DRIVING THE DAY
1. Xi Jinping heads to Hong Kong
Xi Jinping heads to Hong Kong on Thursday. He’ll be in town for a three-day visit to celebrate the 20th anniversary of the city’s return to PRC control from the Brits. The official anniversary is July 1.
This will be Xi’s first visit to the city as General Secretary, but he is no stranger to Hong Kong.
Xi traveled to the city on official visits in 1992, 2000, 2005 and 2008. His sister also famously owns properties in the city worth tens of millions of US dollars.
So what will Xi be doing?
SCMP has the itinerary:
- Xi will fly to Hong Kong Thursday.
- That night he will attend a banquet with Chief Executive Leung Chun-ying at Government House.
- Friday Xi will inspect the local PLA garrison.
- After the inspection, he heads to the convention centre in Wan Chai to “attend functions”.
- On Saturday, he will oversee the swearing-in of new chief executive, Carrie Lam Cheng Yuet-ngor.
- That afternoon he is expected to visit either the Hong Kong-Zhuhai-Macau bridge or the high-speed rail link to Guangzhou.
- He flies back to Beijing Saturday evening.
Xi is sending a clear message: Hong Kong is part of China, and the Party is in control:
- The visit to the PLA is meant to remind everyone that the Party owns the guns.
- A visit to the bridge or rail link — both of which connect Hong Kong to the Mainland — will remind everyone that Hong Kong and the Mainland are one country.
- And meetings with CY Leung and Carrie Lam underscore that they were elected according to Beijing’s rules.
DRIVING THE DAY, CONT’D
2. Protests might be a wild card
Some further context on Xi’s Hong Kong visit:
Under Xi’s leadership, the Mainland has enforced greater control over Hong Kong to put it mildly.
One prominent example is the narrow interpretation of the Basic Law that allows Beijing to control which candidates can stand for election to lead the Hong Kong government. Another has been extra-judicial abductions of anti-Party booksellers and financial tycoons — namely, Xiao Jianhua.
The rub: Opinion polls show that Hong Kong residents increasingly identify themselves as “Hong Kongers” and not “Chinese”.
What to watch: Anti-CCP protestors will do their damnedest to disrupt proceedings. Security forces have the city on lockdown, but when it comes to protests Hong Kong is more unruly than any Mainland city. The optics here will be key.
The reality: 20 years ago many thought that Hong Kong would change China. But it’s China that is making Hong Kong just another Chinese city – whether Hong Kongers like it or not.
Xinhua: Xi: “One country, two systems” the best arrangement for HK
FINANCE AND ECONOMICS
3. China sees record reduction in risky financing products
Still don’t buy that financial deleveraging is taking hold?
Recently released data show that outstanding interbank wealth management products (WMPs) declined by RMB 1.6 trillion in May — that’s the largest monthly drop in 10 years.
Why it matters: Interbank WMPs are exactly the types of speculative financing products that regulators have zeroed in on recently. So the record reduction in these contracts shows that the initial round of financial de-risking has been effective.
And it won’t stop: As Xinhua tells us, most of the decline was due to the fact that expiring products were not being renewed. The surge in expiration will continue in the second half of 2017 as contracts initiated in late 2016 run their course.
The outlook: We saw in May that financial tightening did not have a substantial effect on bank lending or economic growth — expect more of the same in the next two quarters as regulators stay the course.
Xinhua: 同业理财紧箍咒显效 5月份银行理财骤降1.6万亿
FINANCE AND ECONOMICS
4. On SOE reform, the action is in the provinces
If you had to pick just one, most China watchers would agree that SOE reform has been the biggest laggard in the reform program.
But some interesting things are happening at the provincial level.
Shanxi province has used its most recent SOE guidelines to clearly delineate which companies are in bounds when it comes to private investors obtaining controlling stakes: it won’t be possible at the SOE group level, but subsidiaries are okay.
It’s a narrow space, but simply clarifying those rules should embolden private investors to get involved. And if it works, the concept may well be expanded to the group level.
One HUGE caveat remains (21st Cent Biz):
- “The biggest difficulty facing mixed ownership reform lies in the value evaluation of state-owned assets. The current state-owned assets management system has not set up a price discovery mechanism.”
The upshot: Until they get the pricing right, SOE reform will remain stuck. But the latest buzz in Shanxi gives a glimmer of hope for privatization.
FINANCE AND ECONOMICS
5. China’s unique political risk is tanking equities
Enda Curran has a solid take on Chinese equities in Bloomberg today. It’s a good reminder of the unique political risk for listed Chinese companies — no matter which country they trade in (Bloomberg):
- “The point was hammered home again late Thursday after China’s broadcasting regulator ordered Weibo Corp. and two other internet media firms to halt video and audio webcasting, accusing them of operating without a license and disseminating opinions potentially harmful to social stability. Weibo shares sank 6.1 percent in New York.”
We mentioned the Weibo slump in the Tip Sheet last week. We also pointed out that the move by the regulator was specifically about tightening control over the political narrative ahead the 19th Party Congress.
The key: Everyone knows that Chinese markets carry unique political and business risk. But we are entering a period where there is specific 19th Party Congress risk — and it is effecting Chinese companies listed from Hong Kong to New York.
We have a deeper look at this phenomenon in our most recent weekly finance publication — get in touch if you want to swap notes.
Bloomberg: China Tycoon Questions Hit Markets Even as Growth Fears Fade
POLITICS AND POLICY
6. Li Keqiang goes globalist
China is the new leader of globalization: It’s the narrative that refuses to go away — at least if China has anything to do with it.
Li Keqiang’s speech at the Summer World Economic Forum (WEF) in Dalian was the latest opportunity to promulgate the idea (Xinhua):
- “The problems facing different countries are not due to globalization itself, but because of their inability to address it, [Li] noted. ‘It does not make sense to blame a rough road and stop moving if I sprain my ankle.’”
It will take more than words: These speeches continue to play well to the WEF crowds. But the US and the EU are increasingly frustrated with China’s mercantilist approach to trade.
What to watch: The 100-day plan with the US comes due in a few weeks. And Donald Trump is increasingly frustrated with China’s lack of action on North Korea.
Xinhua: Full text of Chinese Premier Li’s speech at New Champions 2017 annual meeting opening ceremony
Reuters: Trump growing frustrated with China, weighs trade steps: officials
POLITICS AND POLICY
7. Li’s thoughts on the growth target?
Last week, we flagged that folks should watch out for any position Premier Li Keqiang may take on the growth target in his Dalian speech.
The closest he came was to emphasize employment as the key indicator for government to monitor. Jobs, he said, are the fundamental reason to stabilize economic growth.
That’s not exactly newsworthy. The focus on employment as the bottom line has been a longstanding element of the Chinese political-economic calculus.
So that idea doesn’t exactly signal the death of the GDP target.
But, but but…it’s still important: Progress is slow, but China is genuinely relying more on the services sector for economic growth. And services are inherently more labor intensive than industry and manufacturing. That means slower growth can still create plenty of jobs.
There is some wiggle room in there. But to truly alter incentives, Xi Jinping himself will have to make it abundantly clear that GDP growth is no longer a criteria for cadre promotion.