintaining the ambiguity to play the mediator role in the conflict.
China clearly is not against Russia in this conflict, but equally, there is no strong evidence to suggest that China was even informed about Russia’s move, though the question probably won’t matter given the anarchic state of international affairs.
Even so, Beijing is not shy about speaking out about the West’s culpability in offshore balancing, which it identifies with ambivalence as the root cause of the conflict. Before the conflict, Beijing voiced its opposition to the eastward expansion of NATO at the Munich Security Conference, which by then was viewed as feasible by no major stakeholders, not even President Zelensky himself.
The folly of the Ukraine tragedy is such that if the West had been unwilling or unable to defend Ukraine all along, what was the point of promising a NATO membership to Ukraine? In a street interview program conducted by Deutsche Welle, the parallel appears to disturb many in Taiwan.
To Beijing, the real issue and intrinsic concern is Taiwan. For effective deterrence, former Japanese Prime Minister Shinzo Abe urgently requested the US to abandon strategic ambiguity towards Taiwan. However, this is easier said than done. Like Russia, China is a hypersonic ballistic nuclear power, but unlike Russia, China is the number one trading partner with an overwhelming majority of nations. Also, unlike Ukraine, Taiwan receives the diplomatic recognition of only 14 UN member states, not even doubling the countries that recognize Luhansk and Donetsk, Ukraine’s two breakaway republics.
Even today, the Chinese military exercises simultaneously in three areas off of the coast near Taiwan were swift and unambiguous as the Ukrainian crisis unfolds.
Undoubtedly, the global commodity price spike, military escalation, and diplomatic wrangling pose enormous challenges to China. But will China wind up being a beneficiary of the geopolitical events? The RMB has risen against the Dollar to the highest since 2018. China ironically has become the war-time safe haven for global capital. As it turns out, in wartime, sanity is valuable in more ways than one.
Summary of Articles:
RMB Assets Exhibited Safe-Haven Characteristics Amid Ukrainian Tension
What Did China’s No. 1 Document Say?
Government in Action
State Council: Children Not Supporting Parents Will Receive Bad Social Credits
China Plans New Stimulus Measures to Combat Slowing Growth
Shanghai to Upgrade Infrastructure to Meet the Electricity Demand of over 1.25 Million EVs by 2025
China Attributes Lack of Party’s Leadership to Financial Corruptions
Meituan Asked to Lower Fees to Support Restaurants
Alipay and Wechat Pay Tightened Rules on QR Code Payment
Electric Car and Smartphone Makers Enter Mutual Markets
China Restricts Income for the Entertainment Industry
SOEs Breaking Inroads into the Booming Coffee Market
China Treads Fine Line on Russia’s Troop’s Advance in Eastern Ukraine
Chinese Foreign Ministry’s Latest Remarks Aims at Taiwan
China Is Not Choosing Sides on the Ukrainian Crisis.
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1. RMB Assets Exhibited Safe-Haven Characteristics Amid Ukrainian Tension
On February 23, the RMB has appreciated over 100 points against the USD Dollar. The onshore exchange rate climbed to 6.32 RMB/USD. In the offshore market, the RMB/USD exchange rate has climbed above 6.31, the highest in 4 years. This has given rise to an unlikely assessment that the Chinese market has become a safe haven amidst the rising tension of war in Ukraine. Experts view the recent appreciation as driven more by short-term market supply-demand dynamics rather than any medium-to-long term shifts in policy direction or economic fundamentals.
According to Khoon Goh, head of Asia Research at Australia & New Zealand Banking Group, the RMB “has been trading like a safe-haven currency.” While the PBoC adopts more monetary easing, the direction for the currency should be depreciating. The fact that it has been appreciated is counterintuitive. It shows the currency’s attraction to risk-averse investors.
Chinese equity market should exhibit some risk-haven characteristics too.
Chinese onshore equity market should rise too. This is also giving rise to the prospects that China’s growth should recover, adding to the resilience of the onshore equity markets.
Huang Yiping, a former member of the PBoC monetary policy committee, has commented that with the great determination shown by the government to stabilize growth, “investors may think that RMB assets…can have some safe-haven properties.”
Three factors supported a strong RMB in 2021.
Strong exports during the pandemic
Due to China’s role as the global producer of last resort in 2021, China recorded a significant rise in trade surplus, thereby adding to the demand for the RMB.
Capital inflows through FDI and equity markets
Sustained efforts in opening up market access coupled with continued confidence in the Chinese economic fundamentals drive increased allocation of international capital to China. China’s FDI grew in double digits in January.
Interest rate differential
RMB-denominated bonds still offer one of the best risk-free rates among stable currencies, and short-term cash flows chasing yields have continuously piled in.
All the above three trends may reverse in 2022, marked by the resumption of global production and narrowing yield spreads.
To be clear, if the appreciation becomes more structural and persistent, the PBoC has made it clear to intervene in the value of the RMB. However, the current consensus among experts is that the right set of policies should focus on domestic economic growth, increase the flexibility of exchange rates, and maintain balanced expectations around the RMB.
2. What Did China’s No. 1 Document Say?
China’s Number 1 document was released on February 22, focusing on agricultural and rural development. This is the 19th No. 1 Document in the 21st century themed on agriculture. The fact that the Number 1 document of the year covers agriculture indicates the significance of rural development to the Chinese economy.
Two bottom lines are highlighted in the Document.
Guarantee food security.
“The Chinese food bowl must be firmly held in Chinese hands.” “The Chinese bowl must contain mainly Chinese grains.” China wants the agricultural output to be over 1.3 trillion jin (500 grams), or 650 billion kilograms.
