DRIVING THE DAY
1. Did Xi Jinping win the G20?
Pretty much. He had a very successful summit, not least because of his solid meeting with the US President.
Trump left Hamburg feeling as if the bromance with Xi was still intact – which is exactly what Xi wanted.
How did he do it? Xi once again personally reassured Trump that China is working on North Korea.
But Xi also made his preference for dialogue clear (Xinhua):
- “Xi said China is firmly committed to denuclearizing the peninsula, safeguarding peace and stability on the peninsula, and solving the issue through dialogue and consultation.”
- “China, Xi said, has repeatedly made clear its principled stance that while making necessary responses to the Democratic People’s Republic of Korea’s violations of UN Security Council resolutions, the international community should also increase efforts in promoting dialogue and controlling the situation.”
In an effort to forestall any unilateral moves by the US, Xi also sought to bake in a cooperation framework on trade (Xinhua again):
- “Noting that the 100-day action plan initiated after the two presidents’ meeting at Mar-a-Largo in April has achieved new progress, Xi said the two sides are discussing a one-year cooperation plan.”
- “Trump was scheduled to pay a state visit to China later this year.”
Get smart: Xi’s tactic hasn’t changed. He wants to outline clear timelines for progress in hopes of defusing Trump’s impulsive tendencies. Xi is also looking to bake in frequent personal interaction with Trump to ensure the US president is feeling the love.
DRIVING THE DAY, CONT’D
2. China – Japan ties remain frosty, but not frozen
Xi’s second most important bilat was with Japanese Prime Minister Shinzo Abe.
There were some positive developments (Nikkei):
- “Japan envisions that Abe would visit China in the first half of 2018”
- “Xi would visit Japan in the second half of the year.”
- “[They will] quickly get a maritime and aerial communication mechanism up and running between the two countries’ defense authorities.”
Why it matters: It’s positive that the two sides are talking. Proposed visits will help to steady relations and provide impetus for greater cooperation.
Get smart: Frosty relations are about as good as we can expect from these two. Xinhua’s coverage of the meeting spells out why the Chinese side finds it difficult to have productive relations. “Bilateral trust” it says, has been “marred” by:
- “Tokyo’s reluctance on admitting its past war crimes”
- “[Japan’s] attempt to annex China’s Diaoyu Islands and adjacent islets in the East China Sea”
- “[T]he initiative to abolish its post-war pacifist constitution”
The rub: It’s Abe himself who is the key proponent to amend the constitution. It’s hard to see bilateral ties improving too much as long as he is in office.
Still, frosty ties are better than frozen ones.
DRIVING THE DAY, CONT’D
3. Silence on the Xi-Modi chat as Chinese media stays on message
Xi also spoke briefly with Indian Prime Minister Narendra Modi on the sidelines of a BRICS meeting.
The current Sino-Indian border standoff provided an unusual backdrop for the encounter (Bloomberg):
- “Far from the plush leaders events in Hamburg, China and India are facing the resurgence of a decades-long dispute over a remote area of the Himalayas.”
A glaring omission? Over the weekend China’s domestic media called out the Indians over the border issue. But the Xi-Modi chat went uncovered in Chinese language media, which focused instead on Xi’s leadership of the broader BRICS meeting.
The narrative: Xi interacting with Modi amidst the border standoff doesn’t play into the right narrative. The focus for Chinese media was squarely on Xi’s role in setting the global agenda and dialoging with the “big boys” — Merkel, Macron, Abe, Trump, Moon and Putin.
Bloomberg: Himalayan Stand-Off Makes It an Awkward G-20 for Xi and Modi
FINANCE AND ECONOMICS
4. June inflation — nothing to see here
China’s inflation data for June came out this morning. There wasn’t much to see.
Consumer prices rose 1.5%y/y in June — the same pace as in May.
Producer prices rose 5.5%y/y in June — also the same pace as in May.
The central bank is happy that consumer inflation remains relatively low. That means it doesn’t have to consider raising interest rates to slow price growth.
On the producer side, the fact that June’s print was the same as May’s tells us that disinflation is slowing a bit. If upstream inflation settles in at low single digits, as the PBoC hopes, China’s industrial profitability will hold up just fine.
The upshot: The PBoC knows it’s in an inflation sweet spot right now. That means monetary policy can remain neutral as the bank concentrates on containing financial risk. The question is how long this sweet spot will extend.
We think they will be fine until the end of Q3. After that, policy calibration will become more complicated.
FT: China inflation gauges hold steady in June
FINANCE AND ECONOMICS
5. Central bank sits on the sidelines
Inflation is not the only issue on which the PBoC has adopted a wait-and-see attitude.
The bank has not conducted liquidity operations for 12 trading days.
The reason? Bank liquidity remains moderate, according the PBoC’s Open Markets Operations Office.
Why it matters: After dumping quite a bit of liquidity into the banking system to get through June, the PBoC is now sitting back and letting that liquidity slowly expire. It’s another temporary sweet spot for the PBoC, as China markets are feeling pretty good right now.
What to watch for: Things look good through the Party Congress. But we have December circled on our calendar – that’s when strains in money and credit markets could appear.
Caixin: 银行体系流动性适中 央行继续暂停逆回购
POLITICS AND POLICY
6. Premier Li signals policy continuity for H2
While Xi was globetrotting, Li asked a panel of economists and businessmen to discuss the economy.
The upshot: Policy continuity and maintaining economic stability is the order of the day.
What to watch: The upcoming Politburo meeting, scheduled for this weekend, is what really matters.
What they will be talking about: Leaders want to ensure that funding will continue to reach businesses despite the current tightening on speculative finance. It’s a difficult balancing act. They’ve managed it so far, but it’s the key issue going forward.
POLITICS AND POLICY
7. Xiong’an hits the 100 days mark — is it the model for tomorrow?
It was 100 days ago yesterday that Xi Jinping announced his plan for the Xiong’an New Area (XANA).
XANA will be a testing ground for new ideas in governance, and it will feature a much-streamlined bureaucracy.
There will be only seven government agencies – as compared to over 20 in an average Chinese city.
Here’s what the seven agencies will look like:
- Party and State Office – combines usually separate secretariats for the Party and government into one unit
- Party and masses work department – administrates Party affairs, human resources and public relations (i.e. propaganda, crisis management, etc)
- Reform and development bureau – enacts all economic policy
- Planning and construction bureau – supervises city planning and construction
- Public service bureau – oversees social affairs and public services
- Law enforcement bureau – brings all law enforcement under one umbrella
- Safety supervision bureau – oversees work safety and any other safety-related mandates
Get smart: Fewer agencies doesn’t mean smaller government. The government’s broad mandates will stay in place. Rather, the hope is that consolidating agencies with relevant portfolios will improve efficiency.
Where we’re headed: It’s too early to tell whether the XANA model will change the rest of the country or the other way around. The Shanghai Pudong New Area used to only have ten agencies when it started but later expanded.