Real estate "buyback", US tariffs, cross-border data transfers - Week in Review #18

Hi folks,

This week, at Peking University, I held a lecture on the US-China tech competition for a group of European students studying in the dual-degree program between LSE / Sciences Po and PKU. It was much more engaging and lasted much longer than I expected. Many students, many of whom would be future diplomats for their respective countries, stayed up after the lecture and bombarded me with many hard questions. I even went to dinner with the last of them, over which we chatted and debated. Overall, I left with a strong feeling that there is so much more to be done for cross-cultural communication, especially at the human-to-human level.

Me at PKU lecture this Monday

With this renewed sense of mission, let me start my review of events that I think will last beyond news cycles. (Again, for who I am and why I write, please check here. For what unique things I can bring to the table, check here.)

#1 China’s real estate “buyback” and “QE”

China has finally introduced some heavy weapons to stabilize the imploding real estate market.

On Wednesday, Bloomberg first reported that China “considers government buying of unsold homes to save property market”, a historic policy move that was later confirmed by a big news conference on Friday. Presumably, those unsold homes would be bought on the cheap. In many cases, those homes would be purchased to act as public housing. Whatever form it takes, the market feels relieved that the government is finally stepping in with real cash. The real estate sector in China is roaring back in response.

CSI China Mainland Real Estate Index, Created with TradingView

I was actually planning to write about this policy move at the beginning of this week, before it actually happened. I noticed that such a policy had already been put to trial in Zhengzhou, two days after Vice Premier He Lifeng, in charge of financial stability, inspected there in April. It seemed only logical that the trial would be formalized into a national policy soon. I just didn’t expect this would happen so quickly, so although normally, you would expect to have some informational edge from my analysis, unfortunately, you didn’t get to know about this beforehand this time.

I have a few more comments to make here. I use the word “buyback”, in the same sense as a share buyback. This is because legally speaking, land in China is owned by the state and is only leased to developers and homebuyers. The past 3 decades of China’s real estate industry have been about the Chinese state leasing out its land, for a price, so developers can build stuff on it for individual homebuyers. Now, as the industry’s golden age has come to an end, it only made sense for the state, who is the single largest “shareholder” of the real estate market, to buy back excesses.

I also use the word “QE”. In QE in the US, the Fed stepped in to purchase treasury bills. In Japan’s QE, the Bank of Japan stepped in to purchase stocks via ETFs. What China is doing now is essentially the same. I have stressed many times that real estate is still the “backbone asset class” underpinning China’s financial system. Injecting stimulus cash into the market by buying back this asset is not much different from when Ben Bernanke purchased treasury bills from the USG.

This leaves the question of why it took the Chinese government so long to respond to the real estate crisis as forcefully as it is doing now. I think there are 2 main reasons. First, the central government is determined not to go back to the old economic model where real estate and high local government debts fueled economy growth. Acting on a crisis too early risks prolonging the core structural imbalances. Only enough pain can dissuade local governments and vested interests from re-enjoying their party like yesterday. Second, in a dollar-dominated global economy, stimulus by China is only going to be ineffective if the external environment is not favorable. Now, US-China relations have entered the “easiest” period of the last few years and so there is a relatively smaller threat of a stimulus derailed by further external tension. Now is a good time window for policymakers to act more boldly.

#2 US tariffs

Talking about US-China relations. A month ago, commenting on Janet Yellen’s China visit, I explained that the whole “over-capacity” talk would serve as the harbinger for more trade barriers.

And so they came this week. The US on Tuesday unveiled steep tariff increases on an array of Chinese imports including electric vehicle (EV) batteries, computer chips, and medical products.

The actual impact though, seems milder than expected.

The 100% tariff on Chinese EVs, which has grabbed most of the media attention, sounds huge but is frankly just political theater. After all, China exports close to zero auto to the US, so a 100% tariff on nothing is a nothing burger. It’s obvious that this round of tariffs is more about the upcoming election, rather than anything substantive.

It’s likely that communicating this new round of tariffs was the core purpose of Yellen’s last visit. I can almost imagine Yellen talking to Chinese officials behind closed doors like this: You guys export too cheaply, your practices are not fair and we can’t just stand by and watch. (Just btw, there is an election coming up so boss Biden would need to do something for the American people.) But rest assured our tariff is going to be targeted to minimize pain for you. So please, don’t retaliate that much, especially after I personally came over here and enjoyed good Chinese food. I am really respectful here and I wish you could feel my respect for you. So please, make your response tepid.

And tepid is the response from China this time. Not many harsh words have been voiced, and not much of tit-for-tat tariffs have been announced. A trade war doesn’t seem on the horizon.

I also want to say something more about China’s EVs. In almost all discussions about China EVs and the logic behind these tariffs, the word “cheap” is always highlighted. But most of the people in America don’t realize that China's EVs are cheap and super good. A German automobile executive based in China recently confided to me that when he did ride-hailing, he preferred riding on a BYD to a Volkswagen. It's just so much better in every possible way. China Inc. is making a killing in the high-end segment too. Xiaomi's recently launched SU7 blows the mind of every of my friend testing it, at only $29,900. And another friend who purchased the $150,000 YangWang U8, a beautiful beast from BYD, told me that he believed Yang Wang was much better than the $400,000 Mercedez G-class or anything in the Land Rover family.

