Zhou Warns of Stimulus Cost; Xi Urges Cooperation: Boao Update

China’s annual Boao Forum entered its last day, with former central bank governor Zhou Xiaochuan warning of inflation risks caused by global stimulus policies adopted during the Covid-19 pandemic.

Chinese government officials and business leaders are gathered this week on the tropical island province of Hainan for the forum, with discussions encompassing topics from digital currencies to carbon neutrality and the economic outlook for a post-pandemic world. Billed as an Asian version of the World Economic Forum, the event kicked off Sunday and is slated to run through Wednesday.

President Xi Jinping, in a keynote speech delivered for the forum Tuesday, called for greater global economic integration and called on certain countries to avoid “bossing others around.” China’s central bank governor Yi Gang said China will limit investment of the country’s foreign exchange reserves in high-carbon assets as part of the nation’s efforts to move toward a greener economy.

Bloomberg News captured the pulse of the event throughout the forum. Updated as of Wednesday 5:00 p.m. Beijing time.

Latest developments:

Trade Friction Discussed at Closed-door Meeting

Chinese and U.S. companies discussed how to defuse trade frictions, tap the potential of bilateral economic and trade cooperation and promote healthy development in a closed-door meeting during Boao Forum Tuesday night, the forum’s Secretary General Li Baodong said, according to the transcript of a media briefing held by Li Wednesday.

Former PBOC governor Zhou Xiaochuan, China’s State-owned Assets Supervision and Administration Commission secretary general Peng Huagang, former U.S. Treasury secretary Henry Paulson and top executives from Qualcomm, Bridgewater Associates and Goldman Sachs attended the meeting, Li said.

Chinese and U.S. companies agreed both nations should prevent politicization or making troubles in dealing with trade relations, and decoupling is not good for anyone, he said.

Businesses in China Consider Splitting Operations: Roland Berger

Some businesses in China, especially in the technology sector, are exploring the possibility of splitting their local units from the rest of their operations to cope with geopolitical tensions between the U.S. and China, according to consulting firm Roland Berger.

Executives of companies, both Chinese and foreign, affected by various bans and sanctions due to U.S.-China tensions have floated this idea in boardroom discussions, even though they wouldn’t want to see it become a reality, said Denis Depoux, president and managing director for China at Roland Berger.

“If you are a sound business leader you have to be strategically ready for any kind of move that you might have to do,” he said in an interview on the sidelines of the Boao Forum in the southern Hainan province.

Zhou Sees Inflation as Cost of Global Stimulus

The spillover effect of global macro policies amid the Covid-19 pandemic is increasingly obvious and inflation may be the cost of stimulus, Zhou told a media briefing at Boao Forum.

The pandemic has worsened debt problems of developing countries involved in China’s Belt & Road initiative, he noted.

On digital yuan, he said its launch won’t have any serious impact on the global financial system and the cross-border use of the digital currency will be ultimately decided by the pace of the yuan’s internationalization.

People’s Bank of China Deputy Governor Li Bo said at the forum Sunday that China’s goal for internationalizing its currency is not to replace the dollar, and the efforts to create a digital yuan are aimed at domestic use.

Larry Summers Calls for Pragmatic U.S.-China Ties

The central challenge facing the Chinese, U.S. and global economies is how the U.S. and China can reassure each other even as they compete, Summers said on a panel at the Boao Forum.

“In addition to the competition that is inevitable, in addition to the competition that is desirable as a spur, a central priority for both our countries must be strategic reassurance of the other,” he said via video.

“I believe that the right way of thinking about the United States and China is to envision two very strong individuals together in a life boat in a turbulent sea a long way from the shore. It doesn’t really matter whether they like each other. It doesn’t really matter what their feelings are about each other’s attitudes. It doesn’t really matter what has gone on in the past between them,” Summers said.

“For the long run their focus is going to be cooperating well enough to get back to the shore. That is what will determine their fates.”

Tesla China Executive Missed Boao Event Amid Owner Protest Chaos

Grace Tao, the electric carmaker’s China head of communications and government affairs, didn’t show up at a panel today after the company apologized overnight for “delay in resolving the car-owner’s problem.”

Tao was originally scheduled to speak at a 9 a.m. panel regarding “building a secure and manageable supply chain”. The panel’s introduction board outside the ballroom didn’t include her name, and she did not show up for the panel.

Tesla Inc. is coming under increasing pressure in China with two government entities firing off missives Tuesday about the carmaker’s behavior and treatment of customers, eliciting an apology from the company. This came after a Monday incident at the Shanghai Auto Show, one of the world’s premier car events, where an angry protester climbed on one of its display vehicles shouting that her car’s brakes had lost control.

Growing Bad Loan Pressure

The Chinese banking regulator sees a rebound of bad loan pressures at Chinese banks and is paying a lot of attention to this, Xiao Yuanqi, vice chairman of the China Banking and Insurance Regulatory Commission, said on the sidelines of the Boao Forum Tuesday.

He also said digital yuan won’t have any impact on commercial banks because it’s targeted at consumers and it’s not banks’ assets.

