Only difficult years ahead
Skyscrapers Shanghai Tower (L), Jin Mao Tower (Top) and Shanghai World Financial Center are seen during a hazy day at the financial district of Pudong in Shanghai.
Skyscrapers Shanghai Tower (L), Jin Mao Tower (Top) and Shanghai World Financial Center are seen during a hazy day at the financial district of Pudong in Shanghai. (Photo provided by ロイター/アフロ)

2019 will go down as a pivotal year for US-China relations.  As the year end approaches Hong Kong has enjoyed a few relatively quiet weeks and both sides claim a phase one trade is agreed but we have yet to see any detailed text.  But no one should think that this year end calm is a sign that the broader US China clash is over, at best it is a short pause.  Nothing has really been resolved yet and the first year of the new decade will likely be more volatile that this one.

For China this is the year that the shine well and truly came off the Xi Jinping’s grand plan for rejuvenation of the Chinese nation.  Four areas in particular came unstuck for Xi as the year progressed.  The domestic economy continues to slow and although the stock markets were some of the best performing in the world for 2019 the rise in defaults brought home the very real costs which China will be paying for years because of uncontrolled credit expansion.  The worsening trade and economic relations with the US, but then by extension with other countries which have grown tired of China’s unfair practices became even more apparent.  The Hong Kong anti-extradition protests caught everyone by surprise in terms of duration and ferocity.  And importantly the Xinjiang camps where China has illegally imprisoned over 1 million Uyghurs become front page news.  China found itself on the backfoot on all fronts.

The domestic economy will grow at a touch above 6% for 2019 or so says the government’s own figures.  Few believe those numbers and the real rate of growth is certainly lower and even then, the growth within China is very unevenly split across the provinces.  What is important for China is that for much of the past decade the growth has been maintained through massive increases in credit.  Xi Jinping has at last understood the need to rein in the credit expansion but the flipside of that is growing defaults as money dries up in different parts of the economy.  The private sector has been hit badly as sources of credit have dried up, but the year ended with the default of a State-Owned Enterprise from rich Tianjin.  Tianjin may notionally be a rich city in China, but it has one of the largest debts loads.  The failure of Tewoo, a government backed commodity trader, was the first state default since GITIC back at the time of the Asian Financial Crisis.  This failure should have brought home to even the most positive investors how difficult the debt situation is in China.  There is no easy, or better put no painless solutions.  Too much money has been lent to projects and companies which have no ability to pay it back.  Defaults, across many sectors are going to continue to happen.  Clever accounting and window dressing of financials can only do so much.  Unlike in past times of bust in China the shear complexity of today’s financial system and interconnected web of cross guarantees and loans mean that failure at one point can result in a chain reaction affecting many other seemingly unrelated companies or sectors.

If the debt defaults aren’t a big enough worry, then the massive rise in pork prices should be.  China has seen possibly half or more of its hog population wiped out from African Swine Fever.  Poor animal husbandry, a culture of denial and corruption has mean that the disease has spread faster and more broadly than the government reports.  This scare indicates how vulnerable China is to health shocks.  Whether for human or animal its medical system is overstretched and operates in a system of denials when fast, clear information is essential for tackling such problems.  The denials and coverups which were seen over tainted blood donations in the 1990s, for SARS in 2003 look all too familiar for swine fever in 2019.

The trade war has paused perhaps, and this week saw China starting to repurchase soybeans from the US.  The accounts of what has been achieved in phase one though are very limited, more agriculture purchases, more promises around market access and a roll back of some tariffs.  Hardly worth the effort.  There is so much still to do yet the trade war has become so much bigger than trade.  The entire US political machine has turned against China and has grown wary to its expansion in all areas.  Indeed, the phase one trade deal had some democrats and republicans denouncing it as a sell out to China.  The anti-China feeling remains strong.