YangWang U8, a beast of beauty by BYD filled with the most advanced technologies

I can only see 2 options left for the US auto sector: 1) play a denial game, live on past laurels, be protectionist, act like an ostrich, get yourselves off global innovation in EV, and eventually lead Americans to drive shittier cars at higher prices than the outsiders, and be permanently uncompetitive for global consumers. If America keeps believing that China’s EVs are successful because of the fabled “massive subsidies by the Chinese state”, then I imagine this option will be the preferred choice.

But if you believe as I do about the real reason for the rise of China’s EVs, the only option left for the US is to give up on your big ego and copy from China's own playbook, by inviting Chinese EV companies into the US market, setting up local joint ventures and "force" them to transfer technology in exchange for market, while letting the weaker ones die on their own like what China just did.

Honestly, I think the second option is the only option now for the continued survival of the US auto sector globally. The US market is huge for Chinese manufacturers. If the US becomes as self-confident as it should be, the best policy option is always to invite “competition in a controlled environment”, and Chinese manufacturers will jump at such opportunities to grow their businesses.

#3 New cross-border data transfer policies in Lingang

A few months ago, China’s data regulator, the CAC, started to allow the so-called “free trade zones” to implement data transfer rules on their own. Since then, FTZs such as Lingang have been quite aggressive in terms of localized data reform push.

On Friday, Lingang, where the Tesla Shanghai Gigafactory was located, introduced something bolder. According to Reuters, Lingang has:

…compiled a list of data that can be transferred overseas without security assessments, according to a government document seen by Reuters, a much anticipated move as China tries to lure foreign investment to boost a sluggish economy.

…

According to the Lingang website, the newly announced data transfer rules take effect immediately.

For the auto sector, the data includes information involving manufacturing such as procurement and stockpile, research and development including auto design and tests, after-sales services and used car sales.

Also included in Lingang’s data transfer “whitelist” is a section applicable to the fund management industry, where, I think for the first time ever in any Chinese official documents, “market research data, including industry research reports as well as macro-economic research reports”, are explicitly allowed to move overseas in order to “improve domestic market research capabilities as well as attractive foreign investment into the China market”.

This is great news for me personally, because I run a data and research company serving many international institutional investors. Despite the exaggeration by Western media over the cases of Capvision or the Mintz Group last year, I always know our kind of products will not run into official redlines. But having it explicitly written down there in a “whitelist” is so much better in China’s context.

I also want to emphasize again my observations of China’s data regulation: this is an entirely new field, built from scratch in the last few years. Many details of implementation take time. Many ideas are being experimented with. Both the regulators and market participants are in the process of figuring out how to regulate. Some of the hiccups and delays during this experimentation are natural, but they have often been mis-characterized as “China is cracking down on data transfers”.

The Lingang move is yet again an application of the “innovative enclave” strategy, China’s secret weapon to fight the inherent inclination toward loss of vitality in a centralized managed system. There are varying degrees of autonomy for those enclaves, ranging from a SAR like Hong Kong where any rules apart from national security can be entirely different, to the case of Hengqin which is in the process of being transferred from the mainland to Macao SAR, to the case of Pudong (where Lingang is situated) where rules different from the rest of the country could be implemented within a pre-approved general framework.

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One more poll about the name of this newsletter

My poll last time regarding the name of this newsletter didn’t go as I intended. More poll participants from you chose the current name over my personal favorite: Lost in Nanjing. Many of you also expressed to me that “Lost in Nanjing” feels too much like a travelogue, which I think is a valid concern.

I understand that ultimately the name of this newsletter is up to me to decide, but I would want to try this one last time, by proposing another style of name.

So I always think of this newsletter as a guide to China from the viewpoint of a practitioner, not an academic, or a full-time journalist. As I explain on the About page, I am mostly concerned about facts on the ground that can actually be useful for your predictions, based on which you can make better decisions. So, every now and then, another name that often pops up in my head is “Robert Wu’s practical guide to China”.

And there is another more “playful” version: “China Woos”. First of all, “Woo” is another format of my last name 吴 (as in “John Woo吴宇森”). Second, I want China to “woo” more people to comprehend her complex stories. Thirdly, it’s also pronounced the same as “China Woes”, and I do sometimes feel woeful when I am at pains of bridging the cross-border communication gap.

Again, please let me know what you think!

And please share with me whatever name suggestions you have as well! If your recommendation is chosen in the end, I will credit you with complimentary access when the paywall is finally launched.

Oh and yes, I will launch paywall features after this post.

There will be mainly two differences between a free subscriber and a paid one.

First, the paid subscriber will have access to my weekly review articles (such as this one) immediately after I publish them, while the free subscriber will only be able to read the full text 5 days after publishing. (For my long “essays”, I may paywall some of them as well.)

The second difference is that paid subscribers will have access to all “Ask Me Anything” sessions, either through Substack Chats or through live webinars that I host for the Baiguan newsletter from time to time.

And again, if you are already a paid subscriber of Baiguan, I will gift you with complimentary paid access. Currently, Substack does not support such kind of gifting automatically, and it might take too much effort for me to look through Baiguan’s paid list one by one, so if you are Baiguan’s paid subscriber and would want free access to this newsletter, please DM or email me, and I will set it up for you.