China’s Struggles

September 7, 2019, 3:14 PM UTC
fortune logo icon (black)

CEO Daily lands late this morning, as your correspondent has just landed back in Hong Kong from China’s Yunnan province.

The three hour flight involved swapping Faustian bargains: cool alpine breezes and blocked Internet access at one end versus oppressive humidity and unrestricted Internet access at the other.

At the Hong Kong airport, it was smooth sailing despite reports that anti-government protestors planned to shut the whole place down. Demonstrators had threatened to infiltrate the airport by forging travel documents and dressing to blend in with ordinary travelers. But as the Fortune team exited tonight there were no signs of trouble—perhaps reflecting the huge police presence around the transport hub.

Our return follows fierce clashes between police and protestors Friday in Hong Kong’s Mong Kok shopping district. Those skirmishes suggest demonstrators aren’t buying Hong Kong chief executive Carrie Lam’s attempt to ease tensions by announcing Wednesday that her government will withdraw a controversial bill allowing criminals arrested in Hong Kong to be extradited to China’s mainland.

Continued protest would be bad news for Hong Kong’s beleaguered economy, which took a further hit Friday when Fitch Ratings downgraded the territory’s credit rating, citing the erosion of Hong Kong’s autonomy from the mainland.

The big riddle for Hong Kong is how Chinese leader Xi Jinping intends to deal with unrest in the territory. On Friday, Chinese premier Li Keqiang bristled at a suggestion by German chancellor Angela Merkel, during a visit to Beijing, that China should do its “utmost” to avoid violence in Hong Kong. “Chinese people have the capability and wisdom to manage well our own affairs,” Li said. His comments were widely interpreted as a signal to foreign governments to mind their own business.

Xi has yet to comment directly on the situation in Hong Kong. But in recent speeches he has revived the rhetoric of revolutionary leader Mao Zedong in emphasizing the idea of long-term sacrifice and “struggle.”

More China news below.

Clay Chandler
– @claychandler

Economy and Trade

Ten-Years of War. Negotiators from Washington and Beijing have agreed to trade talks this month and next, but economic advisor Larry Kudlow warns the trade war could still take years to resolve. “The stakes are so high, we have to get it right, and if that takes a decade, so be it,” Kudlow said. The U.S. introduced new tariffs on Chinese products September 1 and has another raft of sanctions ready to unload in October. Meanwhile, China has lodged a formal complaint with the WTO against U.S. trade policies. Reuters

The PBoC wants liquidity. China’s central bank is cutting the reserve requirement ratio (RRR) by 50 basis points, marking the third reduction this year. The cut will free up some $126 billion in liquidity as China’s economy continues to slow, dragged by the trade war and the general global slowdown. Financial Times

Degrading Hong Kong. Fitch Ratings changed its outlook on Hong Kong’s economy from stable to negative while downgrading the city’s credit rating from AA+ to AA Thursday, as protests have roiled the city for much of three months. Fitch said the protests have “inflicted long-lasting damage” on international perceptions of Hong Kong’s governance and rule of law and have also “called into question the stability and dynamism of its business environment.” South China Morning Post

Innovation and Tech

Alibaba goes shopping. Alibaba Group acquired rival cross-border e-commerce site Kaola, operated by game developer NetEase, for $2 billion. Alvin Liu, the general manager of Tmall Import and Exports, will replace Kaola’s current CEO, Zhang Lei. Kaola will continue to operate under its own brand but will also be integrated into Tmall, creating the world’s single largest cross-border shopping platform. TechCrunch

Xiaomi wants a buy back. Smartphone maker Xiaomi, which IPO’d in Hong Kong last year, announced a $1.5 billion stock buyback on Tuesday, sending its shares up 7% that day. The company has cash and cash equivalents of close to $5 billion, so can afford the purchase. However, Xiaomi’s share price has declined nearly a third this year and is at half of its IPO value. Reuters

Weibo recalls a product. Sina Weibo, which operates China’s most popular Twitter-esque posting platform, pulled its new Instagram-like social media offering, Oasis, from app stores just days after launching it because a user accused Weibo of plagiarizing the logo design of a South Korean firm. The app might come back – Weibo’s profits are declining and Oasis was the group’s first push into China’s popular image-sharing space. TechNode

MoMo faces a backlash. A new “deep fake” app launched by Chinese tech group MoMo Inc sparked privacy concerns after rocketing to the top of download charts this week. The app, called Zao, takes a user’s profile photo and superimposes it over the faces of celebrities in video clips—so a user can see what it would be like if they, rather than Leonardo DiCaprio, played the role of Jack in Titanic, for example. Zao reportedly requires users to sign over IP rights to their own faces. Fortune

In Case You Missed It

World’s No. 1 Money-Market Fund Shrinks by $120 Billion in China Bloomberg

China's Xi says country facing a period of 'concentrated risks' Reuters

China says new digital currency will be similar to Facebook's Libra Reuters

Green Investors in China Want One Thing: Consistency Fortune

China’s Yangtze River Basin Represents the World’s Third-Largest Economy—and It’s at Great Risk Fortune

Politics and Policy

Too little, too late? Hong Kong Chief Executive Carrie Lam formally withdrew the contentious extradition bill that sparked over three months of protests in Hong Kong. The belated move, which comes just a week after Reuters reported that Beijing blocked Lam’s previous attempt to withdraw the bill, has done little to quell unrest. Demonstrators vandalized underground stations Friday night in protest of what they view as collusion between train operator, MTR Corp, and the Hong Kong police. South China Morning Post

King Solomon. Beijing reportedly offered to bankroll a development fund on the Solomon Islands if the archipelago ditches its diplomatic ties with Taipei in favor of Beijing. The self-governing island of Taiwan has few allies left, with only 17 nations recognizing the island as a sovereign state. Taiwan warned the Solomon Islands it could fall into a “debt trap” if it accepts Beijing’s offer although, to be fair, Beijing appears to be offering money to replace a funding service currently provided by Taiwan. South China Morning Post

This edition of CEO Daily was edited by Eamon Barrett. Find previous editions here, and sign up for other Fortune newsletters here.

Read More

CEO DailyCFO DailyBroadsheetData SheetTerm Sheet