PBOC to Limit High-Carbon Investment

“We will continue to increase the allocation of green bonds in foreign exchange reserves, and limit investments in high-carbon assets,” Yi said at a panel discussion at the Boao Forum.

China will evaluate the impact of climate change on financial stability and monetary policy in a timely manner, he said, adding that the central bank is currently studying how to “systematically incorporate climate change factors in the stress tests for financial institutions.”

With a target to be carbon neutral by 2060, Yi said China has less time than developed economies like the U.S. and European countries in achieving its goals.

“We will need to put in more serious effort to prepare, and ask financial institutions to transform early,” he said. Some of the problems in the development of China’s green finance include poor environmental information disclosure, Yi said.

Green Goals May Stoke Utility Defaults

China’s pledge to become carbon neutral by 2060 poses an existential threat to polluters and that could have ramifications for the financial sector, a former central bank adviser said.

“High-carbon emission companies and industries in China will have to exit the market in the next 30 years if they can’t cut down their emission, and this will bring about huge financial risks,” Ma Jun, previously a member of the People’s Bank of China’s monetary policy committee, said at a briefing during the Boao Forum.

The country’s shift to cleaner energy means companies in high-polluting industries face a decline in revenue, leading to more bad loans, he said. The loan default rate among coal power firms could jump to 22% by 2030 from the current 3%, according to estimates by his team. Ma, who retired from the monetary policy committee in March, is the chairman of the Green Finance Committee of China Society for Finance and Banking, a research body managed by the central bank.

Xi Challenges U.S. Global Leadership

Zhou Warns of Stimulus Cost; Xi Urges Cooperation: Boao Update

“International affairs should be conducted by way of negotiations and discussions, and the future destiny of the world should be decided by all countries,” Xi said in a pre-recorded video speech, without naming the U.S. specifically. “One or a few countries shouldn’t impose their rules on others, and the world shouldn’t be led on by the unilateralism of a few countries.”

In a veiled critique of U.S. efforts to reduce dependence on Chinese supply chains and withhold exports of goods like advanced computer chips, Xi said “any effort to build barriers and decouple works against economic and market principles, and would only harm others without benefiting oneself.”

“What we need in today’s world is justice, not hegemony,” Xi said, adding that China would never engage in an arms race. “Bossing others around or meddling in others’ internal affairs will not get one any support.”

IMF Sees Multi-Speed Recovery of Global Economy

IMF Managing Director Kristalina Georgieva said she sees multi-speed recovery of the global economy in 2021 and the U.S. and China will drive global growth.

Speaking at the Boao forum Monday night, she cautioned that strong growth could lead to faster-than-expected policy tightening, while the pace of vaccine rollout is another risk to global economy.

Dalio: Cash, Bonds Bad Assets to Hold

Ray Dalio, founder of Bridgewater Associates, said cash and bonds are bad assets to hold and stocks are a better investment.

Speaking at the Boao Forum, Dalio also said China’s bond market looks relatively attractive. The world is overweight in U.S. bonds and underweight in Chinese assets, he added.

Lam: Seems Worst is Over for Hong Kong

Hong Kong’s Chief Executive Carrie Lam expects the city will see about 3% to 5% annual economic growth this year, she said in an interview with state broadcaster CCTV during the Boao forum.

Hong Kong’s economy has faced multiple challenges in the past two to three years, including trade disputes between China and the U.S., social unrest and pandemic, Lam said. “Now, it seems the worst time is over.”

Keep an Eye on Fast Money Inflows

Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said the authority is paying “high attention” to overseas brokers that are backed by hedge funds and use the Stock Connect program for investments into China.

“There are rules that if a foreign account creates a large market move we can stop its trading,” he said. “So we have tools to prevent these investments from creating fluctuation in our markets.”

Investors such as mutual funds, pension funds and insurance funds are “very welcome” in China, he said.

He also said China plans to increase inclusion factors of mainland A-shares in major indexes, and continue to expand the scope of inclusion to attract more foreign investment. As of the end of March, foreign capital held 5% of China’s stock markets.

Huang Zhaohui, Chief Executive Officer of China International Capital Corporation Ltd., said at the same panel that capital market opening is a must for China and the country should boost equity financing as part of economic transformation.

Full-throated Defense of Belt and Road

China’s former central-bank boss delivered a full-throated defense of the country’s Belt and Road projects, dismissing what he called “conspiracy theories” about geopolitical motivations for overseas infrastructure investments.

China’s investments marry its overcapacity in some industries with demand in developing countries, Zhou Xiaochuan, former governor of the People’s Bank of China, said at the forum.

“They are bottom-up, not top-down,” he said. “The banks take decisions by themselves, they are not told to do it, and the financing is based on the market rates.”

China has faced criticism that its investments are part of a strategy to entrap some countries in excessive debt, boosting China’s political clout over the target nation.

Zhou Warns of Stimulus Cost; Xi Urges Cooperation: Boao Update

China Hopes Both U.S. and China Can Join TPP

To truly liberalize trade and investment in the Asia-Pacific, we hope that China can be admitted to CPTPP trade deal and the U.S. would also return to it, former senior Chinese trade official Long Yongtu said at the Boao forum. If that happens, then TPP would become a high-level regional trading agreement, Long said, adding it would be difficult, but he hoped both nations will make the effort.

