LUNCHTIME UPDATE - Tuesday 7 March 2023, 13:00 Hong Kong

• China says US relations have left rational path & warns of conflict • Australia raises interest rates to the highest since 2012 • Core inflation in the Philippines reaches highest since 1999

Foreign Minister Qin Gang arrives at the NPC media centre on Tuesday morning

Chinese Foreign Minister Qin Gang speaks at the Two Sessions

New Chinese Foreign Minister Qin Gang took the stage on Tuesday at the Two Sessions in Beijing. Before being appointed two months ago, he was ambassador to the United States from 2021 to 2022. He reports to China’s top diplomat Wang Yi, director of the Office of the Central Foreign Affairs Commission. In his first press briefing as China’s No. 2 diplomat, Mr. Qin said China will uphold an independent foreign policy and contribute to world peace. He said China has pressed “the acceleration button” on diplomacy and is steadily resuming exchanges with the world. But he added China will hit back at hegemony and defend its core interests, in a veiled reference to the US. In a further reference to the US and its ban on exports of high technology to China, he said Beijing opposes any form of decoupling and unilateral sanctions. 

He also touted Chinese-style modernization, saying it breaks the myth that modernization must follow a Western style. He said one of the tenets of Chinese modernization is “common prosperity for all.” referring to one of President Xi’s flagship policies. But he said Chinese modernization features respect for other countries’ development paths. In yet another thinly veiled reference to the US he said, “certain countries” have a political infighting problem and frequent policy flip-flops. On Monday, in a rare direct criticism of the US, President Xi accused the US and other Western countries of “containing” China. Mr. Xi said, “western countries led by the US have implemented all-round containment, encirclement and suppression against us, bringing unprecedentedly severe challenges to our country’s development.”

Responding to a question from a Russian news agency on the future of Beijing-Moscow ties, Mr. Qin says both countries have strategic trust and enjoy good relations as neighbours. He said, “certain countries” (presumably once again the US) like to use a Cold War mentality to view China’s relationship with Russia. He said relations between Moscow and Beijing “are based on non-alliance and non-confrontation and are not targeted at any third party.” He added that the bilateral ties should not be subject to the interference of any third party either. In his remarks on Russia, Mr. Qin said ties will “surely grow from strength to strength” under the leadership of Xi Jinping and Vladimir Putin. In response to a question whether China-Russia trade ties will lead to them ditching the US dollar, Mr. Qin said China will use whatever is “efficient, safe and credible,” and that currency should not be used for unilateral sanctions. The yuan comprised almost 17% of China’s goods trade in the first half of last year. According to Russian newspaper Kommersant, the yuan’s share of trading in the Russian market is around 40%, while the US dollar’s share is just over 38%. It’s the first time the yuan has overtaken the US dollar as the most traded currency in Russia. The euro stood at 21.2%.

On US-China relations, Mr. Qin highlighted how much the recent balloon incident had damaged ties between the two countries. He said the passage of a balloon over US territory earlier this year was an “unexpected incident” but the US “acted with a presumption of guilt, overreacted, abused force and dramatized the incident.” He warned that if the US does not “hit the brakes, and continues on the wrong path, there will surely be conflict and confrontation. Containment and suppression will not make America great and will not stop the rejuvenation of China.” He accused the United States of staging unfair competition with China, saying if one tries to “push the other to the Paralympics”, then “it would not be a fair competition, but malicious confrontation”.

Addressing the Taiwan issue, Mr. Qin said, “the two sides of the Taiwan Strait belong to one family which is called China,” adding that the people on both sides are “brothers and sisters”. He said proponents of Taiwanese independence are the “real threat” in the cross-strait crisis. He said the US needs to explain its plan for “the destruction of Taiwan”. “Why can the United States talk about sovereignty and territorial integrity over Ukraine, but not respect China’s sovereignty and territorial integrity over Taiwan?” Why is China not allowed to provide weapons to Russia,” while the US arms Ukraine, Mr. Qin said. He warned that if the Taiwan question cannot be handled well, it will shake the very foundation of China-US relations.

Raising China’s 12-point peace proposal for Ukraine, Mr. Qin says there seems to be “an invisible hand” escalating the crisis, once again referring to the US. He insisted that China didn’t provide weapons to any party in the Russia-Ukraine war.

