Our peace will, like a broken limb united, grow stronger for the breaking: RCEP, Negative Interest, SOE default, Tsinghua Unigroup, Baidu, Kissinger, a Special Weekend Edition

Intelligence and Insights on China's government actions, foreign policy, economy and the capital market

Letter from the Editor

The week’s highlights carry the common theme of mending the broken and the wronged. In destruction is creation found.

It began with the breakthrough of the eight year-long negotiation over RCEP, the greatest free trade agreement the world has ever seen, a newly formed bond in a region with a wounded past and a brighter future in expectation. With the rise of protectionisms and uncertain future of multilateral trading systems, 10 ASEAN nations, China, Japan, Korea, Australia, and New Zealand found the courage to renew the pact of prosperity. A study by Peterson Institute found the pact would boost global trade back to the pre-trade war level.

With the world’s largest trading bloc forming at its doorstep, China fastens to transform its economy, shifting attention to high-end manufacturing and high-tech industries.

Rise of protectionism and withdrawal of great powers from regional trading block negotiations threaten the continuation of economic integration of the region. Born out of the cinders, the RCEP block carries great expectations in the post-COVID era.

An old world shall be broken in order for a new world to begin. This week has seen a series of high profile SOE debt defaults, including the prized crown jewel in the Integrated Circuit Industry-Tsinghua Unigroup. China is reluctant to bail out the State-owned sector in 2020, and perhaps even determined to let market nature take charge, in judging state-owned and private companies alike. This week will be the sign of a beginning. China will place Bankruptcy Law on the central pedestal to restore market normalcy. This, following a tumultuous regulatory week for China’s largest internet companies, is perhaps another form of broken and healing.


I. Structural

1. Key Features of the RCEP

RCEP encompasses 20 chapters, including trade in goods, trade in services, investment and market access, as well as clauses on IP, E-commerce; intellectual property; competition; small and medium enterprises (SMEs); economic and technical cooperation; government procurement; and legal and institutional areas including dispute settlement. 

  1. Trade in goods includes the clauses for e-commerce, the potential for micro, small and medium enterprises, the deepening regional value chain, and the complexity of market competition.

    It covers e-commerce development including protection of personal information of e-commerce users and provides protection for consumers using electronic commerce. The E-Commerce Chapter also addresses some data- related issues, through provisions on location of computing facilities and cross-border transfer of information by electronic means. 

  2. Although ASEAN members have signed 10+1 free trade agreements with all five partner countries separately, the RCEP Agreement covers much more grounds in trade in services and investment clauses than those covered in the ASEAN Plus One FTAs.

  3. When one trading partner enters one country within the RCEP, the country enters all 15 member markets simultaneously.

  4. RCEP also covers trade in services, including specific provisions on financial services; telecommunication services; and professional services, as well as the temporary movement of natural persons.

  5. The RCEP has significantly strengthened the FTA relationship between China-Japan, and Japan-ROK. RCEP marks the first time that Japan has reached a FTA with both China and the ROK.


  1. over 90% of all trade in goods will reach zero tariffs according to the RCEP Agreement. Some trade items will reach zero tariffs immediately, and almost all the rest will phase down to zero tariffs over 10 years.


  1. The RCEP will be executed as early as next year.

The Asian Ecosystem

  • Among North America, the EU and Asia, global economy has finally formed a tripolar growth pattern.

  • Global manufacturing capacity will continue to gravitate towards Asia. China, Japan and the ROK combined take up over 50% of global industrial output.

  • This region includes world second largest (China), third largest (Japan), 7th largest (India, which can join by simply agreeing to the RCEP agreement), and 11th largest (ROK) economies.

Industries benefiting from the RCEP:

  • Logistical shipping, free trade ports, cross-border e-commerce;

  • high-end manufacturing and high-tech industries from China will benefit. Labor intensive industries will suffer.

2. A BRICS Innovation Hub for the New Industrial Revolution

Chinese president Xi Jinping announced today that China will accelerate the grouping of a BRICS partnership on the new Industrial Revolution, with the establishment of an innovation hub in Xiamen, Fujian Province. This was announced today at the 12th BRICS summit in Beijing.

The participation in the Xiamen innovation hub by the other BRICS countries are non-binding, but welcome. The message is consistent with China’s proposal in 2018 for the establishment of a BRICS conceptual Partnership on the 4th Industrial Revolution. This delivers the first concrete step in solidifying such a concept.

