Some mid-week links

Statement by UK charity Prisoners Abroad on Lord Neuberger (subject of above headline). The group seems surprisingly (charitably?) supportive of his role on Hong Kong’s CFA.

David Webb looks at the ever-rising proportion of unconvicted people in Hong Kong jails…

…the number and percentage of people on remand (presumed innocent) in HK jails reached new highs of 3700 and 38.6% at 30-Jun-2024. 

If we exclude immigration detainees, the percentage is 40.0%.

The Standard reports that it’s not just up-market F&B outlets – the junk-hire trade is losing out to trips to Shenzhen.

Foreign Affairs on the lessons China is learning from the war in Ukraine…

…Chinese analysts were especially startled by the West’s coordinated push to sanction the Russian economy. That effort offered a “vivid demonstration of the tools of economic power” that the United States could muster, Li wrote. Not all Chinese experts agreed on the sanctions’ likely efficacy. Some, such as Huang Jing, argued that the West’s “world war without gunpowder” would fail because sanctions on the energy and financial sectors are notoriously “leaky” and because, he contended, disagreements would emerge between the United States and Europe.

…others concluded that the United States still wields unrivaled power over the international financial system. Zhang Bei, an analyst at the People’s Bank of China, predicted that the United States’ leverage over key payment and settlement mechanisms, including the SWIFT system, which handles interbank messaging, would allow it to threaten Russia’s “national financial security.” The economist Wang Da went further, likening the expulsion of Russia from SWIFT to a nuclear attack. The United States’ capacity to devastate a rival financially would have stark implications for China: in October 2022, one researcher at China’s central bank warned that China must be ready to defend against a U.S. effort “replicating this financial sanction model against China” in the “context of the intensified Sino-U.S. strategic game and the Taiwan Strait conflict.”

…missing from the public-facing discussion in China is a true recognition of the costs Beijing has assumed as a result of its support for Putin’s war. Experts’ early assessments lingered on dramatic potential damage to China; now, they tend to ignore or underappreciate the serious costs Beijing has incurred. China’s relations with most European countries have degenerated, probably irrevocably. In the declaration following its July summit, NATO included an unprecedentedly sharp denunciation of Beijing’s behavior, calling China a “decisive enabler” of Russia’s war effort—language that would have been unthinkable prior to February 2022.

Frustration with China is not limited to European policymakers. Europeans who were recently very bullish on Chinese-European relations—especially those with business interests in China—now hold a much dimmer view. A May survey of European CEOs by the European Round Table for Industry found that only seven percent believed that Europe’s relations with China would improve in the next three years. More than 50 percent saw future deterioration. In a July survey by the European Council on Foreign Relations that polled nearly 20,000 people, 65 percent of respondents in 15 European countries agreed that China has played a “rather negative” or “very negative” role in the ongoing war in Ukraine.

Also in FA – why post-Covid China’s economy is struggling. It’s more than demographics, a property correction or growing friction with the West…

…there is a more enduring driver of the present stasis, one that runs deeper than Xi’s growing authoritarianism or the effects of a crashing property market: a decades-old economic strategy that privileges industrial production over all else, an approach that, over time, has resulted in enormous structural overcapacity. For years, Beijing’s industrial policies have led to overinvestment in production facilities in sectors from raw materials to emerging technologies such as batteries and robots, often saddling Chinese cities and firms with huge debt burdens in the process.

Simply put, in many crucial economic sectors, China is producing far more output than it, or foreign markets, can sustainably absorb. As a result, the Chinese economy runs the risk of getting caught in a doom loop of falling prices, insolvency, factory closures, and, ultimately, job losses. Shrinking profits have forced producers to further increase output and more heavily discount their wares in order to generate cash to service their debts.

…As the party sees it, consumption is an individualistic distraction that threatens to divert resources away from China’s core economic strength: its industrial base. According to party orthodoxy, China’s economic advantage derives from its low consumption and high savings rates, which generate capital that the state-controlled banking system can funnel into industrial enterprises. This system also reinforces political stability by embedding the party hierarchy into every economic sector. Because China’s bloated industrial base is dependent on cheap financing to survive—financing that the Chinese leadership can restrict at any time—the business elite is tightly bound, and even subservient, to the interests of the party. 

…The Chinese economy clearly needs to strike a new balance between investment and consumption, but Beijing is unlikely to make this shift because it depends on the political control it gets from production-intensive economic policy.

A Twitter thread on the same subject…

China’s state-directed investment in ‘high-quality, productive’ forces is leading to massive overproduction that will reverberate in global markets for manufactured goods.

As China’s manufacturing exports exploded in the 2000s (to 19% of world total by 2013), aided by protectionism/subsidies, the US lost one million manufacturing jobs.

A second China shock is rapidly unfolding, this time in the EU’s key sectors. And the shock is much larger. 

After China’s property bubble burst in late 2023, China directed the country’s savings toward making cars, chemicals, machinery, and chips (hi Germany).

And China has been selling the resulting overproduction on global markets to avoid unemployment at home.

The EU is poised to potentially lose many more jobs than the U.S. did during the first shock.

For one, the bloc currently has around 30 million manufacturing jobs compared to the 17 million the U.S. had in 2000.

India and Vietnam have been the new China for 10 years now. MSCI pulls more China companies from its indexes…

The index provider said it will remove 60 stocks from the MSCI China Index this month, following 56 deletions in May and 66 in February, the highest tally in at least two years. At the end of July, China represented 22.33% of the Emerging Markets gauge.

The changes, effective after the close on Aug. 30, will also apply to the MSCI All Country World Index. Stocks slated for removal include airline operator Air China Ltd., Sany Heavy Equipment International Holding Co. and Shanghai Fosun Pharmaceutical Group.

MSCI’s changes underscore the increasingly grim prospects for the world’s second-largest economy, as Chinese shares risk losing their outsized presence in emerging market portfolios to peers such as India and Taiwan. The deletions may further increase the downside for China’s already battered market, with index-tracking funds forced to sell these shares.