Australian pension funds weigh in on China private sector debate

Welcome to the tenth edition of my weekly newsletter. As the Editor of Week in China I read a lot of articles about China. Here I share with my LinkedIn connections a selection of links to some of the best articles we've published in Week in China in our most recent edition, but also point out articles from other sources I've found of interest.

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There is so much going on this week, whether it is the escalating situation in Ukraine or China’s worsening outbreak of Omicron, it was hard to prioritise what to lead off with this in this newsletter.

However, there were a couple of announcements that very possibly got less of your attention but which nevertheless also have very broad, long term consequences, and I am going to highlight these.??

The first came from Australia’s massive pension market (with A$3.5 trillion it is the fifth-largest in the world behind the US, Japan, the UK and Canada, according to consultancy Willis Towers Watson). This week the chief investment officer of one of the biggest of those Aussie pension funds UniSuper told the Financial Times that it had cancelled its direct China investment mandates. Its fear was the ‘Common Prosperity’ drive – a policy tool wielded by Beijing in the cause of wealth reallocation – which meant in UniSuper's view that the Chinese government, with rapid changes in policy, could destroy an entire industry sector’s viability “with the stroke of a pen”. UniSuper’s CIO John Pearce pointed to crackdowns on the private tutoring, property and tech sectors as examples.

‘Common Prosperity’ he said heightened the risk of government interference in the private sector.??That had led UniSuper to pull back from direct China investment and any pure play A-share market exposure. “We just felt that with the reforms that have taken place, it’s just become too risky as a direct play. What does Common Prosperity mean so far? We’re going to belt the tech industry, belt the education industry, belt the property market," said Pearce. "It’s becoming pretty tough… are they just the first cabs off the ranks and it’s wresting control from the corporate sector in total?”

Adding to this mood was an investment warning from America’s top bank, JPMorgan. Amid an ongoing equity rout among Chinese tech firms – $460 billion has been wiped from China tech shares listed in Hong Kong this year so far – it downgraded 28 Chinese internet stocks and called them “uninvestable” over the next 12 months.?

The two decisions were not identical – JPMorgan cited market conditions as part of the background for its move – but also added there was a “lack of valuation support” for stocks like Alibaba. These two big calls point to an erstwhile unthinkable proposition: internet giants, once the most favoured China plays among international investors, are now being viewed as off limits because regulatory factors have made their futures less predictable from a traditional investment point of view.

This is actually something I have been thinking about for quite a while – China and its private sector – and had been formulating a historical theory on. However, given all that is going on in the world today this may not be the best time to expound further on this. I promise to return to it in a later newsletter…

So what did we feature in our most recent issue of Week in China??Last week our cover story featured our analysis on the ‘Two Sessions’, the political term used by the Chinese for the government’s annual parliamentary session in Beijing. This would be the last such political meeting before President Xi Jinping is expected to have his third term in office confirmed later this year – the official language was telling: in his one-hour keynote Xi's prime minister Li Keqiang used the word 'stability' 76 times.

Much of the attention here was on what Premier Li would say about the economy, particularly with an array of global disruptions to contend with.

He announced that the government had set a GDP growth target for the year of “around 5.5%”. Notably this was the lowest figure since the authorities first made public such projections in 1994.?In another key objective, China aims to create over 11 million new jobs this year. The same target was set in 2021 and the economy ended up generating more than 12 million (the full employment numbers include nearly 200 million gig workers, of which 13 million are riders for delivery platforms).

Li, however, predicted testing times for the economy, warning of the “triple pressures” of shrinking demand, disrupted supply and “weakening expectations”. To counter this, there were promises of more infrastructure spending and Li’s announcement of a large-scale tax cut and refund programme, to the tune of Rmb2.5 trillion, in a bid to breathe new life into core areas of the economy.

Both the IMF and World Bank had earlier lowered their China forecasts and many independent economists at banks think 4-4.5% a more realistic target range for 2022 GDP growth. The great unknown at this point is the economic impact of citywide Covid-19 lockdowns (more to come on this topic) across the country, as China continues with its Zero Covid approach. To read more about Li’s economic plans, including his metaphor for scaling a 3,000 metre mountain metaphor that he shared with journalists, click here.

