Li Shangfu and Qin Gang; 1T RMB in new debt; Xi visits PBoC and SAFE; Neighborhood diplomacy; AI chip controls

Summary of today’s Essential Eight:

1. Li Shangfu and Qin Gang removed from all state posts - The National People’s Congress Standing Committee (NPCSC) decided to remove Li Shangfu from his state posts as Defense Minister, State Councilor and member of the state Central Military Commission (CMC). Former Foreign Minister Qin Gang, who was removed as Foreign Minster in July but retained his State Councilor title, has now also officially lost his State Councilor role. There has been no official explanation as to why Li and Qin lost their jobs. The next news we may hear about Li and Qin could come around the Third Plenum. Li and Qin are both Central Committee members and the Party will want to replace them, and it needs a Plenum to do that. I believe it also needs a Plenum to remove Li from the Party CMC and name his replacement.

2. NPCSC meeting approves more bond issuance and higher deficit - In addition to the headline grabbing personnel changes, the meeting also approved 1 trillion in new government bonds to be issued in the fourth quarter and then spent 50% before year end and 50% next year. The 2023 budget deficit will increase to 3.8%. According to the Ministry of Finance those new funds “will be primarily used for eight major areas: post-disaster reconstruction, key flood control projects, emergency capacity-building projects for natural disasters, other key flood control projects, irrigation area construction and renovation, urban drainage and flood control capacity improvement actions, key natural disaster comprehensive prevention and control system construction projects, and high-standard farmland construction in disaster-stricken areas in the northeast and Beijing-Tianjin-Hebei regions.

3. Xi visits the PBoC and SAFE - Xi paid a visit to the People's Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE) according to Bloomberg and Reuters. There have been no mentions so far of the visits in PRC media. The reports note this is Xi's fist visit to the PBoC. The timing, just before the delayed National Financial Work now scheduled for next week, is interesting. What it signals for those hoping for more supportive policies for the economy and financial markets is unclear. It certainly could be a positive sign of more policy goodies coming. It could also be Xi sending a message to the PBoC and SAFE to further batten down the hatches and harden the financial system, all while strengthening Party leadership and further cleaning up the financial system. Or it could be both.

4. More support for the private sector - The State Council is launching an inspection campaign to “tackle issues hindering economic development, especially ones affecting private enterprises”. In a letter to the All-China Federation of Industry and Commerce (ACFIC) on its 70th founding anniversary Xi called on “the vast number of private entrepreneurs will earnestly implement the new development concept, vigorously promote the entrepreneurial spirit, and strive to be a model of patriotism, dedication, lawful operation, entrepreneurship, innovation, and giving back to society.”

5. EU hosting its “Global Gateway Forum” - Theoretically it is an alternative to the Belt and Road Initiative, but so far at least it seems more a gateway to nowhere. Perhaps I am too cynical but it is hard to see how this initiative makes much headway given the EU’s internal dynamics.

6. US-China - The momentum towards a Xi visit to the US in November continues apace. The US national Security Advisor Jake Sullivan has the lead essay in the latest issue of Foreign Affairs titled “The Sources of American Power”. His discussion of China is interesting, and he writes that “We are often asked about the end state of U.S. competition with China. We expect China to remain a major player on the world stage for the foreseeable future. We seek a free, open, prosperous, and secure international order, one that protects the interests of the United States and its friends and delivers global public goods. But we do not expect a transformative end state like the one that resulted from the collapse of the Soviet Union”. Ryan Hass, a former US government official now at Brookings, has an essay in the same issue arguing that the US strategy towards China should be one of “entanglement”: “Washington’s goal should be to keep China entangled in a global system that regulates interstate behavior and pushes Beijing to conclude that the best path to the realization of its national ambitions would be to operate within existing rules and norms”.

7. Neighborhood diplomacy - 10 years ago today Xi convened a foreign policy work conference on the theme of China’s neighborhood aka periphery diplomacy (周边外交). For the tenth anniversary Wang Yi hosted a symposium with the theme “Amity, Sincerity, Mutual Benefit and Inclusiveness: New Dimensions, New Progress and New Vision”, Xi sent a letter to the Symposium, and the Foreign Ministry issued the document “Outlook on China's Foreign Policy on Its Neighborhood In the New Era 新时代中国的周边外交政策展望”. It is not clear that there will be another work conference specifically on this topic, but the Party is due for a Central Conference on Work Relating to Foreign Affairs, which I believe meet every five years, and the last one was in June 2018.

8. AI chip export curbs come into effect early - Nvidia revealed that the expanded controls on exports of AI chips went into effect Monday. When the updates were announced last week they were supposed to come into effect after thirty days.