Plus: Crooked COPs
Hi Intriguer. In a dose of much-needed good news, Israel and Hamas agreed yesterday to further hostage-prisoner exchanges, and extended their truce by two days until Wednesday night.
But our focus today is on another important but slower-burning story: China’s ongoing economic problems.
Understanding those problems and the choices China faces is important because so many of China’s recent actions on the world stage – including making nice with the US and Australia earlier this month – can be explained by the domestic imperative of improving its economy.
In any event, I think it’s a story well worth getting across, if for no other reason than to be well-armed going into the eggnog-fuelled holiday debate season.
– John Fowler, Co-Founder
Truce extended. Following last night’s news that Hamas and Israel had extended their truce, the US announced Secretary of State Antony Blinken will now head to Israel and the region for the third time since October 7. His various aims include to increase aid, release all hostages, and protect civilians in Gaza.
Biden and Xi to skip COP28. A White House official says US President Joe Biden won’t attend the upcoming COP28 climate summit in Dubai, and we’re hearing the same about his Chinese counterpart Xi Jinping. But another 160+ world leaders will still be there, including Pope Francis and King Charles.
Marble row. Greek Prime Minister Kyriakos Mitsotakis has expressed “annoyance” after British PM Rishi Sunak cancelled their planned meeting today at the last minute. The row relates to the Parthenon Marbles, which Greece wants returned after Britain’s Lord Elgin removed them from Athens in the 19th century.
Miners freed. Rescuers in India have finally broken through to 41 miners stuck in a collapsed tunnel since November 12. Complications in the digging works have plagued the rescue mission.
TOP STORY
Source: DALL-E “dark storm clouds looming over Shanghai, China”
China’s shadow financial system is creaking under increasing amounts of bad debt
Chinese authorities have launched a criminal investigation into Zhongzhi Enterprise Group, one of the country's biggest shadow lenders, days after it told investors it was “severely insolvent”. The firm blamed “internal management [running] wild” for its problems, which is one of the rarer corporate excuses you’re ever likely to hear.
“Shadow banks” emerged in China after the global financial crisis in 2007 to satisfy the country’s ravenous appetite for credit. But they’re largely unregulated and are therefore not subject to the same risk, liquidity, and capital restrictions as traditional banks. The sector is now worth ~$2.9T.
So, what’s the problem? During the good times (aka pre-COVID), nothing. China’s shadow banking sector helped facilitate huge government investments in infrastructure that would otherwise be uneconomical.
But right now, China’s economic fortunes are not so good:
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Chinese debt (private + government debt) reached a dizzying 280% of GDP back in May (and the real figure is likely higher)
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Recent forecasts suggest the economy will probably meet its 5% growth target but will slow in 2024 (and the real figures are likely lower), and
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Foreign investment outflows have already exceeded $100 billion this year, which will further depress growth next year.
Slowing growth is a problem for China’s shadow banks because they hold a lot of high-risk municipal government and real estate debt. In the worst case, a rapid collapse of the shadow banking system could threaten a wider crash in China’s economy.
But that nightmare scenario remains highly unlikely. Xi Jinping has staked his legitimacy and legacy on his promise of restoring Chinese greatness. That means he’ll do everything in his considerable power to ensure that Zhongzhi’s collapse – and any others in the future – are quarantined from the rest of the economy.
INTRIGUE’S TAKE
The most important question then becomes, what can Xi Jinping do to stem the economic bleeding? In true decision-by-(standing)-committee style, he looks to be going for a little bit of everything:
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Throw caution to the wind and borrow more. Beijing decided in October to issue $100B worth of new sovereign debt bonds (a decision finance expert Michael Pettis called polluting “the last clean balance sheet left in China”).
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Direct state banks to lend more. Regulators have released several directives over the last few weeks to push banks to give more loans to private businesses to try to shore up confidence.
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Attempt to reverse the foreign investment outflow. By sucking up and playing nice with President Biden two weeks ago, Xi is hoping a tactical stabilisation in relations with the West will be enough to at least slow the capital exodus.
Make no mistake – the threat to China’s economy is real, but sooner or later, all these measures have to start working… don’t they?
Also worth noting:
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Xi Jinping is expected in Shanghai today, his first visit to the financial capital of China since 2020. (The South China Morning Post had the unverified scoop via a very rare leak of Xi’s travel diary).
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The Communist Party surprisingly failed to announce a date for a key meeting known as the ‘third plenum’ yesterday – the lack of policy clarity will fuel concerns for domestic companies as well as foreign companies working in or investing in China.
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ROAD TO COP
BBC report alleges COP28 host UAE used host status to source oil and gas deals
Documents leaked to the Centre for Climate Reporting suggest UAE officials have sought to leverage their COP28 host country status to push for oil and gas deals, just as the UAE kicks off the COP28 climate talks in Dubai this Thursday.
