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The Year of the Horse has arrived, but with less than auspicious beginnings. The financial system is showing signs of strain, and tensions are running high in border regions. The year ahead looks to be an interesting one.
Men of the people
Both Xi and Li went on inspection tours this week, Xi to Inner Mongolia and Li to Shaanxi. Both leaders did their best to present themselves as compassionate leaders in touch with the people by visiting poor areas and shantytowns and vowing to improve the people’s livelihoods. Xi was (as always) the more charismatic figure, performing traditional Mongolian rituals, donning military fatigues, learning sign language, holding babies and making grown women cry.
Cynics will view this as empty political theater, but it’s more likely that such visits 1) signal a commitment to develop poorer regions, and 2) give leaders a better view of the challenges that poor populations face. It seems that Chinese leaders spend a lot more time in poor villages than do western politicians in inner-city ghettos or trailer parks. China’s leaders understand that their legitimacy depends on keeping the people happy; expect continued efforts to promote the social safety net, as well as reduce corruption within the Party that often keeps the benefits of such policies from reaching the intended recipients.
Thanks for coming?
During their trips, Xi and Li visited firms in the dairy, agriculture, aerospace, electric vehicle and logistics sectors. The visits bode well for domestic companies in these sectors overall, but the “leader effect” was mixed when judging by the stock price of the companies visited.
Not necessarily moral, not necessarily hazardous
Investors in a USD 500 million wealth management product (WMP) issued by ICBC were bailed out this week by an annonymous “strategic investor” when it was clear that the product would not yield its promised returns. This happened even after ICBC had publicly stated that it would let the product default. Such a bailout is not new; of the 20-plus WMPs that have run into difficulties in the past two years, all have been rescued in some form or another.
Many argue that this will exacerbate moral hazard, and ultimately increase instability in the financial sector. Some pundits have gone so far as to say that this represents a moment similar to the collapse of Bear Sterns in 2008 that, in retrospect, heralded the financial crisis.
These fears are overblown. Just because investors were paid back (and it is worth noting that they received only the principal and not the promised returns) does not mean that the banks are off the hook. China’s NPLs are the product of a too-cozy relationship between local officials, state-owned enterprises and the banks (which are predominantly state-owned as well). The Party has considerable leverage over all of these players, and the party-building and anti-corruption campaigns on which Xi has spent so much political capital are intended to impose stricter control over matters such as these. The Party will rescue investors to stave off unrest, but handcuffs are more likely than golden handshakes for the parties involved in originating the bad loans.
This is not to say that everything is fine. 2014 will see an increase in NPLs, but China’s Lehman moment is not around the corner. In stark contrast to 2008, EVERYBODY is aware of the problems in China’s financial system. Officials have been proactive, cleaning up the NPLs, reining in shadow banking, and liberalizing the financial sector. As this highly recommended recounting of the June 2013 liquidity crunch shows, China’s financial regulators know what they are doing. We will not see systemic collapse in 2014.
Xinjiang: The west is red
Last week, twelve people were killed in Aksu by a combination of police violence and bombs, while a further eleven Uighurs were killed crossing the border into Kyrgyzstan. These are only the latest in a series of incidents that have claimed over a 100 hundred lives in the past year.
The violence is clearly worrying to the Chinese leadership and has sparked a shift in the strategy laid out by Xi Jinping at a PBSC meeting in December. While details of the strategy have not been made public, China Daily has said “a crackdown is definitely necessary,” and it has been reported that Xinjiang will increase spending on public security by 24% suggesting that the government will take a hard line approach.
The violence in Xinjiang is unlikely to have direct affects on most foreign business in China, but it does raise the country’s overall risk profile. Xinjiang is not the only region suffering from ethnic violence; Inner Mongolia has seen tensions, and the problems in Tibet are widespread and could become much more violent should the Dalai Lama die. Moreover, October’s car bomb in Tian’anmen Square reminds us that the violence is not confined to border regions.
SOE reform: careful what you wish for
China is slowly moving ahead with SOE reform. Shanghai has divided its SOEs into competitive, functional and public interest companies. Sinopec is promoting “mixed ownership” and will be more open to private and social capital. And SASAC is piloting efforts to further separate ownership and operations.
When China talks about SOE reform, it does NOT mean privatization; instead it means making SOEs stronger and more efficient. The measures mentioned above should do exactly that. Foreign firms should expect increased competition from Chinese SOEs, both in China and abroad.
Don’t trust ‘em
The NDRC’s anti-trust investigation into Qualcomm looks like it might be nearing a conclusion. This means that the NDRC’s beefed up anti-trust department is going to free up some resources to carry out new investigations. Those in the petroleum, telecommunications, banking and the auto sectors should be on alert.
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Top Leaders Week in Review |
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