DRIVING THE DAY
1. CNPC suspends fuel sales to North Korea
Sometimes good economics is also good politics.
China National Petroleum Corp — one of the country’s state-owned oil majors — has reportedly cut off fuel sales to North Korea over the past couple of months. The exact timeframes remain unclear, so we don’t know exactly when the shutdown started or how long it will last, but this is a big deal.
The basic reason for cutting off the Hermit Kingdom (NYT):
- “’It’s no longer worth the risks,’ said [a] source. Chinese and international banks are stepping up compliance checks on companies dealing with countries on the U.S. sanctions list, such as North Korea, he said.”
- “The North Korean agents who mostly buy the diesel and gasoline have been unable recently to pay for the supplies — CNPC normally requires upfront payments, the source said.”
A spokesman for China’s Ministry of Foreign Affairs claimed to have no knowledge of the cutoff. So it’s unclear whether this is government policy, or simply a commercial decision — no one likes to sell product to a customer that can’t reliably pay.
A fig leaf: The decision comes as China needs to show progress on North Korea to placate an increasingly frustrated Donald Trump. The US administration was disappointed they didn’t get specific commitments on Chinese oil sales to North Korea last week at the defense dialogue between the two countries in Washington, DC.
China’s hope: CNPC’s suspension of fuel sales will buy some goodwill in the US.
Xi Jinping’s goal is to continue to buy time. He needs Trump off his back for five more months to get through the Party Congress.
FINANCE AND ECONOMICS
2. China’s property developers keep finding a way
Where there’s a will there’s a way. That’s why we aren’t giving up on China’s property markets just yet.
Despite ongoing restrictions on housing purchases, demand is still strong. In response, developers are lying, stealing and cheating to get funds and keep building.
The latest move is selling very short-term bonds offshore (Caixin):
- “More and more Chinese real estate developers have been issuing one-year bonds in overseas markets since late May to bypass government measures to curb…fundraising channels.”
It’s a convenient way to get around the NDRC approval process:
- “The National Development and Reform Commission (NDRC) stopped approving offshore debt issuance in May — but bonds maturing in a year or less do not need approval.”
The upshot: Developers still want to start new projects.
Why it matters: In case we haven’t said it enough — as goes property, so goes the economy. If developers keep chugging along, economic growth will be stronger than anticipated.
Caixin: Developers Getting Around Clampdown on Issuance of Overseas Bonds
3. It’s time to start buying lithium
And shorting Tesla and other American battery manufacturers.
China is jumping into battery production with both feet (Bloomberg):
- “Chinese companies have plans for additional factories with the capacity to pump out more than 120 gigawatt-hours a year by 2021 according to a report published this week by Bloomberg Intelligence.”
- “That’s enough to supply batteries for around 1.5 million Tesla Model S vehicles or 13.7 million Toyota Prius Plug-in Hybrids per year, according to Bloomberg New Energy Finance.”
But China isn’t the only one:
- “In all, global battery-making capacity is forecast to more than double by 2021 to 273 gigawatt-hours, up from about 103 gigawatt-hours today.”
The upshot: The price of battery inputs like lithium and nickel are about to go through the roof as this capacity starts to come online.
Watch out: These investments remind us of solar a few years ago. Chinese over-capacitization crushed margins and made the entire global market unprofitable.
Bloomberg: China Is About to Bury Elon Musk in Batteries
POLITICS AND POLICY
4. China’s coal policies are a convoluted balancing act
The government wants three things from the coal sector:
- Higher quality production.
- Controlled prices in the run-up to 19th party congress.
- Fewer coal imports.
That mix of goals has put the government in a bind. Cuts to low quality capacity have sent high quality coal prices soaring over the past year. To keep coal prices from rising further the NDRC needs to boost coal supply.
But they don’t want to do so through imports, which are already growing at almost 30% y/y.
The answer to this conundrum: Ask the big domestic coal companies, which can meet quality standards, to ramp up production while clamping down on purchases from abroad.
That is the thinking behind the latest ban on coal imports via ports overseen by provincial governments. As of July 1, only State Council-approved ports can bring in foreign coal.
The upshot: It gives the NDRC more control and is a huge step back from marketization.
POLITICS AND POLICY
5. Xi Jinping wants to keep colleges campuses quiet
In case you didn’t realize already, Xi Jinping wants ideological conformity. That’s why he has sent inspection teams to China’s top universities. Wednesday he held a Politburo meeting dedicated to hearing their findings (official readout below).
Some context: Xi has focused a lot of Politburo time on the ideological system. His plan is to ensure that key levers of power are thoroughly beholden to the Party. That started with “the pens and the guns” — propaganda, media, security forces and the legal system.
So why universities? The answer is simple. Chinese leaders believe that universities are incubators for subversive thought. They’re not exactly wrong.
Some more context: Xi’s top political adviser and former political science professor, Wang Huning, has argued since the 1980s that too much intellectual freedom could undermine the political system. The 1989 Tiananmen incident made this thinking accepted wisdom among most of the ruling class.
The upshot: This isn’t a one-time thing. Xi will continue to push ideological conformity in his second term.
POLITICS AND POLICY
6. China is codifying its intelligence gathering operations
And expanding them.
The National Peoples Congress (NPC) passed the National Intelligence Law of the PRC on Tuesday (Reuters):
- “China already has broad laws on state secrets and security but the new law will allow intelligence officials to enter ‘restricted access areas’ and use ‘technological reconnaissance measures’ when required, according to the draft.”
The NPC passed this fast.
Remember: They didn’t even announce that this was out for comment.
Inside Xi Jinping’s head: Security-related legislation has dominated the NPC’s agenda under Xi. Those actions reflect Xi’s own focus (obsession?) with national security. He has also created the National Security Commission and passed new laws pertaining to cybersecurity, foreign NGOs, and counterintelligence.
The important context: Xi and the Party are terrified of: 1) color revolutions; 2) domestic separatist/terrorist groups.
How Xi Jinping sees recent history:
- 2003- Rose Revoultion in Georgia
- 2004- Orange Revolution in Ukraine
- 2005- Tulip Revolution in Kyrgyzstan
- 2008- Unrest in Tibet
- 2009- Unrest in Xinjiang
- 2011- Arab Spring
- 2014- Umbrella Protests in Hong Kong
- 2014- Upsurge in domestic terrorist incidents
The upshot: Xi Jinping is creating a security state. Security services will be given more resources and power going forward.
China.org: China adopts intelligence law
POLITICS AND POLICY
7. Empowering China’s beleaguered prosecutors
China’s legislature wants to empower court prosecutors to be the protectors of the public interest. Can it work?
As of July, prosecutors will be allowed to file civil lawsuits against acts that compromise the public interest in cases related to environmental protection and food and drug safety. Suits can also be brought against the government.
Some context: Empowering prosecutors is part of the Party’s 2014 Fourth Plenum decision to enhance the rule of law.
Get smart: Chinese leaders are sincere about promoting rule of law – so long as it doesn’t interfere with Party rule. But that’s the catch. Neither prosecutors nor governments are independent from the Party.
The effect: There is a very high ratio of pre-trial deals in these areas. Government officials don’t want the Party’s scrutiny or discipline, which would take place if misdeeds were publicized via a trial. That makes it hard to empower the courts.