For months the world was exposed to protests in Hong Kong which awed and amazed onlookers.  Millions took to the streets in peaceful protest and came back the next day to clear up their rubbish yet within weeks riots, tear gas and mass disruption became the norm as the Hong Kong Government turned a blind eye and deaf ear to the demands of the people.  Police brutality was broadcast live around the world, but the local government refused to even consider an independent inquiry into the clear excesses.

After 6 months of protest there is no sign that the discontent has faded.  The university sieges of November followed a week later by district council elections, which saw a landslide of seats go to the protest and anti-government parties, provided a natural pause in the protest momentum, but the struggle will continue for years to come. These latest demonstrations ultimately are the latest in a long arc of protest dating back over fifteen years to the growing encroachment by Beijing into Hong Kong’s freedoms.  After months of protest, many needlessly violent, the success of the district council election results and the passage of the Hong Kong Human Rights and Democracy Act by the US Congress and its prompt signing into law by President Trump, Hong Kong was on the world’s map like never before and Beijing response is of concern to all nations.  Beijing may claim, as it always does, that Hong Kong is a purely domestic affair yet the Sino-British Joint Declaration was a treaty lodged with the United Nations and one which the Chinese lobbied to be accept so as to ensure Hong Kong retained it special, independent trading status from China.  Hong Kong is a global concern however much Beijing dislikes it.

The global exposure and a slowly growing outcry around the illegal imprisonment of perhaps as many as 1.8 million Uyghur Muslims in Xinjiang has brutally exposed the very dark side of Communist Party rule and the concerns around electronic surveillance.  The Party has been eradicating Uyghur culture for years with the destruction of mosques and restrictions on local language and religious freedoms, but it has been the establishment of the camps and the disappearance of children and parents that has made the world pay attention to what is going on.  Beijing claims its policies in Xinjiang are designed to stamp out terrorism and extremism and there have been several attacks by Uyghurs, but they need be put in context of the growing tyranny within Xinjiang.  Beijing initially denied the camps even existed and then pivoted to the claim they were vocational schools teaching useful life skills to the population.  But these are camps with barbwire fences, armed guards patrolling the perimeter, hi-tech facial recognition and no communication with family, friends or lawyers outside.

Beijing still defends its actions but there is a growing awareness of what is happening and an understanding of how the Party treats its own citizens and how it exercises control.  The Hong Kong protesters often raise the surveillance state seen in Xinjiang when pushing back on Beijing’s reach in Hong Kong.  Such comparisons may seem far fetched but there is no doubt about the massive human rights violations being committed in Xinjiang for those willing to open their eyes.

None of these problems will be going away or being solved soon.  The trade war basically pits two different systems against one another.  Beijing has played the global trade game unfairly and very much to its own advantage.  It has built entire industries on subsidies thereby undermining foreign competitors.  Beijing has expanded into buying foreign companies yet limited foreign companies from buying in China or completely restricting market access.  Such lopsided interaction has grated on economic relations for too long.  But the trade war has also given cover to raise further issues with China beyond trade.  The capital war and real concerns within the US about US funds buying into companies which are enabling repression in Xinjiang are very much going to feature in the coming year.

For Xinjiang and Hong Kong, and by extension Taiwan, the problems would require an entire change in the nature of Communist Party rule.  The Party is about control, about loyalty to the Party, about falling into line as they see fit.  Both Xinjiang and Hong Kong don’t fit into that Party mold.  These societies operate different and value different things from what the Party values.  There is no reason to think that the Party will be changing its fundamental nature now.  In fact, Xi Jinping has made loyalty to the Party in the name of building a strong nation absolutely central to his entire way of governing.

