DRIVING THE DAY
1. Xi and Merkel – the new dynamic duo
Xi Jinping is still globetrotting.
He’s in Germany today, where he and German Chancellor Angela Merkel plan to “plot G20 strategy… over lunch” according to Reuters.
Bloomberg gives important context:
- “The two industrial powerhouses of Asia and Europe are being nudged into an informal alliance to pick up the leadership baton that the U.S. is accused of having dropped since President Donald Trump’s inauguration earlier this year, according to diplomats and officials from several Group of 20 members.”
Get smart: Xi wants to have his cake and eat it too. Since Trump’s election he has positioned China as the standard bearer for free trade. The rhetoric has been right on, but there’s been no genuine opening of the Chinese economy.
What to watch: Xi wants the EU to grant China Market Economy Status. Merkel and other Europeans want further concessions first. We’ll be watching to see if the two sides can strike a deal.
FINANCE AND ECONOMICS
2. Does a financial super-regulator have traction?
The PBoC is setting priorities.
Two of those priorities are tight financial supervision and regulatory coordination, both of which featured in the PBoC’s financial stability report that dropped on Tuesday.
Some context: Readers will know that this year has already seen much strengthened regulatory scrutiny over a range of financial institutions. There has also been more coordinated action between the central bank and the three commissions that oversee banks, securities and insurance, respectively.
Some bigger context: The idea of bringing the various financial regulators under the roof of one “super-regulator”, spearheaded by the PBoC, has been floating in Chinese financial circles for a while. So the report’s language has people asking if the PBoC is signaling in that direction.
We don’t think so.
The key argument: The turf battles and technical aspects of creating a super-regulator are daunting. That’s why the idea hasn’t gained more traction. Why bother with such a change now that the financial regulators are already rowing in the same direction?
And now we know: Just as we were going to press send, Caixin confirmed a scoop from the WSJ’s Lingling Wei earlier in the day: the long-awaited Financial Work Conference will happen next week. And the reporting says that a super-regulator is not on the cards for now.
We’ll have a further update in Thursday’s Tip Sheet.
WSJ: China to Hold High-Level Meeting Aimed at Streamlining Financial Regulation
FINANCE AND ECONOMICS
3. The PBoC improves its firefighting capacity
While the bulk of the PBoC’s financial stability report looks back to developments in 2016, it offers some key nuggets to monitor in the rest of 2017.
File this under boring but important. The PBoC is set to improve the effectiveness of the Standing Lending Facility (SLF). This facility is the emergency lending window that banks can borrow from in a pinch. Improving it means giving it wider coverage and speeding up transaction times.
Some context: The PBoC has already been active in using the SLF this year. Last month, the facility was especially in demand.
Why it matters: This type of facility is an extremely powerful tool to firefight against risk contagion among banks. They know the SLF is an option when they can’t get cash elsewhere, so it keeps them from panicking during times of stress.
FINANCE AND ECONOMICS
4. China’s growing disparities
Anyone who has traveled around China has seen that regional differences are vast.
Those disparities are underscored in a recent report about salaries across 23 (of 31) Chinese provinces in 2016 (see link below).
Some key takeaways:
- Beijing’s public-sector salaries are more than two times as high as those in Henan.
- Private sector salary growth was broadly solid, especially in East China where it was 9%.
- But private sector salaries in the Northeast grew at only 3%, barely keeping up with inflation.
Why it matters: Given regional disparities, the assumption among many China watchers has long been that the poorer parts of the country would catch up with the richer parts over time. But for now, that’s not happening. In fact, China’s economic slowdown is increasingly being defined by divergence in local economic performance.
It’s a huge challengefor businesses and for public policy.
China Economic Weekly: 23省份2016年平均工资出炉：北京平均工资最高
5. Chinese equities and political risk, redux
We’ve said it before. China’s idiosyncratic political risk can be a real bear for equity prices.
The latest victim of that risk is Tencent.
Earlier this week the People’s Daily published an article calling Honor of Kings — Tencent’s most popular role-playing game – “poison” (SCMP):
- “The game has more than 80 million daily active users, which means one in every 17 Chinese [people] is playing the game at any time.”
- “A few tragic examples of overindulgence in the game were listed in the article: a 13-year-old jumping off a building after being scolded for playing the game, and a 17-year-old who almost died of cerebral infarction after playing non-stop for 40 hours.”
- “’Don’t commit evil,’’ the People’s Daily wrote in its July 4 commentary. ‘As a company that does good for the world, we will get better rewards in the long run even if we want to sacrifice some short-term profits.’”
Speaking of short-term sacrifice: Tencent’s stock price fell by 5% on Tuesday in Hong Kong and was down again in early trading on Wednesday.
Why it matters: As Chinese companies and financial markets become more important globally, this type of risk will have ever greater transmission channels to global markets.
SCMP: Tencent loses US$17.5 billion in market value after People’s Daily describes its game as ‘poison’
People’s Daily: 人民网评：《王者荣耀》，是娱乐大众还是“陷害”人生
POLITICS AND POLICY
6. Lack of incentives grounds China’s rockets
Uh-oh. China just had two failed rocket launches in two weeks. That’s two big blemishes on what had so far been a banner year for the space program.
Reasons for the failure are still unknown.
Possible culprit? A bad HR department.
There has been high turnover among scientists at China’s state-owned rocket science research and manufacturing institutes recently. The reason: a rigid benefits and promotion system that has little relationship to performance.
Why this matters: The absence of a market-based incentive system undermines efficiency in China’s state-owned companies and laboratories. Former chairman of SINOPEC, Fu Chengyu, recently said his SOE reform dream is for “employees to be able to go in and out… and payment can go up and down.”
Xinhua: 长征五号遥二火箭发射失利 专家将调查故障原因
The Paper: 傅成玉谈他的国企改革理想：干部能上能下，工资能高能低
The Verge: China’s most powerful rocket failed yesterday. What does that mean for the country’s space plans?
POLITICS AND POLICY
7. Xi’s political purification campaign gets high marks
Xi Jinping’s first term has been characterized by the widest ranging corruption crackdown in the Party’s 96 year history. Xinhua has a rundown of the accomplishments:
- “authorities have registered about 1.16 million cases and taken disciplinary actions against 1.2 million people”
- “57,000 party members voluntarily confessed to their wrongdoings in 2016”
- “at least 240 senior officials have been investigated”
- “2,873 fugitives from more than 90 countries and regions had been captured, of which 476 were former officials”
The result? It has bolstered the Party’s public image:
- “92.9 percent of Chinese said they were satisfied with the results [of the anti-corruption effort] … [up] 17.9 percentage points… from 2012.”
What’s next? Anti-corruption 2.0. The NPC is drafting a Supervision Law that will create the legal framework for the new National Supervision Commission next year.
Xinhua: Factbox: Seven facts of China’s anti-corruption campaign