China's top diplomat Wang Yi heads to Europe to shore up ties | East Asia Tonight (Jun 30)

Key Concepts

• China-EU relations: Trade disputes, strategic dialogue, economic cooperation, Ukraine conflict.
• Hong Kong National Security Law: Impact on political dissent, civil society, freedoms, and business environment.
• China's manufacturing: PMI, trade truce with the US, stimulus measures.
• Starbucks in China: Competition from local rivals, market share decline, pricing strategies.
• Hong Kong IPO market: Resurgence, dual primary listings, investor interest, connect franchise.
• Stigmatized homes in Japan: "Chikobuken," isolated deaths, cultural beliefs, ghost investigation services.

China-EU Relations

• Wang Yi's Visit: China's top diplomat, Wang Yi, is visiting Europe to strengthen ties with the EU, particularly Germany and France, as a counterweight to US influence. His first stop is Brussels for a high-level strategic dialogue with his counterpart, Kajakalis.
• Trade Frictions: Deep frictions exist between China and the EU, including a trade deficit of over $357 billion. Both parties have imposed tit-for-tat tariffs, with the EU seeking to address unfair economic practices by China.
• EU Demands: The EU is likely to raise the issue of overcapacity and seek concessions from China, such as joint ventures, job creation in the EU, and IP sharing. Economists suggest China may struggle to meet these demands but will make serious efforts.
• Ukraine Conflict: The EU is expected to urge China to use its influence with Russia to end the invasion of Ukraine, despite China's neutral stance.
• Trade Deal Framework: Wang Yi's visit comes after the US and China finalized a trade deal framework involving the loosening of export restrictions on rare earths to the US and the lifting of restrictions to China.
• Quote: China's foreign affairs ministry hopes to work with the EU for an "open and cooperative dialogue" and to "properly handle differences."

Hong Kong National Security Law

• Five Years of Implementation: Hong Kong marks five years since the National Security Law came into force, introduced in 2019 in response to anti-government protests.
• Sweeping Powers: The law grants authorities sweeping powers to clamp down on dissent, criminalizing secession, subversion, terrorism, and collusion with foreign forces. These crimes are punishable with a maximum sentence of life imprisonment and apply to crimes committed within and outside Hong Kong.
• Impact on Civil Society: Over 300 people have been arrested under the law. At least 14 news outlets, including Apple Daily, have closed, and nearly 100 civil society organizations, labor unions, and political parties have disbanded.
• Safeguarding National Security Ordinance: In 2024, Hong Kong adopted the Safeguarding National Security Ordinance to augment the 2020 legislation, targeting crimes such as sabotage, sedition, theft of state secrets, and espionage.
• Disbandment of Pro-Democracy Group: Hong Kong's last active pro-democracy group, the League of Social Democrats (LSD), is disbanding after 19 years due to "immense political pressure." The LSD is the third major opposition party to shutter in Hong Kong in the past two years, following the Democratic Party and the Civic Party.
• Article 23: A second set of laws, known as Article 23, was passed in 2024, covering crimes such as sedition and treason.
• Quote: China's top official on Hong Kong affairs, Xia Baolong, stressed that national security work must continue as hostile forces are still interfering in the city.
• Andrew Lung's Perspective: International and independent China strategist Andrew Lung notes that the law was introduced after riots and separatist elements infiltrated movements in Hong Kong. He argues that the law is reasonably lenient compared to similar laws in other countries. He also highlights Hong Kong's regained status as the freest economy in the world, according to the Fraser Institute.
• Resident's Perspective: A former district counselor expressed that Hong Kong people are now scared of the unknown, facing a new normal with many regulations, ambiguous red lines, and self-censoring.
• Red Lines: Lung suggests that the red lines are challenging Beijing's sovereignty, attacking the Communist Party, or questioning Beijing's rule over Hong Kong. Criticisms of the Hong Kong government are generally tolerated.

China's Manufacturing

• PMI in June: China's factory activity ticked up for a second month in June but remained in contraction territory. The official manufacturing PMI came in at 49.7, edging up marginally from May. A reading below 50 indicates contraction.
• Non-Manufacturing Gauge: The non-manufacturing gauge rose to 50.5 in June from 50.3 in May.
• Market Sentiment: Poor business sentiment continues to put pressure for more stimulus despite a temporary trade truce with the US.

