Tech crackdown hammers private education companies

Xi Jinping told a group of educators in March that the country’s school tutoring sector was “a chronic disease”. Unbeknown to the $100bn-a-year industry, the cure he had in mind would far exceed efforts to rein in China’s largest technology companies, and would amount to a “death penalty”, reported the FT.

Drastic new restrictions on tutoring companies, confirmed over the weekend, have slashed the share prices of US-listed industry leaders including New Oriental Education. Goldman Sachs estimates the crackdown could cut the sector’s annual earnings from $100bn to less than $25bn. Beijing’s clampdown on the booming private education industry is prompting a rethink of how far Xi is willing to go to tighten the party’s grip on the world’s second-largest economy, reported Bloomberg.

To reassure global banks and investors, securities regulator Fang Xinghai privately told global financial firms this week that Beijing will consider the market impact before introducing future policies, reported the Wall Street Journal. The regulatory crackdowns on companies engaged in private tutoring, online financial services and other sectors will help them “grow in a proper manner”, said Mr Fang.

But in response Reuters reported that the US Securities and Exchange Commission (SEC) has stopped processing registrations of US initial public offerings (IPOs) and other sales of securities by Chinese companies while it crafts new guidance for disclosing to investors the risk of a new regulatory crackdown by Beijing, according to people familiar with the matter.

Meanwhile, local news reports say that China is preparing to apply an anti-sanctions law on Hong Kong, laying the groundwork to punish foreign financial groups in the territory that comply with Western sanctions.

Why It Matters

As we told clients this week, Xi’s motive in cutting the cost of schooling has been hidden in plain sight: he’s repeatedly demanded a more equal China with wealth and income more fairly distributed. In all his crackdowns, control and stability are Xi’s top priorities, with foreign investors last on the list.

You can listen to my interview with John Ellis for The Recount for more on what’s going on right now and what’s next.

The world’s most indebted developer

Two more suppliers, Peace Tree Wood and Huaibei Mining, went public with their complaints that China Evergrande Group failed to pay its bills on time, adding to signs of a cash crunch at the world’s most indebted developer, reported Bloomberg.

After a brutal 12 months, it’s been another tumultuous week for Evergrande as the group’s billionaire chair and its investors contend with financing woes, credit downgrades and a U-turn on an expected pay-out, said the FT.

Shares in Evergrande tumbled in Hong Kong after the group, which has almost Rmb2tn ($309bn) of liabilities, announced it would cancel a planned special dividend in the latest blow for Hui Ka Yan, formerly China’s richest person, thanks to Evergrande’s role in China’s sweeping waves of urbanisation, the paper added. Reports of banks rejecting commercial acceptance bills (CABs), or IOU notes issued by Evergrande to its suppliers, have gone viral on Chinese social media this year.

Evergrande is quickly becoming the biggest financial worry in a nation with no shortage of financial worries, reported Bloomberg. “Just how bad could this get? The short answer: very bad.” Its troubles intensify fears about systemic risk as investors consider possible credit defaults in the country’s highly-leveraged real estate sector and the likelihood of wider contagion.

Evergrande complained that S&P Global’s move to downgrade its outlook was “regrettable and incomprehensible”, but they’re not convincing many. For years, Evergrande rode some of the biggest trends in Chinese finance, using debt-fuelled growth to capitalise on a seemingly unstoppable property boom, said the Wall Street Journal.

Now Hui’s conglomerate is struggling to adapt to a new era. Meanwhile, escalating property curbs highlight Xi’s priority: to respond to mounting dissatisfaction with hoarded wealth and narrowing avenues for advancement, said Bloomberg.

Why It Matters

Property is critical for China’s economy given sizeable real estate developer debt and the huge importance of housing as a store of value. Even more worrying is that concern mounts about the viability of Evergrande, one of China's biggest property developers, before the authorities have managed to come up with a solution for the problems of Huarong, one of its biggest shadow banking institutions.

Can’t we all just get along?

China’s new Ambassador to the United States, Qin Gang, arrived in Washington where he started his term by declaring the China-US relationship faces “not only many difficulties and challenges but also great opportunities and potentials (sic).” As two big countries “different in history, culture, social system and development stage,” China and the USA are “entering a new round of mutual exploration, understanding and adaptation, trying to find a way to get along with each other in the new era,” said Qin.

His record of vigorously contesting Western criticism suggests that Beijing is steeling for extended tensions with Washington, said the New York Times. He will most likely convey to Washington that Xi expects his country to be treated as a great power, reflecting a confidence that stems in part from China’s success in controlling the pandemic.

Wendy Sherman, the US Deputy Secretary of State, visited Tianjin from July 25-26 to meet her counterpart Xie Feng, and Foreign Minister Wang Yi. The Chinese diplomats set out lists of remedial actions that Washington must take to get relations back on track. Sherman said she raised concerns over human rights in Hong Kong, Xinjiang and Tibet.

