There’s No Summer Lull for Beijing This Year

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There will be no summer lull for Beijing this year, not with unrest roiling Hong Kong, the presidential election heating up in Taiwan and a sudden ratcheting up of trade tensions with America.

In Hong Kong, authorities began prosecuting dozens of protesters on rioting charges, which carry prison sentences of up to 10 years. That harsher approach sparked anger, with hundreds of demonstrators scuffling with police outside the station where those arrested were held.

Beijing meanwhile increased the economic pressure on Taiwan by limiting the flow of tourists from the mainland. That comes as President Tsai Ing-wen, who has sought to distance Taiwan from China, is preparing for January elections against challenger Han Kuo-yu, who advocates closer ties with the mainland.

Then there's trade. In a surprise move, President Donald Trump is imposing more tariffs on Chinese goods after judging that progress on a deal was moving too slowly. This came days after U.S. and Chinese negotiators met in Shanghai for their first face-to-face talks in three months. Before this latest escalation, the two sides had agreed to meet again next month. Whether that still happens is now uncertain.

These are three complicated issues. What could make them seemingly more intractable is if they begin to bleed together. And the increasingly continuous nature of U.S.-China ties has the potential to do that.

China this week continued to blame Washington for stirring unrest in Hong Kong, with the Chinese foreign ministry describing the demonstrations as a U.S. creation. Beijing's protests about American interference in Taiwan, which it claims as part of China, have been just as strong.

If resolving the protests in Hong Kong, disputes about Taiwan and differences on trade are all dependent on America and China first fixing their relationship, then lulls of any sort may well be a thing of the past.

Huawei

Don't forget Huawei. The Chinese communications giant has been a key part of the tussle between Beijing and Washington for sway over the technologies of the future. Huawei released first-half financials this week that showed a dramatic slowdown in sales growth as it deals with American efforts to curb its business. Chairman Liang Hua said U.S. companies still haven't resumed supplying Huawei with critical components despite President Donald Trump saying in June that it would be allowed to buy some American technology again.

South China Sea

There's also the South China Sea, where China's building of islands to bolster its territorial claims has fueled tensions with Southeast Asian nations and the U.S. Though there did appear to be some progress this week. Foreign ministers from China and Southeast Asia were able to agree on a preliminary draft of a code of conduct for the waterway. That said, in an illustration of how far off a resolution of the issue still is, the foreign ministers from Southeast Asian nations also issued a communique warning that incidents in the South China Sea had "eroded trust" and could undermine regional stability.

Zombies

China of course has plenty to deal with domestically too. Take for example corporate zombies. These are companies that have only kept afloat by borrowing ever larger amounts, sometimes aided by local governments who arrange the financing to avoid job losses. The down side is they suck up money that would be better invested in more innovative companies, and load the financial system with risky debt. When the Politburo, comprised of China's 25 most-senior officials, met this week to plan out economic priorities for the second half, cleaning up zombie companies was one of a few specific tasks mentioned in the read-out from their conclave.

Banking

Another priority the Politburo identified was managing risks in the country's financial sector. That's no small task. Since late May, Chinese regulators have had to seize control of one struggling commercial bank and organize the state-led rescue of another. Neither was especially large, but their troubles have jolted domestic markets. To put themselves on better footing, many of China's lenders will need to raise additional capital. UBS analyst Jason Bedford, whose star is rising after he issued early warnings about China's smaller banks, sees the lenders he covers needing $349 billion.

IPOs

There is one part of China's financial system where raising money seems to be easy. Shanghai's new Star board, a Nasdaq-style equity market that began trading last week, has seen record valuations for companies listing there. Shenzhen Chipscreen Biosciences, which focuses on cancer treatments, this week priced its shares at about 468 times reported earnings. Its listed peers trade at an average of 31 times. With the stock set to start trading in early August, it shouldn't take too long for there to be some reconciliation of those two values.

To contact the editor responsible for this story: Jeff Black at jblack25@bloomberg.net

With assistance from Bloomberg