SinoInsight 1
On Nov. 7, the Associated Press and other American mainstream news outlets declared Joe Biden the winner of the 2020 U.S. presidential election. Biden and his running mate Kamala Harris subsequently delivered victory speeches in Wilmington, Delaware. Several world leaders have congratulated Biden, including Canada, Germany, France, India, Taiwan, and the United Kingdom.
In a statement issued by the Trump campaign, President Donald Trump noted accurately that Biden “has not been certified as the winner of any states, let alone any of the highly contested states headed for mandatory recounts,” or in states where the Trump campaign “has valid and legitimate legal challenges that could determine the ultimate victor.”
CCP propaganda suggests Beijing is lowkey optimistic about its chances in a Biden presidency. A Nov. 8 Global Times editorial declared “it has become a foregone conclusion that Democratic contender Joe Biden will become the next US president,” and Biden will “maintain a tough attitude on China” if he comes to office. While the Global Times believes that “the U.S. is unlikely to ease the pressure on China on key issues” under Biden, he will “pop” the bubbles of Sino-U.S. tensions created by the Trump administration “on purpose.” Beijing will thus “communicate with the Biden team as thoroughly as it can, making greater joint efforts to recover China-US relations to a state of great predictability.”
Hu Xijin, Global Times editor-in-chief, struck a divisive tone in his commentary on Biden being declared the victor by media outlets. “Democratic candidate Joe Biden’s victory in the presidential race has been essentially acknowledged in the US society and the international community. The only thing missing is incumbent President Donald Trump conceding defeat and extending his congratulations to Biden for his win. If Trump plays delaying tactics or leaves the White House having failed to accept the election result, the split in the U.S. society will deepen or even be substantially solidified. The ability of the US to come together after the election will be further weakened,” he wrote in a Nov. 8 piece.
OUR TAKE
1. U.S. media outlets have “called” the election for Joe Biden and Biden is referring to himself as “President-elect.” World leaders have also congratulated Biden. However, it is the states that ultimately decide the winner, not the media. The states have until Dec. 8 to resolve outstanding issues regarding the results, before the winning party’s slate of electors finalize the results on Dec. 14. The year 2020 has been full of surprises so far, and a lot could change over the course of a month.
There is no guarantee Biden will still have the upper hand after Trump’s legal challenges are addressed. Based on publicly available information, there are sufficient anomalies in states with ongoing litigation to cast doubt on the media victory call on Nov. 7. Like Bush v. Gore in 2000, the U.S. Supreme Court could end up playing an integral role in the 2020 presidential election.
For a preview of how a Biden or Trump presidency will shape Sino-U.S. relations, please see our earlier piece on the topic.
2. The CCP is clearly seizing the opportunity to spread disinformation about the outcome of the 2020 U.S. presidential election. The Global Times commentaries cited above cast a Biden victory as a done deal, encourage a Biden administration to end Trump’s tough measures against the CCP regime, signal the CCP’s willingness to “normalize” relations with the U.S., and barely suppress glee at the fracture of American society. Forthcoming CCP propaganda on the U.S. presidential election will likely revolve around similar themes, denigrating the “chaos” of American democracy while extolling the “strength” and “stability” of the Party’s authoritarian system.
The CCP revels in a divided America and will undermine its greatest geopolitical rival regardless of who is President of the United States. Communist China will always disparage the political systems of the U.S. and other non-socialist countries, even if said systems have proven more robust than communist regimes.
In accordance with its Marxist-Leninist ideology, the Party’s ultimate goal is world domination. Americans and people around the world need to be cognizant of the CCP’s ideological warfare, disinformation, and “Red Matrix” operations to avoid being deceived by its propaganda.
3. The CCP’s recent propaganda indicates it prefers a Biden victory. This is in line with the Office of the Director of National Intelligence’s assessment in August (“We assess that China prefers that President Trump–whom Beijing sees as unpredictable–does not win reelection.”). We believe that the CCP will ramp up its various influence and interference operations in the coming days to sell a Biden presidency as a fait accompli.
It is unclear what Beijing thinks of President Trump’s odds of legal victory. Xi Jinping has not congratulated Biden, and neither has the PRC government. Regardless, a Biden election result reversal will optimize conditions for political Black Swans to emerge in China.