The government also asked to secure the minimum arable land threshold. It aims to optimally allocate arable land, improve water diversion and irrigation, and multi-tiered terrain utilization for agricultural production.
Prevent populations lifted out of poverty from systemically reversing to poverty.
The central government’s agricultural budget will be prioritized in the annual fiscal budget. More fiscal budgets will be shifted to the rural regions.
The financial sector will expand special lending programs to encourage rural enterprises, rural entrepreneurship, and rural technological innovations.
Agricultural technology and seed technologies will be further integrated into China’s rural development.
Government in Action
1. State Council: Children Not Supporting Parents Will Receive Bad Social Credits
The State Council released a 2025 Plan for Aged Care and the “Silver-Haired” Services Economy Development, marking the first time China systematically crafts an economic strategy for the country’s aged population. Over 200 million Chinese are currently over the age of 65. （ read more in Chinese)
The Notice stressed that children will play a bigger role in providing aged care, referencing China’s adage “supporting the parents is the beginning of all virtues.” Children who have the financial capacity but are unwilling to support their parents will see their social credit scores tarnished.
The legal retirement age will be extended in phases.
A long-term care ecosystem will be established.
The Plan focuses on supporting the growth of the “Silver-Hair” economy.
The “silver-haired” economy means economic opportunities. The Plan has highlighted financial and technological growth opportunities.
“Silver-haired” special economic zones will be established to focus on products, innovation, and smart appliances for the aged population.
Upgrade the aged care products to include technology and digital capabilities and robotic products for transportation, mobility, and supervision.
Retirement pension scheme reform
Support individual aged care insurance industry, individual retirement contribution plans, the wider coverage of corporate retirement benefit plans.
Establish a long-term care insurance system.
Strengthen the role played by state-sponsored senior living facilities.
State-sponsored senior living facilities will support senior childrenless citizens, who do not have the financial means, and who are physically or mentally disabled.
100% of counties in China will provide senior living facilities to the people with the above special needs by 2025.
China’s population allocation by age
According to the National Bureau of Statistics’ latest data,
62.5% of the population are between 16-59.
18.9% of the population is over 60.
14.2% of the population are over 65, indicating that China has fully entered into an aging society.
2. China Plans New Stimulus Measures to Combat Slowing Growth
In its latest press release, the Ministry of Finance unveiled three fiscal policy focuses for 2022.
1. Expanded tax breaks and fee cuts for households and Small-Medium-sized businesses.
Finance Minister Liu Kun promised bigger cuts than in 2021, which totaled over RMB 1.1 Trillion in reductions.
The fee reductions have also been supported by the government’s deliberate measures to reduce the fees charged by platform companies on restaurants and small businesses.
2. Increased fiscal transfer from central to local governments in 2022.
The increased transfers are expected to balance local governments’ revenue reductions from reduced taxes and fees.
The purpose of the transfer is to “continue to favor regions with difficulties and underdeveloped areas.”
3. Enforced local governments to frontload infrastructure investments.
Xu Hongcai, the Vice Finance Minister, pointed to the issuance of RMB 484 billion worth of special bonds by local governments as evidence for progress in infrastructure spending to cushion the slow growth expected during the first half of 2022.
1/3 of the special bonds allocated to local governments in 2022 have been unleashed in January alone to arrest the economy from further sliding.
The fiscal stimulus is consistent with the easing monetary measures from the Central Bank.
It also highlighted two particular difficulties facing fiscal policies:
· New downward pressures from unresolved domestic issues of property market debt and strict anti-virus measures, and developing global headwinds in reduced relative export competitiveness and monetary policy cycle de-synchronization.
· Reconciling debt build-up and counter-cyclical necessity in fiscal policy setting; that is to say, the need for greater deficit spending amidst secularly reduced government income and to combat problems of weak demand.
3. Shanghai to Upgrade Infrastructure to Meet the Electricity Demand of over 1.25 Million EVs by 2025
On February 24th, following the earlier issued development plan of the EV industry (2021 - 2035) by the State Council, Shanghai municipal government issued an official statement regarding the construction of new infrastructure to accommodate the rising charging demand for EVs and to support the development of the EV industry. (Source)
Shanghai’s infrastructure plan aims to provide sufficient charging piles for at least 1.25 million EVs by 2025, ensuring the EV-to-charging pile ratio in the city is below 2:1. The new EV infrastructure system will also improve IT-based connectivity, standardization, comprehensive management, and operation mechanism.
The details of the infrastructure plan are summarized as below:
1. Enhance overall planning and arrangement of facility construction. The infrastructure plan will see accelerated construction of public charging facilities. Establish a management framework for charging facilities in residential complexes. Old residential complexes are expected to undergo modification works to enable the installation of charging piles.
2. Promote industrial management standards. Manufacturers of EVs will be required to participate in the campaign to provide charging facilities for their customers, which will be taken into account in evaluating their EV sales license. Charging facilities must be connected to the metropolitan government’s online platform to ensure the usage efficiency and failure process. Electric grid planning will work in conjunction with the new EV infrastructure plan.
3. Enabling public sharing of charging facilities. Establish a management system for the charging facilities, which provides connectivity for both companies providing charging piles and government platforms. Ensure the integration of charging and parking services.
4. Sustainability. Establish a standard for smart charging facilities and promote the usage of renewable energy.
5. Promote new business models and financial support. Encourage companies that can construct and manage to charge facilities to explore the commercial potential of residential complexes. The government supports these companies to manage residential complexes on the overall construction and management of charging facilities for all residents. Banks will be providing loans with favored interest rates for these projects.
6. Supporting measures. The Shanghai government will also focus on regulation, promotional campaign, ensuring security responsibilities, and leveraging its networks with market participants to promote involvement and support for the project across the city.