The Xiamen hub will also facilitate cooperation in areas of policy coordination, personnel training and project development.

BRICS Partnership on the New Industrial Revolution

Partnership on New Industrial Revolution (PartNIR) is a program of partnership among BRICS nations that was initiated at the 2018 BRICS Summit. It aims to Maximize the opportunities arising from the fourth industrial revolution/New Industrial Revolution. 

The Fourth Industrial Revolution (4IR)

Also known as Industry 4.0, 4IR is the unfolding age of digitalization—from the digitally connected products and services we consume, to advancements in smart cities and factories and increasingly common automation of tasks and services in our homes and at work. It blends the physical and virtual worlds.

And it’s pervading virtually every aspect of modern life. From consumers to manufacturers to cities, 4IR advancements are more accessible and less costly than just a few years ago. But 4IR is more than technology: as it gradually shapes how we live and work (and even play), it also ushers in a revolution of experience. ( PWC summary )

Nine essential technologies that mark the 4IR

II. Events

3. China Issues First Negative-Yielding Government Bond

China has officially joined the world’s sub-zero bond club. China is set to sell a 750 million euro ($887.93 million) 5-year bond at an effective -0.15% interest rate.

This bond issuance represents the first negative-yielding government bond China has offered, and the second euro-denominated bond China has issued. The first Euro-denominated bond was issued in 2019.

The Eurozone bond issuance brings strategic benefits to China.

  1. It capitalizes on the negative yield advantage in the EU market.

  2. It prepares for potential investment decoupling brought by the US policies, by intensifying its capital market engagement with Europe. In light of the recent W.H. Executive order to ban US-based investors from investing in Chinese investments connected to the Chinese military, market diversification of Chinese offshore investments is important.

  3. Offer sovereign bonds in alternative currencies to the RMB or dollar is seen as an important part of China’s larger role in global investments.

4. Funds snap up Distressed SOE Debts with Rising Defaults

China has seen a series of SOE bond defaults this fall.

At the end of October, Brilliance Auto’s parent company defaulted on a bond payment, announcing it would not be able to repay a three-year RMB1 billion bond.

Yongcheng Coal & Electricity, a regional coalminer in Henan province, defaulted on Friday, also unable to pay a RMB1 billion bond. 

Prior to their defaults, Yongcheng and Brilliance were given AAA ratings and with RMB20 billion or more on their respective balance sheets. 

The troubles of the two companies has prompted funds – particularly ‘vulture funds’, which specialize in distressed assets - to race to buy the debts of these Chinese SOEs, who are betting that the central government will not allow the situation to deteriorate further in order to stave off systemic risks. 

Other investors, on the contrary, now perceive that there is no longer a subtle government bailout guarantee to ill-run SOEs.

It was later reported that Yongcheng paid RMB32.4 million of overdue interest in the aftermath of its default, and that the company is raising money to repay its creditors. 


5. Defaults Trouble Chinese Companies 

Tsinghua Unigroup, the semiconductor company that is a wholly-owned subsidiary of Tsinghua University, has defaulted on a US$198 million bond. The default prompted a credit rating downgrade from AA to BBB, which will weaken the company’s financial health in a costly chip making industry.

The price on a corporate bond of Unigroup’s parent, Tsinghua Holdings, fell more than 14% on Tuesday, making it the worst performing bond on the Shanghai Stock Exchange. 

Unigroup failed to win creditor approval for a rollover of the US$197 million bond, which came due on Sunday. In a meeting on Friday, Unigroup proposed repaying RMB100 million and extending the balance by six months. 

The company is a key player in China’s push for self-reliance in semiconductors. The OECD ranked it top globally out of 21 semiconductor companies in terms of government support received from 2014 to 2018.

This follows defaults at Yongcheng Coal & Electricity on Friday and Huachen Automotive Group, the parent company of Brilliance Auto, at the end of October, on which China BIG Idea reported yesterday.

Worryingly, China’s leading battery player, Tianqi Lithium Corp. is also facing a huge debt burden. The company must come up with US$1.88 billion by the end of November amid falling lithium prices. It has already missed US$71.5 million in interest payments this year. Shares in the company fell 10% on Monday. 

6. Baidu Lags in Digital Economy, but Leads in AI.

Baidu Inc. has agreed to buy livestreaming app YY for US$3.6 billion in an attempt to adapt its business to the mobile era. Joyy’s YY streaming network is a business worth US$1.8 billion with 4 million paying users. Baidu’s CEO Robin Li said, “this is an proactive move”. 

