DRIVING THE DAY
1. China’s smart strategy for managing Donald Trump
For Xi Jinping, stable US-China relations are a priority, especially in the run-up the 19th Party Congress. If Xi is perceived to be mishandling the relationship, it could damage his standing at home.
That would hamper his ability to push his agenda and get his people in place at the upcoming conclave.
An official commentary by “Zhong Sheng” (钟声, i.e. “Voice of China”) in today’s People’s Daily makes the Chinese position clear (see link).
The title says it all: “The necessity for Sino-US cooperation far outweighs any differences.”
To manage the relationship, the Chinese have been attempting to build relationships with the first family. Peter Martin at Bloomberg gets the scoop: The Chinese have invited Jared Kushner and Ivanka Trump to Beijing (see link).
Some context: Jared was instrumental in arranging the Xi visit to Mar a Lago. He and Ivanka are the only White House advisers who can never be fired, so it’s a smart strategy to cultivate strong relationships with DC’s first princelings.
The real prize: The Kushner visit could be paving the way for Trump to come to China later this year.
Get smart: A pending Trump visit could help to delay any breakdown in relations. A potential meeting is the perfect excuse for both sides not to get tough.
It’s working, for now. We are China experts, not Trump interpreters, but we read his recent tweet as saying: “Don’t worry Xi, we’re still bros despite this North Korea stuff”:
- Here’s the tweet: “While I greatly appreciate the efforts of President Xi and China to help with North Korea, it has not worked out. At least I know China tried!”
But it could go bad at any moment. We still don’t see a solution to the North Korea problem. And the US is making that the litmus test for the relationship. In the absence of progress, the specter of a sharp deterioration in relations will always be looming.
Bloomberg: China Invites Ivanka Trump and Jared Kushner to Visit Beijing
People’s Daily: 中美合作的需要远远大于分歧 (钟声)
DRIVING THE DAY, CONT’D
2. China’s envoys to the States might be more important than they look
China’s overtures to the first family and Trump’s tweet come on the eve of the first meeting of the US-China Diplomatic and Security Dialogue.
What is it? One of four new mechanisms that replace the Obama-era Strategic and Economic Dialogue.
Who’s in charge? It’s led by State Councilor Yang Jiechi on the Chinese side, with General Fang Fenghui, Chief of the PLA Joint Staff Department, also taking part. The US side is led by Secretary of State Rex Tillerson and Secretary of Defense James Mattis.
A broken promise? When the new dialogues were announced, Tillerson said that the Chinese side would have Politburo representation. Neither Yang nor Fang are Politburo members.
Get smart: Both Yang and Fang might soon be Politburo members. Fang in particular has had a meteoric rise, is close to Xi, and looks to be in the running for a Central Military Commission vice chairmanship. Few think that Yang has a shot at the Politburo, but he does not have to retire and traditionally state councilors graduate to the top table.
DRIVING THE DAY, CONT’D
3. Talks with the US will be dominated by North Korea
Acting Assistant Secretary of State for East Asian and Pacific Affairs Susan Thornton gives us a preview of the meeting:
- “We want to have good cooperation with China on North Korea.”
- “We have determined that both of our countries have overlapping and mutual interests.”
- “So we ought to see really good cooperation… on that issue.”
- “And if we’re not getting it, it’s going to color the sense, I think, among people as to whether or not China also wants a constructive and positive relationship with us.”
The Trump team has China’s attention. There is no doubt that Trump and co. have succeeded in bringing the DPRK issue front and center.
This could help to strengthen bilateral relations if the two sides can bond over their shared frustrations.
But relations could go south in a hurry if good relations depend on China “solving” the North Korea issue. There is no easy solution there.
State.gov: Previewing the U.S.-China Diplomatic and Security Dialogue
FINANCE AND ECONOMICS
4. MSCI throws down the gauntlet
Financial headlines are celebrating China’s MSCI inclusion.
Meanwhile, the domestic securities regulator tried to play it cool. It posted a brief statement describing the decision as “in line with the inevitable needs of international investors.” Such restrained language masks the desperation with which Chinese regulators wanted to obtain inclusion.
But the statement from MSCI was clever (link below):
- “further inclusion will be subject to a greater alignment of the China A shares market with international market accessibility standards, the resilience of Stock Connect, the relaxation of daily trading limits, [and] continued progress on trading suspensions…”
The symbolic victory of initial index inclusion is nice. MSCI even bumped them up to 0.73% of the index instead of the originally mooted 0.5%.
But what China really wants are capital inflows. To see large, ongoing portfolio flows there is a lot of work to do.
The hurdle: MSCI will only include 222 Chinese large cap companies — the rest are still suspended from trading on Chinese stock exchanges.
MSCI: RESULTS OF MSCI 2017 MARKET CLASSIFICATION REVIEW
Marketwatch: MSCI to add 222 China A shares in emerging-markets index
FINANCE AND ECONOMICS
5. Animal spirits and property
We are not giving up on the real estate market just yet.
Analysts are focused on the fact that fewer cities saw m/m price rises in May.
The reality: The number fell to 56 cities from 58 in April. That’s not exactly a huge slump.
To us, it looks like animal spirits are still alive.
At least, that’s what the PBoC’s quarterly sentiment survey shows. A full 23% of respondents — from 50 cities — said they plan on buying a house next quarter. That is a fresh high for that category.
What it means: The survey shows that people’s mentality toward the housing market has not changed, despite tight purchasing restrictions. They still want to buy — right now. If they thought prices would start falling, they would plan to hold off on their purchases.
Why it matters: The data show that housing investment eased in May. If that becomes a trend, it will drag on economic growth. But if people still want to buy houses — which they do — it’s a strong incentive for developers to keep building.
21st Cent Biz: 央行调查：超过30%的居民预期未来房价会上涨
Economic Information Daily: 严控之下，三四线城市房价为何逆势上涨?!
21st Cent Biz: 房价“逆向分化”形势确立三线城市全面领跑
21st Cent Biz: 三四线城市去库存要靠产业发展
Straits Times: China home prices up in fewer cities amid curbs
6. Ford makes “made in China” great again
A sign of the times: Ford is set to move more vehicle production to China in 2019 (CNBC):
- “Sales of small cars have dropped sharply in the U.S. and companies are seeking to cut costs making them. Ford’s president of global operations Joe Hinrichs said the move to China will save the company $1 billion.”
That will irk Donald Trump, but Ford thinks the average consumer doesn’t care:
- “Hinrichs said Ford’s research shows that customers — who are used to phones and other gadgets from China — care more about product quality than where their vehicles are made.”
Why it matters: The center of economic gravity continues to shift toward China. The country wants to move up the manufacturing value chain. Enticing foreign companies to produce high quality products here helps that process.
Watch this: We hear Tesla is pondering a similar move.
CNBC: Ford to import Focus small car from China in 2019
POLITICS AND POLICY
7. China wants its own military-industrial complex
That’s why Xi has established the new Central Civil-Military Integration and Development Commission, which held its first meeting Wednesday.
Any guess as to who heads the new commission? That’s right! It’s Xi Jinping.
The goal here is to more effectively leverage private enterprises for military technology. The model is the US, where private companies develop and manufacture a large share of military hardware and software (think Raytheon, Lockheed Martin, Northrop Grumman, etc).
The bigger picture: Xi has already blurred the line between the Party and the state. Now he’s blurring the line between the military and civilian sectors.
People’s Daily: 习近平主持召开中央军民融合发展委员会第一次全体会议强调