Starbucks in China

• Market Share Decline: Starbucks' dominance in China's coffee market has fallen sharply due to competition from lower-cost domestic rivals like Luckin Coffee. Starbucks' market share fell to 14% last year from a high of 42% in 2017.
• Pricing Strategies: Competition has forced Starbucks to cut prices on some drinks for the first time since opening its first store in China in 1999.
• Potential Exit: Starbucks is reportedly looking to exit China, having held talks with more than a dozen potential buyers. However, Starbucks states that it is not currently considering a full sale of its China operations, which make up roughly 9% of its global revenue.
• Competition: Local rivals are undercutting Starbucks on price and convenience, offering new flavors and options. Consumers also have access to gourmet coffee machines in offices and homes, as well as tea chains like Heytea and Chagee.
• Consumer Preferences: Consumers appreciate cheaper options like Manner Coffee for good coffee, while Starbucks is still seen as a good place to chitchat over coffee.
• Market Growth: China's coffee industry grew 18% last year, and the average cup per person grew from under 17 cups in 2023 to over 22 cups in 2024. The report estimates that this statistic could reach 30 cups per person this year.
• Competition in Cities: Competition is keen in first-tier cities, with multiple Starbucks, Manner Coffee, and Luckin Coffee outlets in close proximity. Lower-tier cities are becoming the new battleground, but they offer lower spending power.

Hong Kong IPO Market

• Resurgence: Hong Kong's IPO market is roaring back after being in the doldrums for the past two years, with investor demand surging.
• Fundraising: Companies have raised $13 billion this year, and Deloitte estimates that total fundraising will hit $25.5 billion by year-end.
• Dual Primary Listings: A significant portion of listing applicants are companies already listed in the mainland Chinese market seeking a second listing in Hong Kong. There are close to 60 such companies in the pipeline.
• International Ambitions: Companies pursue dual primary listings to have an offshore fundraising platform, offer conlisted stock as remuneration for international employees, and use Hong Kong-listed stock as an acquisition currency.
• Investor Interest: There is a return of interest from investors around the world looking at opportunities in mainland China and the rest of Asia.
• CIMC Example: CIMC's $4.6 billion IPO listing brought back attention to top-tier Chinese industries listing in Hong Kong. CIMC exercised the green shoe, bringing the total offering size to $5.3 billion. The money raised will fund the building of a factory in Hungary.
• H Share Premium: CIMC's H share price (Hong Kong-listed share price) is now trading at a premium to the A share price, which is symbolically important as it indicates strong interest from international investors.
• AH Share Valuation Gap: There is still a 30-40% valuation gap between A shares and H shares, primarily because the two pools of shares are not fungible.
• Connect Franchise: Hong Kong offers a unique infrastructure called the Connect Franchise (Stock Connect program), which allows companies listing in Hong Kong to benefit from southbound trading.
• Overnight Interest Rates: Overnight interest rates in Hong Kong have fallen significantly to almost near zero in recent weeks, possibly due to high demand for the Hong Kong dollar driven by the vibrant IPO market.

Stigmatized Homes in Japan

• "Chikobuken": Properties where deaths, including murders or suicides, have occurred are known as "chikobuken" or stigmatized homes.
• Isolated Deaths: Most cases involve socially isolated deaths where occupants pass away alone and are not found for some time.
• Discounted Prices: These homes often sell at a discount, around 20% lower, due to their history.
• Cultural Beliefs: In Shinto, many people believe that the soul of a dead person can stay at the place where the person died. Tragic deaths are believed to result in ghosts.
• Ghost Investigation Services: Property consultants and paranormal investigators conduct thorough surveys to certify whether a home has paranormal activity.
• Increasing Market: With an aging population, the market for these homes and the specialists who manage them is expanding. Government data shows nearly 22,000 deaths last year went undiscovered for more than a week.

Other News

• Flooding in China: Rescue and relief efforts are underway in southern and southwestern China after heavy rain triggered widespread flooding. Authorities are warning of more rainfall.
• Panda Return: Japan returned four giant pandas to China ahead of the expiration of a joint conservation project contract.
• Taiwan-China Diplomatic Dispute: China defended its diplomats after Taiwan accused Chinese embassy staff of planning to harm the vice president during an official visit to the Czech Republic.
• UN Development Financing Conference: A UN conference on development financing in Spain begins to rally fresh support for development aid following US-led funding cuts.

Synthesis/Conclusion

The news from East Asia tonight covers a range of critical issues, from geopolitical tensions and economic shifts to social and cultural phenomena. China's diplomatic efforts in Europe, the ongoing impact of the National Security Law in Hong Kong, and the challenges faced by Starbucks in the Chinese market highlight the complex dynamics at play. Meanwhile, the resurgence of Hong Kong's IPO market and the unique market for stigmatized homes in Japan offer insights into the region's economic and social landscape. These stories collectively paint a picture of a region undergoing significant transformation and facing diverse challenges.