Responding to a question on Japan-China relations, Mr. Qin said  that “China always treats Japan with goodwill” but Japan has not reciprocated. He said he “hopes for friendship and good neighbourliness. Yet should some people from the Japanese side choose a beggar-thy-neighbour approach rather than pursuing friendship and partnership.” He accused “certain people” in Japan of participating in a new Cold War. Japan recently joined the US in restricting chip exports to China. To improve relations, both parties must honour their commitments to partnership rather than posing a threat to each other, he said.

Mr. Qin said China will host the first China-Central Asia Summit this year, as well as the Third Belt and Road Forum. He said, “we will ensure the success of two diplomatic events we will host.” In response to a question on President Xi’s flagship Belt and Road Initiative, Mr. Qin maintained that the infrastructure program is a high-quality public good widely welcomed by the world. He said debt-trap accusations can’t be levelled at China, singling out US rate hikes for aggravating the debt problems of other countries. He said, “China should be the last one to be accused of creating the so-called debt trap.” He said China is always committed to helping countries that have financial problems, adding that Beijing makes “the biggest contribution” to the Group of 20’s Common Framework for debt relief.

US House Speaker Kevin McCarthy to Meet Taiwan’s President in US

The Financial Times is reporting that Taiwan’s president Tsai Ing-wen has convinced US House Speaker Kevin McCarthy to meet in California rather than Taipei to avoid “an aggressive Chinese military response”, as tensions run high between Beijing and Washington. The FT said Ms. Tsai and Mr. McCarthy had agreed to meet in the US because of Taiwanese security concerns. The move is a backtrack for the California Republican who said last summer he wanted to visit Taiwan if elected to the top leadership post in the House. Washington has been rife with speculation about whether Mr. McCarthy would visit Taipei. Advocates of a trip say senior US lawmakers should show support for the island in the face of rising Chinese aggression, while critics argue that high-profile visits provoke China without helping Taiwan. In August, former House Speaker Nancy Pelosi sparked China's fury after visiting Taiwan, the first such trip by a US Speaker in 25 years. In response, Beijing held giant military exercises which included the firing of ballistic missiles over the island for the first time in history and a partial naval blockade. A Taiwanese official told the FT, “there might be policies even more irrational than in the past emanating from Beijing. If we can try to control this together, the risks it brings for everybody can be contained better."

Australia Raises Interest Rates to the Highest Since 2012

The Reserve Bank of Australia raised its overnight cash rate by 25 bps to 3.60%, in line with expectations, marking the highest rate since June 2012. The decision brings its cumulative hikes since May to 3.5 percentage points, the most aggressive tightening since 1989. The RBA said in a statement, “global inflation remains very high. In headline terms it is moderating, although services price inflation remains elevated in many economies.” Governor Philip Lowe said, “in assessing when and how much further interest rates need to increase, the board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.” He noted economic data in February that missed expectations saying, “the monthly CPI indicator suggests that inflation has peaked. Goods price inflation is expected to moderate over the months ahead due to both global developments and softer demand in Australia.”

The country also posted a narrower trade surplus for January, according to official data. The trade surplus fell to AUD11.7 billion (US$7.9bn). Goods and services imports grew by 5% after seeing a 1% growth in December, while exports for January rose by 1%, reversing a decline of 1% in the previous period.

China Exports & Imports Continue to Decline at Start of 2023

China’s exports and imports continued their recent declines at the start of 2023, combined figures for January and February released on Tuesday by China Customs showed. Exports from China fell 6.8% from a year earlier in January-February combined, better than market consensus of a 9.4% drop and following a 9.9% fall in December 2022. This was the fourth straight month of decline in exports, amid weakening external demand due to a slowdown in the global economy. Imports to China tumbled 10.2% y/y in January-February, compared with market estimates of a 5.5% fall and after a 7.5% drop in the previous period. China's trade surplus increased to US$116.9 billion in January-February combined from US$109.7 billion in the same period a year earlier and compared to market forecasts of US$81.8 billion

Core Inflation in the Philippines Reaches Highest Since 1999.