SinoInsight 2
On Nov. 6, the People’s Bank of China issued the PRC financial stability report for 2020 that assessed the soundness of China’s economic and financial system over the past year. According to the report, China’s economic and financial system faced significantly increased external pressures due to a “more complex and severe” global environment. The coronavirus pandemic raised the risk of defaults on some corporate debt, and such risks could be transmitted throughout the financial system, increasing difficulties and compounding risks.
The report said a total of 575 large companies in China were “in danger” at the end of 2019. Of those companies, 460 encountered serious liquidity issues, 120 were unable to make payments on issued bonds that reached maturity, 27 had their equity frozen, and 67 filed for bankruptcy. The financing scale of the 575 companies totaled 3.88 trillion yuan (about $586.87 billion), of which 646.2 billion yuan were non-performing assets. The companies’ total insurance guarantee balance totaled 1.6 trillion yuan, with total contingent liabilities equivalent to 40 percent of total financing scale.
The report also iterated that China’s trust industry saw increased risks in the past year, with a “small number” of trust companies becoming high-risk institutions. At the end of 2019, the risk ratio of trust assets increased 1.69 percent from a year ago to 2.67 percent. The report noted that trust industry risk could spillover to other industries, markets, and regions.
On the whole, however, the report deemed that the PRC governance has kept “China’s financial risks generally controllable,” while “the bottom line of preventing systemic financial risks has been maintained.”
Also on Nov. 6, PBoC deputy governor Liu Guoqiang said during a press conference to introduce the central bank’s financial stability report that the financial sector has “given up” about 1.25 trillion yuan in profits to the real economy, and is expected to meet the target of 1.5 trillion yuan of “profit transfers” by the end of the year. He added that the PRC needs to resolve the high degree of uncertainty in the overall domestic and global situation with the “certainty of [the CCP authoritarian] system and policies.” Liu stressed that the PRC will not make sharp policy reversals (“policy cliffs,” or “政策懸崖”) and cautioned against “financialization games.”
OUR TAKE
1. PBoC deputy governor Liu Guoqiang’s claim about the financial sector sacrificing profits for the real economy’s benefit may be accurate, but we remain skeptical about the actual success of the CCP’s profit sacrificing policy. As we wrote in the June 18 edition of this newsletter, “Financial institutions will still be reluctant to lend to SMEs due to the fallout of the coronavirus (rising unemployment, reduced overseas orders, etc.) and a weak real economy. On top of that, local governments are prone to devise measures, both legal and fraudulent, to superficially meet the policy requirements of the central government.”
Recent data suggests that the impact of the CCP’s profit sacrificing policy on the real economy may be limited. As noted in the Oct. 22 newsletter, national fixed asset investments shrank by 5.3 percent during the January-September period this year per our calculations, and the official figure only showed a 0.8 percent increase.
From the chart above, China’s real economy underwent a very serious recession between the years 2017 to 2019 using a simple year-to-year comparison of National Bureau of Statistics data. However, the NBS somehow massaged the figures using its own opaque calculation methods to reflect year-on-year “growth.”
In 2019, China’s fixed asset investments shrank 13.2 percent per the CCP’s own figures, but NBS data instead showed an increase of 5.4 percent. A breakdown of investment in the various sectors reflects a grim situation: Fixed asset investment in the primary sector dropped 43.6 percent; the secondary sector saw 31.5 percent less investment; and investment in the tertiary sector only grew 0.1 percent (or a 2.8 percent decrease if we deduct it from the 2.9 percent increase in CPI for the whole of 2019). In other words, China’s real economy suffered severe recession in 2019 and attracted few investments, very likely a result of the Sino-U.S. trade war.
China’s real economy will likely fare worse in 2020 due to the pandemic and trade war. Economic and consumer activities have not recovered to pre-COVID levels, as evidenced by the 33.7 percent contraction in passenger traffic in September. Despite PBoC stimulus, poor prospects for profit generation in the real economy will see the funds flowing into the stock markets or real estate, heightening systemic financial risks in China.
2. The PBoC’s financial stability report affirms our previous warnings about systemic financial risks and debt crisis in China, as well as confirm the CCP’s worries about the regime’s financial situation. The CCP’s decision to pause Ant Group’s blockbuster IPO last week and regulate fintech also highlights Beijing’s fears about increasing financialization of the Chinese economy and the creation of bubbles at a time when the PRC’s financial risks are already substantial.