Baidu's financial report shows that in the third quarter of 2020, Baidu achieved 28.2 billion yuan in revenue, boasting only a 1% increase since last year. Despite previously being celebrated as one of China’s leading technology companies, and as one third of BAT (Baidu, Alibaba, Tencent), Baidu has since fallen behind.

According to the company's market value on November 17, Baidu is worth 332 billion RMB, less than 10% of the market value of Tencent or Alibaba ( compared to 4.86 trillion yuan for Tencent and 4.6 trillion yuan for Alibaba).

Baidu has been trying hard to diversify its technology offerings and has repeatedly demonstrated its efforts to join the live broadcasting sector this year. In March this year, Baidu began recruiting a large number of positions related to livestream business.

On June 30, Baidu introduced Gu Feng, founder of Huya, to head up their livestream team, reporting to Ping Xiaoli, the general manager of Baidu App. At the same time, Baidu confirmed that they had completed the construction of a livestream platform.

Commentators suggest that selling YY is considered a good opportunity for parent Huanju Group, as YY has reached a “ceiling” on the user scale. According to the Q3 financial report, paying users of YY fell by 4.7% year-on-year to 4.1 million. Huanju Group is instead focusing on its overseas operations following the successful acquisition of BIGO live.

Meanwhile, Baidu benefits from acquiring a mature product with a large market share. After the acquisition is completed, the entire YY team, including content and technology, will be assigned to Baidu. Chinese reports suggest that this will be undoubtedly useful for Baidu’s ongoing expansion into the sector.

The old BAT to the new ATM

Baidu arose as China’s dominant search engine, and ranked alongside Alibaba and Tencent as China’s tech “BAT”.

Alibaba and Tencent have both adopted more aggressive strategies in building its own ecosystems. Alibaba uses an integrated strategy, and Tencent, a decentralized strategy. Baidu has been lagging in expanding into the rising tech and social areas, and have a far smaller presence.

The Chinese tech universe pillared on BAT has been gradually replaced by ATM- Alibaba, Tencent and Meituan. And more recently, the addition of Bytedance has been particularly strong.

Baidu is a global early mover and global leader in AI.

Baidu started “AI” branding in 2010, 5 years before Google. Baidu has quietly become a global leader in AI.

Quantifying AI rankings are tricky. However, one metric is the General Language Understanding Evaluation (GLUE), which ranks approaches to AI language understanding. At the end of 2019, Baidu topped this list, beating out competition from Google and Microsoft to become the first model to achieve a 90. (read more)

Baidu’s leadership in Autonomous Driving

Baidu says that Apollo – its open-source autonomous vehicle technology platform – is one of the “largest autonomous driving ecosystems in the world, bringing together over 130 global partners and used by over 12,000 developers and partners worldwide.” 

At the 2019 Consumer Electronics Show on Tuesday, Baidu said it would build on this platform by launching Apollo Enterprise, a business unit that will create intelligent driving products and solutions for mass production vehicles. (read more)

II. Opinions

7. Kissinger Urges US-China Rapprochement 

Former US Secretary of State Henry Kissinger called for Joe Biden to restore communication with China and warned that otherwise the world would head towards a major catastrophe analogous to World War I.

"Unless there is some basis for some cooperative action, the world will slide into a catastrophe comparable to World War I," Kissinger said during the opening session of the Bloomberg New Economy Forum, adding that military technologies available today would make such a crisis "even more difficult to control" than those of earlier eras. 

Kissinger also believed an informal dialogue mechanism, between the leaders’ representatives, is essential, beyond the routine official dialogues.

Two sides should "agree that whatever other conflict they have, they will not resort to military conflict." To achieve that, the US and China should jointly create "an institutional system by which some leader that our president trusts and some Chinese leader that President Xi trusts are designated to remain in contact with each other on behalf of their presidents.”

At the New Economy Forum

Former US Treasury Secretary Hank Paulson said that the incoming Biden administration should start a new round of negotiations with China concerning trade. 

"We'll need to deal with structural and process issues that include services, not just goods," he said. "The agreement should be done in phases with regular deliverables, beginning with easier issues that build momentum to tackle the tough ones." 

Dialogue with Henry Kissinger on US-China at the New Economy Forum 2019

This is a wise substantial and consequential dialogue from Henry Kissinger for the current era.


8. Mark West, Head of EMEA of Chinese unicorn 4Paradigm sits down with Hey China! on Cisco’s recent investment