Core inflation in the Philippines surged to the fastest pace in 24 years in February. The core gauge, which strips out volatile food and energy costs, rose 7.8% last month from a year ago, accelerating from 7.4% in January and the fastest increase since March 1999, according to the Philippine Statistics Authority. Headline inflation slowed for the first time since August. Headline inflation last month was 8.6% year-on-year, slowing from 8.7% in January which in turn was the most since 2008. Month-on-month, price growth was unchanged after a gain of 1.7% in January, a 23-year high. Bangko Sentral ng Pilipinas has embarked on the most aggressive monetary policy tightening in two decades, raising borrowing costs by 400 bps since May last year. 

South Korea’s Economy Contracts in Q4

South Korea’s economy shrank 0.4% quarter-on-quarter in the three months to December 2022, following a 0.3% growth in the previous quarter. It came in line with its advance estimate and marked the first contraction since the second quarter of 2020, as spending dropped back to normal after post-pandemic highs. Private consumption dropped by 0.6%, versus growth of 1.7% in the third quarter, as expenditures on durable goods and services decreased.

HKEX to Ease Rules on “Specialist Big Tech” IPOs.

The South China Morning Post is reporting that Hong Kong’s stock market operator is expected to reduce the proposed listing threshold for “specialist” technology companies as it dials up its overtures to allow eligible start-ups to raise funds. The SCMP says Hong Kong Exchanges and Clearing (HKEX) plans to reduce the minimum valuation for pre-revenue technology companies to between HK$10 billion (US$1.3bn) and HK$12 billion (US$1.5bn), from an earlier HK$15 billion (US$1.9bn). For technology companies with at least HK$250 million in sales in the financial year before the initial public offering, the minimum valuation requirement will be slashed to between HK$4 billion and HK$6 billion, from the earlier HK$8 billion. The stock exchange operator may require the IPO candidates to have at least one sophisticated investor in the previous 12 months as their core shareholder, instead of two professional parties. The lower thresholds are believed to have the support of many market participants, who thought the existing proposals too demanding. An HKEX spokesman said, “the proposed listing chapter for specialist technology companies is part of HKEX’s ongoing work to further elevate the attractiveness and competitiveness of Hong Kong as an IPO destination,” adding that the exchange is still working on the consultation conclusion. “We will publish the consultation conclusions and the final proposal in due course”.

Jerome Powell to Testify Before Congress

Fed Chair Powell is set for two days of testimony before Congress, on Tuesday and Wednesday, where he will be pressed about the central bank's efforts to counter inflation. This would provide hints on what policymakers are thinking about price pressures, influencing the market's movements. Democratic legislators in Congress have been worried that the Fed risks dragging down the economy with its determination to fight inflation. Investors also have been torn between wanting the Fed to bring down inflation and being worried that it will go overboard. However, in recent days, they have become more confident that Mr. Powell can pull off a soft landing with the Dow notching a four-day winning streak. The Fed has raised its benchmark interest rate eight times over the past year, most recently a quarter percentage point increase early last month that took the overnight borrowing rate to a target range of 4.5%-4.75%.

Asian Markets

Ahead of Jerome Powell’s testimony, Asian stocks moved higher led by Hong Kong. In Australia, the S&P/ASX 200 was up 0.4%. Japan’s Nikkei 225′s rose 0.4%, while South Korea’s Kospi also rose 0.4%. Hong Kong stocks rose for a third day. The Hang Seng traded 1.2% higher in the morning session, adding 247 points to 20,850. Shares of Chinese state-owned enterprises led the way with the Hang Seng China Enterprises Index jumping as much as 2.4% at one stage before ending the session 1.3% higher. Leading the gains were Cnooc, China Petroleum & Chemical and China Construction Bank. The Hang Seng Tech Index rose 0.4%. On the mainland, the Shanghai Composite Index climbed 0.2%. Asian currencies and government bonds were little changed as investors waited for direction from Jerome Powell later today. Brent Crude oil rose 0.3% in Asia to $86.42 a barrel.

Tesla’s Asian suppliers and peers were in focus after the electric vehicle manufacturer cut prices for its cars for the second time this year as it tries to boost sales and compete with rival firms. The starting price of the Model S has been reduced 5% to $89,990 while the cost of the lowest-priced Model X has come down 9% to $99,990, according to the company’s website. They follow big markdowns of up to 20% that the firm introduced in January.