Second Thomas Shoal approaching a crisis?; Wang Yi to visit the US; Spy games intensify; Real estate, debt and stock market support; Malaise

Summary of today’s Essential Eight:

1. PRC ships ram two Philippines vessels in South China Sea - In a dangerous escalation of the ongoing crisis over the resupply of the the grounded Sierra Madre at Second Thomas Shoal (Ren’ai Jiao), PRC ships rammed Philippine ships trying to deliver supplies. Today the US and Philippines national security advisors held a call to discuss the incident. Mother Nature has a say in how quickly this becomes a real crisis, as the grounded ship that the Philippines is using to secure its territory may break up before the end of the year. And that is what the PRC is waiting for, then they will swoop in and declare possession, unless the Philippines can get a lot of concrete and construction materials to the Sierra Madre soon. The Philippines can’t get the material there on its own, and if it asks the US for help the US will likely have to assist its treaty partner in safeguarding the resupply, which could then turn this into a US-China crisis.

2. Wang Yi to visit the US this week - The US State Department has confirmed that Wang Yi will visit this US this Thursday to Saturday, in what is clearly part of the effort to have General Secretary Xi Jinping attend APEC in San Francisco next month and meet with President Biden.

3. Revelations of another alleged US spy; Five Eyes goes public on China - The MSS and CCTV have released details of an alleged case of a PRC researcher, surnamed Hou, becoming an America spy while studying in the US in 2013, and continuing to work for the US upon his return to the PRC until his arrest in Sichuan in 2021. Based on the CCTV report on this case it looks like Hou worked on nuclear physics. The spy war is intensifying; over the weekend the US news show 60 Minutes broadcast an interview with top Five Eyes intelligence officials, after their summit last week in Silicon Valley, in which they mostly talked about threats from the PRC.

4. Foxconn draws tax and land use probes - Mainland authorities are investigation Foxconn for tax and land use issues. Foxconn could of course have land use and tax issues, and local governments are looking everywhere for more revenue, but the timing, just three months before the Taiwan presidential election in which Foxconn founder Terry Gou is a candidate, is suspicious. A Global Times article suggests that the goal of the probes may be to get Gou to drop out as, according to a "Beijing-based scholar of cross-Straits relations", Gou's candidacy "does objectively create a situation that favors the DPP...Gou is running with a very slim chance of winning, either out of this billionaire's obsession to become a regional leader to honor his ancestors, or, most likely, because of the US or the DPP authorities who are likely coercing him to run as a card to damage the atmosphere of unity and integration in the non-DPP camp". I have seen some claims that these probes are a warning shot against Apple, but I am skeptical they have anything to do with that company.

5. National Financial Work Conference and debt relief plans - Bloomberg reports that the National Financial Work Conference, which usually meets every five years but last met in 2017, will convene in Beijing early next week. That conference should conclude with much better visibility into plans to deal with the local government debt crisis, as well as the real estate debt crisis. As expected, the National People’s Congress Standing Committee will, according to Reuters, approve today “slightly more than 1 trillion yuan ($137 billion) in additional sovereign debt issuance on Tuesday as Beijing steps up its efforts to spur infrastructure spending and encourage economic growth”.

6. More support for the falling stock market - Huijin is now buying shares in some ETFs in addition to increasing stakes in the big banks. The Shanghai Composite broke through 3000 Monday and now punters are talking about the “battle to hold 2900”. Perhaps Huijin’s Monday buying may help keep it above 2900 in the short-term, but without something that fundamentally improves both liquidity and confidence many punters will likely see any increase as a selling opportunity (We have seen this movie several times).

7. Securities Times call for freeing prices to support real estate - A Monday page one article in Securities Times called for removing price limits on land auctions and new home prices. For new home sales, the article said “the policies restricting the filing prices of new houses introduced during periods of rapid house price increases should also be relaxed in a timely manner, allowing real estate companies to reasonably reduce prices to clear inventory and alleviate the financial pressure on some companies”. So that means that developers should be allowed to cut prices to a market clearing price? In some, or many, cities the market price may be far below what others have paid in surrounding developments, so if the market is allowed to set the price there may be a lot of unhappy people.

8. From Age of Ambition to Age of Malaise - Evan Osnos recently spent time in the mainland and today the New Yorker published his 10,000 word story about the darkening mood in the PRC. No need for me to summarize, just read it.

A reader reminded me after my comments last Thursday about the possibility of the Third Plenum this year that the Party already held a Second Plenum in February this year, so it has fulfilled the requirement to hold at least one plenary session each calendar year. Since the 13th Party Congress the Party has convened a Second and Third Plenum in the first full calendar year after a Party Congress, with one exception. In 2018 the Party held the Second Plenum of the 19th Party Congress in January, and the its Third Plenum in March, on the eve of the “two sessions”. That “surprise” Third Plenum of course was the meeting that changed the term limits rules for Xi. It would be anomalous for the Party to not hold a Third Plenum between now and the end of the year, and not convening a Plenum will send a worrisome signal to both domestic and foreign audiences. I still believe the Party will hold one, but that is more a guess. The October Politburo meeting should meet this week, so we will likely know in just a few days whether or not the Third Plenum will convene in November.