So how should countries respond to China?  Is decoupling and a complete disengagement with China a workable or desirable option?  The short answer is no.  China is simply too big to ignore and by ignoring it the problems and abuses will not go away.  Instead it is important that developed, and developing nations speak out against China when needed but also engage with China in a realistic way which reflects the realties of the place.  Should Xi Jinping be welcome in Japan, the US or European capitals with great fanfare and state visits.  No should be the answer.  To welcome him at this time when millions are illegally detained is to sacrifice our own values.  Conflict with China is not desired but a robust and honest dialogue is.  For too many years businessmen, politicians, universities presidents and other dignitaries have been telling China what it wants to hear not what it needs to hear.  That era should be long over.

As the new decade starts China is badly positioned across all aspects of economy and society.  It is without doubt much bigger, richer and more assertive than ever before but that hides very real weaknesses.  Demographically China is in a dreadful position.  A rapidly aging population with a falling workforce will make China into the world’s largest nursing home.  While Japan may have gotten rich before it got old China has no such luxury.  China’s larger economic scale is only due to the vast increase in debt that has been seen over the decade.  This year saw not only a state firm default, but three banks needed direct state support and restructuring.  At the beginning of the 1980s, 1990s, 2000s, and then even in 2010s, China had economic kickers which could boost the economy.  First the opening and reform of the agriculture sector, then opening to manufacturing in the 90s, the WTO entry a decade later and a huge credit boost a decade ago but now there is no such easy option.  The external kickers are gone, and the credit situation simply can’t allow for the type of stimulus which has been seen before.

Potentially the biggest challenge will be handling external relations and geopolitical affairs.  China has grown rich as has its trading partners, but it has not made any friends yet has alienated many.  While China already has a difficult domestic situation it too must deal with a world which is less inclined to allow China to do its own thing.  The easy years are over for China.  Its political system is inflexible and unable to work constructively with others as China views all relations as a zero-sum game.  2019 was a difficult year for China, next year will bring more of the same and will set in place what will be the most difficult decade since the reform and opening of 1979.

フレイザー・ハウイー(Howie, Fraser)|アナリスト。ケンブリッジ大学で物理を専攻し、北京語言文化大学で中国語を学んだのち、20年以上にわたりアジア株を中心に取引と分析、執筆活動を行う。この間、香港、北京、シンガポールでベアリングス銀行、バンカース・トラスト、モルガン・スタンレー、中国国際金融(CICC)に勤務。2003年から2012年まではフランス系証券会社のCLSAアジア・パシフィック・マーケッツ(シンガポール)で上場派生商品と疑似ストックオプション担当の代表取締役を務めた。「エコノミスト」誌2011年ブック・オブ・ザ・イヤーを受賞し、ブルームバーグのビジネス書トップ10に選ばれた“Red Capitalism : The Fragile Financial Foundations of China's Extraordinary Rise”(赤い資本主義:中国の並外れた成長と脆弱な金融基盤)をはじめ、3冊の共著書がある。「ウォール・ストリート・ジャーナル」、「フォーリン・ポリシー」、「チャイナ・エコノミック・クォータリー」、「日経アジアレビュー」に定期的に寄稿するほか、CNBC、ブルームバーグ、BBCにコメンテーターとして頻繫に登場している。 // Fraser Howie is co-author of three books on the Chinese financial system, Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise (named a Book of the Year 2011 by The Economist magazine and one of the top ten business books of the year by Bloomberg), Privatizing China: Inside China’s Stock Markets and “To Get Rich is Glorious” China’s Stock Market in the ‘80s and ‘90s. He studied Natural Sciences (Physics) at Cambridge University and Chinese at Beijing Language and Culture University and for over twenty years has been trading, analyzing and writing about Asian stock markets. During that time he has worked in Hong Kong Beijing and Singapore. He has worked for Baring Securities, Bankers Trust, Morgan Stanley, CICC and from 2003 to 2012 he worked at CLSA as a Managing Director in the Listed Derivatives and Synthetic Equity department. His work has been published in the Wall Street Journal, Foreign Policy, China Economic Quarterly and the Nikkei Asian Review, and is a regular commentator on CNBC, Bloomberg and the BBC.