The topic of Ukraine remained high on the agenda, particularly the diplomatic positioning and careful language Beijing continues to use over the Russian invasion. How this is being perceived outside China is becoming critically important. We looked at how the European media,?particularly the German press, was reporting on Beijing’s stance. We also looked at the?tightrope Chinese firms would walk should they continue to deal with Russia. Plus the impact on China of a soaring?oil price.

With the?electric vehicle revolution?ongoing we looked at the latest wave of global carmakers' efforts, including Hyundai, to reconfigure their local joint ventures in China; and as China seeks to bolster domestic consumption the efforts in the e-commerce livestreaming space came to the media’s attention again after the Viya tax scandal with the emergence of a new team:?Honeybee Surprise Club.

It was International Women’s Day last week and gender issues got attention in China at the Two Sessions. Likewise a popular drama (starring actress Bai Baihe, see photo below) sparked widespread debate for its realistic portrayal of the difficulties working mothers find returning to their careers. If you are looking for an explanation for why the government is finding it tough to boost?the birth rate, this evidenced why women were reluctant to have more kids.

What else have I been reading in publications besides our own? A warning: all of the sources (with clickable links) that I am about to highlight have paywalls…

Aside from Ukraine, the fastest-moving news story that media was trying to stay on top of was the rapidly worsening Covid-19 situation in cities throughout China. The South China Morning Post reported that the country was facing its worst outbreak since what was seen in Wuhan in early 2020 with a doubling of daily infections to 5,154 on Monday and a total caseload of more than 15,000 since the start of this month. Jilin in the northeast is the new epicentre but on Monday a one-week lockdown occurred in the high-tech manufacturing city of Shenzhen. The Times reported on what this could mean for global supply chains and shipping. The closure of?Foxconn’s factories?in the city got widespread attention, given its impact on Apple.

The Financial Times reported that even Shanghai was on the cusp of a possible lockdown.

Returning to Ukraine news: the?Washington Post?reported on a high level seven-hour meeting in Rome between China’s top diplomat Yang Jiechi and his US National Security Advisor Jake Sullivan. The meeting was described as “intense and candid” as the US told China not to provide military equipment or aid to assist Russia with its Ukraine invasion, referring to “significant consequences” if it did.

The Chinese state media report on the same meeting said that Yang, a Politburo member and the Communist Party’s foreign affairs chief, told Sullivan that “the situation in Ukraine has reached a point that the Chinese side does not want to see” and added “China is committed to promoting peace talks, and the international community should jointly support the Russia-Ukraine peace talks, achieve substantive results as soon as possible, and promote the cooling of the situation as soon as possible.”

Opinion on China and the Ukraine situation obviously kept coming thick and fast. The FT’s columnist Gideon Rachman said President Xi Jinping faced a “fateful decision”, for example.??

In other news, continued Sino-US tensions revealed a different face when China’s top sportswear firm Li Ning was banned from selling in the US over allegations it used North Korean labour in its supply chain. There were also updates on the nickel trading mayhem involving multi-billion dollar losses by Chinese firm Tsingshan as the LME in London looked set to resume trading in the metal today.

A major article from the Wall Street Journal also made a major claim: that Saudi Arabia was discussing with China pricing its oil exports in the Chinese currency (China accounts for 25% of Saudi crude exports). The talks have accelerated, the WSJ said, as Saudi “unhappiness grows with Washington”. In what are already stupendous times for the oil market given the sanctions on Russia, the WSJ noted that such a move “would dent the US dollar’s dominance of the global petroleum market”. It’s definitely an article that’s worth your attention, even amid all the other powerful headlines screaming for your attention.

Finally, that bring us to this week’s quiz. It involves a novel that sets up a?fictional conversation between Khublai Khan and Marco Polo, in which the Emperor of the Yuan Dynasty asks the Venetian:?“The other ambassadors warn me of famines, extortions, conspiracies, or else they inform me of newly discovered turquoise mines. You return from lands equally distant and you can tell me only the thoughts that come to a man who sits on his doorstep at evening to enjoy the cool air. What is the use, then, of all your travelling?”

The novel was published in the same year that Nixon met Mao.?

Message me on Linkedin with the name of the novelist and the novel’s title and I’ll post the first winning respondent a copy of our book?An A-Z of Chinese History.

The answer to last week’s quiz was The Way We Live Now by Anthony Trollope.