Neither country is a member of the Comprehensive and Progressive for Trans-Pacific Partnership, although China has recently said that it is considering joining.

The U.S. was one of the parties negotiating the deal, until President Donald Trump pulled out. China also recently finished the ratification of the Regional Comprehensive Economic Partnership, a separate trade deal which was signed in 2020.

“I very much hope that RCEP and TPP will someday in the future adopt a format for the two to converge or integrate with each other. Then we will have the largest free trade agreement in the whole world,” Long said. The U.S. is the key for this – if they express a positive view about returning to CPTPP and show positive signals on it, the two trade blocs will merge eventually, he said. Long was China’s chief trade negotiator during the country’s process to join the World Trade Organization.

Huawei, China Mobile Tout Power of 5G

Huawei Technologies Co.’s Ken Hu, one of three rotating chairmen who take turns filling the post, on Monday talked up the business by outlining how 5G can reduce waste and speed things up dramatically -- including for itself. Hu described how China’s largest technology company by sales is revamping one of its main plants in the southern city of Dongguan, doing away with miles of pre-5G telecom cables. “We need about 560 kilometers of cable to connect all of the devices in the 60,000-square-meter, 3-floor plant, which could basically be saved after deploying 5G. This is a very big change.”

Read: China Builds World’s Largest 5G Mobile Network: Xinhua

Separately, China Mobile chairman Yang Jie said it was helping take ultra-fast 5G into mines at a depth of up to 500 meters, to help monitor underground working surfaces, control coal mining machines and detect hazardous gas.

“The input-output ratio is still very high,” Yang said at a panel, adding that with help of the 5G technology, “we can reduce the number of people working underground by 20 for each working surface” and “it saves tens of millions yuan of investment every year.”

Foreign Insurers Urged to Learn From Chinese Peers

Chinese insurance companies have learned a great deal from their overseas peers in terms of corporate governance and products, but foreign players haven’t been as enthusiastic in localizing their services and sales practices in China, Shang Jingguo, secretary general of the Insurance Association of China, said in an interview on the sidelines of the Boao Forum.

“The insurance market is a very localized one. It’s not as standardized as the securities market in terms of sales and services,” said Shang, adding that foreign players “should think of how to better connect with the local culture”.

China has eased restrictions and started allowing foreign insurance companies to fully control local units starting January 2020. China is now the world’s second-largest insurance market following the U.S., according Deloitte.

The market share of foreign insurers, however, remains small in mainland China, standing at around 7%, according to local media reports.

Encouraging Signs of Consumer Spending

China’s low-income households are picking up spending, boding well for overall consumption in the economy and a sign of a more balanced recovery, the chief economist of e-commerce giant JD.com Inc. said.

Higher earners in the nation’s biggest cities expanded their spending during the pandemic last year to splurge on luxury and electronic products such as phones and computers, Shen Jianguang said in an interview at the Boao Forum. The driver for consumption is now starting to shift to smaller cities, he said.

“Recently we are seeing a lot of people started working and all the shops are open,” he said. Consumption is “more geared toward necessity goods and less discretionary goods” and spending in tier-three and tier-four cities are picking up, he said.

Politicization of Trade a ‘Great Pity’

The business community was glad to see Europe and China reach the Comprehensive Agreement on Investment, but “then we have seen that political differences have sort of created issues that could make an early ratification difficult to achieve,” according to Jens Eskelund, China CEO of shipping firm AP Moller – Maersk A/S.

Esekelund is also vice president of the EU Chamber of Commerce in China.

“I think it is something that the EU Chamber of Commerce sees as a worrying tendency that trade sometimes becomes politicized and that political difference has spillovers into the commercial arena. It’s something we think is a great pity,” he said on a panel at the Boao Forum. “Our hope is that, irrespective of the current differences, that it will be possible for the two sides to find some sort of common ground that leads to ratification.”

In a position paper published in September 2020, 43% of the chamber’s members reported that the business environment had become increasingly politicized compared to the previous year.

Crowded Rooms, Not Many Masks

The Boao Forum is the first big offline event in China this year, with over 2000 people attending. That’s fewer than in previous years, but it’s still a shock to suddenly be back in an environment with people crammed into meeting rooms, or in a press room with journalists pressed cheek by jowl. While there’re still some signs of the pandemic, including plastic barriers on the dinner tables, one big visual surprise is just how many people aren’t wearing masks.

While there are basically no virus cases in China, the country’s efforts to deal with the return to normal is still a process of trial and error. Initially the Boao Forum demanded that all journalists attending be vaccinated. But that was soon rescinded, likely because there wasn’t enough time for everyone to have the two shots needed. Still, all attendees had to have a virus test before coming to Boao, and then another one on arrival. So even if the masks are gradually coming off and life is returning to normal, there’s still a long way to go.

Zhou Warns of Stimulus Cost; Xi Urges Cooperation: Boao Update

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