Intriguingly, the leaked internal briefings (covering various preparatory meetings the UAE has held since July) say the country’s COP team should:
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🇨🇳 Tell China the UAE is "willing to jointly evaluate international LNG opportunities (Mozambique, Canada, and Australia)"
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🇸🇦 Tell the Saudis there’s "no conflict between sustainable development of any country's natural resources and its commitment to climate change", and
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🇩🇪 Tell the Germans the UAE "stand[s] ready to expand LNG supplies".
In response, the UAE initially told the BBC (which co-produced the report) that “private meetings are private”, before describing the leaks as “inaccurate” and “unverified”.
INTRIGUE’S TAKE
Deal-making is typical of any big summit. That’s partly why so many people show up (~70,000 will be at COP28 this year).
But if these allegations are true, then we’re talking about a real aberration from the norm here. As COP host, the UAE is entrusted with stewarding global negotiations to reduce emissions, rather than milking the process for lucrative deals that would increase emissions.
The UAE has asked the world to judge it on its results this year. And that’s fair enough. But our experience suggests trust is key to getting results. And heading into COP28, trust now looks to be in short supply (unlike local oil and gas).
MEANWHILE, ELSEWHERE…
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🇯🇵 Japan: Prime Minister Kishida and Vietnamese President Vo Van Thuong have agreed to deepen their security ties in the South China Sea with an eye to China’s expansive claims there. It’s part of Japan’s ‘official security assistance’ program, launched last year to provide friendly countries with defence equipment.
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🇸🇪 Sweden: An interim court judgement has sided with Tesla after the company launched a suit against Swedish postal workers who’ve been striking in support of Tesla workers. The strike halted the delivery of new licence plates, meaning the EV company hasn’t been able to fulfil new orders.
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🇳🇿 New Zealand: Christopher Luxon was sworn in as prime minister yesterday (Monday) as head of a centre-right government. Luxon, the former head of Air New Zealand, has pledged to focus on the economy and has axed a world-first generational smoking ban to pay for tax cuts.
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🇲🇽 Mexico: The US is seeking the swift extradition of Néstor Isidro Pérez Salas (aka ‘El Nini’), one of the Sinaloa Cartel’s most notorious assassins. Mexico captured him in Sinaloa last week, prompting statements from both Presidents Biden and Lopez Obrador.
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🇹🇷 Turkey: Turkish authorities have freed Metin Topuz, a former local employee at the US Consulate in Istanbul who was arrested in 2017 in connection with a failed coup the year prior. His arrest and jailing triggered a fraying of ties between the two NATO allies.
EXTRA INTRIGUE
Here’s what’s been happening around the world on Twitter (X)
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🇪🇨 Folks in Ecuador were tweeting about “Los Lobos (The Wolves)”, a criminal gang whose alleged leader was arrested during a police raid.
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🇮🇹 Italians were talking about #Etna, the hyperactive Sicilian volcano that erupted over the weekend.
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🇧🇼 And “authentic” was trending in Botswana after the US-based Merriam-Webster selected the adjective as its word of the year.
TWEET/X OF THE DAY
Speaking of Twitter, Paris Mayor Anne Hidalgo announced her departure from the platform in dramatic fashion yesterday (Monday), calling it a “gigantic global sewer” that was "destroying our democracies.” Quelle horreur.
DAILY POLL
Do you think a high debt burden is inherently bad? |
Yesterday’s poll: Do you think cargo ships should pay an emissions tax?
🟨⬜️⬜️⬜️⬜️⬜️ 👍 Yes, they're huge polluters (19%)
🟨⬜️⬜️⬜️⬜️⬜️ 👎 No, it might dampen trade (12%)
🟩🟩🟩🟩🟩🟩 🚢 All big ships (eg cruise ships) should pay, not just cargo ships (66%)
⬜️⬜️⬜️⬜️⬜️⬜️ ✍️ Other (write in!) (2%)
Your two cents:
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🚢 J.V.B: “Cruise ships serve no meaningful purpose, are held in opaque ownership structures that avoid tax and onerous regulation, employ the cheapest workforce possible, spend almost nothing where they go/pollute and take income away from land-based businesses that employ and generate income locally.”
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👎 R.V: “No, shipping contributes only about 3% to the greenhouse emissions. An emission tax would lead to significant impact on trade and add to the already high inflation.”
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✍️ G.C: “The tax should be reduced or eliminated for vessels that comply with a low emission standard.”
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✍️ R: “I mean, we could put all the cargo on jets…”
✍️ Corrections corner
Yesterday’s briefing included a typo, referring to ‘Finish’ (rather than Finnish) authorities. Sorry, Finland! 🤦