A day later, in Singapore, US Defense Secretary Lloyd Austin said Washington did not seek a military clash with China but would challenge China’s assertive activities in the Asia-Pacific. “We will not flinch when our interests are threatened,” he said. “Yet we do not seek confrontation.”

Why It Matters

Having hoped that it could put a floor under its fast-deteriorating relationship with the US to buy time, Beijing now appears to be on the back foot not quite sure how to proceed. But one thing is certain, the CCP won’t back down. China is convinced it has history on its side and the decline of the West and rise of the East are inevitable.

China practices for invasion, as silos carpet the desert

How to seize an island of 23 million people? Practice, the PLA has concluded. Beijing has held 20 naval exercises involving elements of island capture in the first half of 2021, reported the South China Morning Post. The latest military drill simulated amphibious landing and island seizure in battle conditions.

In response to the perceived rising threat from the mainland, the US and Japan have been conducting war games and joint military exercises in the event of a Taiwan conflict with China, the FT reported last month. The activity includes top-secret tabletop war games and joint exercises in the South China and East China seas.

Japan’s increasing concern with Chinese intimidation of its neighbours has triggered greater willingness to publicly align its national interests with the security of Taiwan, wrote Bruce Klingner in the Japan Times.

Taiwan’s navy received its latest, improved Tuo Chiang-class corvette, with five to follow by 2023, and promising news about its first indigenous submarine. But there’s no doubt the island remains massively outgunned. And Beijing may even be ramping up the ultimate weapon, as researchers in the US said China is building 250 silos for nuclear missiles in “the most significant expansion of the Chinese nuclear arsenal ever”.

Why It Matters

Satellite images from northwest China suggest the nation may be looking to quintuple its nuclear arsenal, reported the New York Times. This podcast examines why Beijing may be changing its strategy. Pressure on Taiwan remains a constant, with the ever-present risk of an accident or miscalculation sparking armed conflict between superpowers.

Enodo’s Taiwan Watch is a specialised service to help you understand, in real-time, the risk of Chinese military action against Taiwan potential US involvement. If you are interested to find out more, email james.bracken@enodoeconomics.com

Tibet receives first top leader visit in 30 years

Xi Jinping popped up in Tibet last week, on his first recorded visit to the plateau since he took power in 2012. China’s Communist Party boss led a senior delegation to mark 70 years since the “peaceful liberation” of Tibet, as the party calls its takeover, two years after the communist “liberation” of the rest of China.

Xi flew in to Nyingchi city, then took a train to Lhasa on the brand-new section of the Sichuan-Tibet Railway, an engineering marvel that is conquering some of nature’s toughest barriers to human infrastructure. In the capital, Xi called the party’s policies in Tibet “completely correct” and urged Tibetans to follow its socialist path.

The party is ramping up investment in Tibet in an effort to spur economic growth and ensure social stability as it seeks to foster harmony between Tibetans and settlers of Han Chinese ethnicity, said Nikkei after a recent visit showed the party’s tight grip amid rising income. This first visit by a Chinese leader to the region in three decades was designed to send a message to the US, India and the Dalai Lama, observers told the South China Morning Post.

Why It Matters

Xi’s eventual visit to Tibet affirms Beijing’s control over a region where its military build-up and ethnic-assimilation polices have drawn international criticism, said Bloomberg. He also vowed to expand border construction that has angered India. As Defence Minister Wei Fenghe told counterparts at a Shanghai Cooperation Organization forum, China will never compromise or make concessions on issues concerning Tibet, Taiwan, Hong Kong, Xinjiang and the South China Sea.

And Finally

Justice has been done, at least according to the official record. After an unusually long trial, by the brusque standards of the Chinese legal system, a court in Hebei’s Gaobeidian sentenced a billionaire pig farmer to 18 years for a catalogue of crimes. They included “gathering a crowd to storm state institutions, obstructing public service, picking quarrels and provoking troubles, illegal mining and illegal occupation of agricultural land,” reported CNN.

Yet to many observers, Sun Dawu’s only “crime” was being an outspoken critic of China’s ruling Communist Party. Sun’s success in turning a small village farm into a model town with its own schools, hospitals and hot springs made him a sought-after speaker on China’s rural development, reported the FT.

His co-operative-style business proved popular with residents, who benefited from the wealth Dawu Group brought to the area in Hebei. But his direct criticism of bureaucratic red tape also pitted him against authorities.

Sun's case stemmed from a minor property dispute with a neighbouring state farm that turned violent last summer, said NPR. At least eight of Sun’s family members and business partners were jailed for two to 12 years. “What does it mean, in practice, to sentence a 67-year-old man to jail for 18 years?” asked human rights researcher William Nee. “Answer: it effectively takes him out of public life forever. Sun Dawu was one of the rare businessmen who was willing to speak out on social justice causes and politics.” Fellow billionaire, and vocal critic of Xi Jinping, Ren Zhiqiang also got 18 years, in 2020.