DRIVING THE DAY
1. Another bear hug for Xi in Russia
Xi Jinping is in Moscow to meet with Russian president Vladimir Putin before both men head to Hamburg for the G20 later this week.
Think the US President has come up in conversation? Certainly, but the two leaders also want to discuss their own bilateral ties.
On Monday, Xi gave an interview to “Russian mainstream media”, in which he said that current Sino-Russian relations are “the best in history”.
Get smart: That’s not saying much. Sino-Russian relations have a long history of suspicion and conflict. Even today, scratch the surface and there is still a lot of distrust – especially in Moscow.
Get smarter: Despite the underlying tensions, the logic for cooperation is solid, and the relationship is set to strengthen in the coming years.
The reason? Both Xi and Putin are fiercely anti-Western, and see each other as useful allies in promoting alternatives to liberal democracy. It’s a marriage of convenience, but that will not change any time soon.
DRIVING THE DAY, CONT’D
2. Xi meets Putin to talk North Korea
The two leaders had an informal dinner last night. North Korea was no doubt a topic of conversation.
Trump’s strategy: US President Trump is reaching out to Japanese Prime Minister Abe and South Korean President Moon to coordinate a strategy on North Korea. The three will hold a trilateral meeting in Hamburg where Trump will try to persuade the other two leaders to join him in presenting a united front that puts more pressure on China.
Xi’s counterstrategy: It’s not clear that the leaders of the US, Japan and South Korea see eye-to-eye on the way forward in North Korea. We expect that Xi and Putin will discuss how to exploit potential differences between the three to muddy the waters and buy time.
The rub: No one knows how to solve the North Korea problem. Unless Xi, Trump, Moon and other leaders genuinely work together, the situation will only deteriorate.
What to watch: All the major players (minus Kim Jong-un) will see each other in Hamburg this week. Those meetings and conversations will determine the way forward – for better or for worse.
FINANCE AND ECONOMICS
3. The PBoC passes its finals for the semester
China’s central bank is taking a brief victory lap.
In a commentary in its official media outlet, the Financial News, the central bank is arguing that it passed its June “final exams.”
What does that mean? The central bank says it employed “steady and neutral” monetary policy to great effect last month. In layman’s terms, that means the PBoC gave banks lots of money but charged them a high price for it.
We take a deeper look at how it played out in our weekly finance piece titled “The PBoC Wins June”. Reach out and we’ll share.
What really matters now is where we go from here. The central bank says liquidity is currently too abundant. That’s why it has not injected liquidity for the past 8 trading days.
The outlook: The PBoC says the steady and neutral policy will remain in place for the time being. Liquidity demand will ease now that we are through the mid-year crunch, meaning Chinese money markets will be a touch less tense throughout the third quarter.
Financial News: 稳健中性货币政策效果良好
Caixin: 流动性总量较高 央行继续净回笼资金
Reuters: China central bank doubles June liquidity injections to avert cash crunch
FINANCE AND ECONOMICS
4. Foreign ratings agencies get the go ahead
We’ll take what we can get.
China’s central bank is now saying that it will allow foreign ratings agencies to rate bonds issued in the interbank market. The PBoC outlined the rules for foreign firms to do so on Monday. It’s a small opening, but it is an opening nonetheless.
What it means: The main reason to allow foreign ratings firms into the interbank market is to give a boost to the “panda bond” market. That’s where foreign companies or governments issue CNY-denominated bonds inside China.
Why it matters: Panda bond issuance is currently tiny — at RMB 130 billion by year-end 2016. China wants foreign companies to borrow through the panda bond market — and to incentivize foreign investors to invest in it.
That would ostensibly mean that foreign entities could more comfortably transact in China. The borrowers would know their lenders, and vice versa.
Getting it right could be a game changer for China’s capital markets.
FINANCE AND ECONOMICS
5. FX reserves are a national security tool
The head of China’s foreign exchange regulator, Pan Gongsheng, has a fascinating piece in Qiushi this week — the Party’s fortnightly magazine that is essential reading for cadres.
This one is worth a read even if you’re not a cadre. Pan outlines the state of China’s foreign exchange reserves. He argues that they help to guarantee the steady operation of the macroeconomy and play a positive role in “financial security”. That’s especially important as the 19th Party Congress nears, he says.
It’s not exactly boilerplate commentary for a central banker.
Get smart: Under Xi Jinping, even seasoned technocrats like Pan are increasingly required to view the economy and financial markets through the lens of national security.
More importantly for markets — if FX reserves are part of national security, they aren’t to be frivolously wasted. Lately that has even meant that they should not be “wasted” defending the exchange rate, which leaves only one option when the CNY comes under pressure — capital controls. Get used to them.
POLITICS AND POLICY
6. All hail chairman Xi
Xi Jinping’s most impressive achievement thus far has been his reorganization of the military and associated reforms.
Nothing shows Xi’s consolidation of power so clearly as his control over the military. It’s in stark contrast to his predecessor, Hu Jintao.
Xi’s authority was on full display when he reviewed troops at the People’s Liberation Army (PLA) garrison in Hong Kong.
The money moment: When Xi greeted the men in uniform, instead of responding with the typical “Hello commander!”, the troops intoned the more personalized “Hello, Chairman!”. That greeting shows two things:
- the armed forces’ loyalty to Xi himself
- that Xi is the genuine chief of the PLA – not just first among commanders
Why it matters: Mao said that “political power grows out of the barrel of a gun”, and in the case of the CCP, that has always been true. Xi’s control over the military is a necessary prerequisite for imposing discipline over the Party.
POLITICS AND POLICY
7. Wang Qishan gives Xi a hand on poverty alleviation
Wang Qishan — the head of the Party’s discipline unit — is on board with Xi Jinping’s drive to eliminate poverty.
Wang held a teleconference Monday for 120,000 discipline officials, where he called on them to step up supervision of anti-poverty efforts.
Get smart: Under Wang, the Party’s discipline commission is playing an ever-larger role. Its job seems to have expanded beyond just supervising the Party, to now actually implementing policy. Want another example? The commission has been running the insurance regulator ever since ousting its chief in April.
Get smarter: A rift between Xi and Wang has been the flavor of the month in the Beijing rumor mill.
But we never heard or saw any credible signs of such a rift. With Wang touting one of Xi’s big initiatives, perhaps that rumor will finally die.
China.org: Top graft-buster stresses enforcement of discipline in poverty relief