Putin in China; Reactions to US tariffs; New hope for real estate bailout; PRC-Philippines tensions; AI
Summary of today’s Essential Eight:
1. Putin in China - Putin has arrived in Beijing. He gave a long interview to Xinhua. It sounds like he is hoping for a lot out of this trip.
2. Reaction to US Tariffs - More denunciations and rebuttals today, but no signs of any substantive retaliation yet. Portraying the US as the destroyer of the global free trade system and a key obstacle to combatting climate change has real propaganda value. Wang Yi called the new tariffs “a most typical case of hegemonism and bullying. It seems that some in the United States have lost reason in a quest to ensure U.S. unipolar supremacy. Taking unscrupulous actions against China does not prove the strength of the United States, but only reveals that the United States has lost confidence and direction…[and] stressed that unilateralism and protectionism go against the trend of the times and are bound to be crushed by the wheels of history. At this crucial moment for the global economic recovery, the international community needs to tell the United States: stop making more trouble for the world.”
3. Renewed hopes for a massive real estate bailout - Bloomberg reports that the government is “considering a proposal to have local governments across the country buy millions of unsold homes”. Caixin reported over the weekend that it “has learned from multiple sources that policymakers have also been studying the creation of a national real estate investment vehicle tasked with acquiring and revitalizing unfinished and inventory properties across regions.” Caixin also wrote in that cover story that “the financial requirements are substantial. Guotai Junan Securities estimates that a national investment vehicle would need between 9 trillion yuan and 30 trillion yuan to acquire the 4.2 billion square meters of properties awaiting sale as of the end of 2023, within a timeframe of 1.5 to 3 years.”
This proposal sounds interesting, and reports may give hope that some sort of massive bailoput to resolve the massive real estate overhang may be forthcoming, but I think there are some real challenges that need to be worked through.
A critical issue is determining where the bailout funds would come from. How can local governments take on more debt to acquire properties? Additionally, accurately valuing these unsold homes is problematic. If homes are valued below market rates, this could depress real estate prices in surrounding areas, potentially destabilizing the market further.
Another key consideration is the allocation of funds. Should the money go directly to developers, or should it be directed to contractors and workers who have been unpaid for extended periods? Furthermore, prioritizing creditors—paying banks first, followed by onshore debt holders, and then offshore debt holders—complicates the process. It seems unlikely there will be enough money to make everyone whole.
Implementing this bailout might require establishing a new bureaucratic mechanism to oversee and distribute the funds, ensuring transparency and preventing misuse.
Given the PRC’s difficulties with existing programs like the white list initiative to complete and deliver already sold homes, how would the central government ensure this program actually worked as designed?
4. Investor protection awareness day - May 15 was investor protection awareness day. China Securities Regulatory Commission (CSRC) head Wu Qing gave a speech and the CSRC released a list of “model cases” of bad capital markets behavior. Unsurprisingly, Wu mentioned strengthening supervision of quantitative trading, and also today the CSRC officially released the "Administrative Provisions on Programmatic Trading in the Securities Market (Trial). Quant funds are not going to have a good time going forward I don't think.
5. PRC-Philippines tensions continue to rise in the South China Sea - A Philippines civilian flotilla to Scarborough Shoal/Huangyan Dao will arrive later today, under watch of the Philippine Coast Guard. Let’s all hope the Chinese Coast Guard does not start water cannoning civilian ships. The tensions over Second Thomas Shoal still remain the most dangerous flashpoint between the Philippines and the PRC. PRC officials clearly believe there was some sort of a gentleman’s agreement to maintain the”status quo”, and that the Philippines have reneged on it. The Ministry of Foreign Affairs has so far failed in its campaign to win the argument about the claimed “gentleman’s agreement”, and that probably does not help the Ministry inside the PRC system. The status quo of course works in the PRC’s favor, as the grounded Sierra Madre is disintegrating and so if the Philippines do not either reinforce it or replace the ship it will eventually disintegrate and PRC vessels will move in. Time is on the PRC side. PRC officials are well aware of the increasingly desperate state of the Sierra Madre, as the Global Times demonstrated today with pictures and video of the ship in an article claiming that it was rusting so much that it is now a pollution hazard to the waters around the shoal. It does not seem to be in anyone’s interest to have an escalation over wither Scarborough or Second Thomas Shoals right now, but how do the PRC-Philippines-US keep the tensions from from escalating?