DRIVING THE DAY
1. North Korea is not China’s problem
The Ministry of Foreign Affairs daily briefing is usually a pretty tedious affair. But not yesterday.
Spokesperson Geng Shuang went off when asked a question about North Korea:
- “As we said repeatedly, the crux of the Korean nuclear issue rests on the conflict between the DPRK and the US.”
- “The Chinese side is neither the focal point of the conflict of the Korean nuclear issue nor the catalyzer for escalation of tensions at present, and it does not hold the key to solving the Korean Peninsula nuclear issue.”
- “In recent days, certain people have been exaggerating and playing up the so-called ‘China responsibility’ theory. Those people have either failed to grasp the Korean Peninsula nuclear issue comprehensively and accurately, or done this out of ulterior motives with an attempt to shirk responsibility.”
- “It won’t help to absolve oneself of responsibility, or kick down the ladder, still less stab in another’s back.”
- “If when China is busy putting out a fire while someone pours fuel on it, when China is faithfully following through on Security Council’s resolutions while someone attempts to infringe upon China’s legitimate rights and interests, and when China is working vigorously to advance the denuclearization of the Korean Peninsula while someone seeks excuse to endanger China’s security interests, then how can China’s efforts work out as expected?”
- How can the situation be eased? And how can the Korean Peninsula nuclear issue be resolved?”
Let me paraphrase: The US needs to get its…uh…*stuff* together and figure out a viable way forward.
Get smart: The tirade makes for a good headline, but It doesn’t matter what Geng Shuang says. What matters is what Xi says to Trump.
The reality is that officials on both sides are going to continue to be frustrated with each other because neither side can fix the North Korea issue — there are no good options.
That’s why the temperature of the Xi-Trump relationship is so important.
FINANCE & ECONOMICS
2. PBoC signals a looser currency regime
We know it sounds crazy. But we think China might be turning to a looser currency regime.
The lead story in today’s Financial News – the central bank’s official outlet – argues for a wider trading band, less government intervention and better FX trading and hedging tools.
Last week, we highlighted that China’s chief FX regulator argued that the FX reserves should be preserved for their primary purpose – fighting a potential Balance of Payments crisis.
The implication: FX reserves should NOT be used to manage the price of the currency.
Get smart: The PBoC has long been the vanguard of Chinese financial reformists. Their arguing for a more liberalized regime is not the final word. They are publicly trying to convince their political superiors.
What to watch: It’s tough to imagine a major shift before the Party congress. So look for a widening of the RMB trading band sometime between December and March of next year.
- JRJ: 【砥砺奋进的五年】人民币汇率不断走向均衡稳定
- Bloomberg: PBOC Newspaper Outlines Steps Needed for Currency Market Reform
FINANCE & ECONOMICS
3. China’s two-pronged approach to deleveraging
“Double deleveraging.” That’s the newest phrase meant to describe what regulators are trying to achieve through tighter financial supervision.
Here’s what it means:
- Financial institutions need to deleverage.
- And corporates need to deleverage.
The Financial News highlights progress in both areas.
The catch: The PBoC is straightforward in acknowledging that de-risking the financial sector is, itself, risky. So the key is to stay focused on proper liquidity provisions.
What to watch: In case we sound like a broken record, it’s becoming clearer to us that regulators are truly focused on leverage this year. Progress will be slow and halting. But the fact that the issue is driving the policy conversation is positive. As per our entry above, don’t expect much to happen before the Party congress. But look for deleveraging to get another boost starting in December.
- Financial News: “双重去杠杆”稳步推进 银行业流动性仍需关注
FINANCE & ECONOMICS
4. Investing in bad loans…from your smart phone?
We previously highlighted distressed debt investment as an enticing asset class. This isn’t exactly how we envisioned it (Bloomberg):
- “For 4.15 million yuan ($610,000), customers on [Taobao]…can bid for the debt of a steelmaker from Zhejiang, a coastal province in eastern China.”
That’s not exactly chump change, so it’s not like mom and pop will be investing in these types of products, but even for wealthier retail investors such investments are very risky:
- “Interaction with the seller is important in a [distressed debt] transaction and the deals can take months to complete, says Andrew Brown, a partner for macro and strategy in Hong Kong at ShoreVest Capital Partners Ltd., which invests in Chinese bad loans…‘It’s not like buying and selling stocks.’”
The reality: Everything in China is done through online platforms like Taobao. Everything. So they will absolutely be part of the debt resolution process.
The rub: Regulators better build in investor protections now, otherwise this will end badly for retail investors.
POLITICS & POLICY
5. Putting the “socialist” back in the “socialist market economy”
The Party’s attitude towards SOEs will be one of the most important dynamics to watch in Xi’s second term. Making the state-owned sector more efficient is key to sustaining economic growth.
That’s why we pay attention when top officials talk about SOEs.
Zhang Chunxian, vice head of the Party-building leading small group just met with SOEs in Hebei. He said that Party leadership is the “root” and “soul” of state-owned enterprises.
Some context: Everyone agrees that SOEs need “reform”. The debate is about what kind of reform. One side argues that marketization is key. The other side argues that more state control is necessary.
Zhang is clearly in the second camp.
Get smart: Zhang, already a Politburo member, could be promoted to the Standing Committee at the upcoming Party Congress. His views on this issue matter. So it’s not a great omen for the marketizers.
- CPC: 张春贤：推动全面从严治党在国企落实落地
POLITICS & POLICY
6. Central SOEs are stronger, but not necessarily better
Xi Jinping is also in the camp that thinks that SOEs need more Party control. His goal is for SOEs to become “stronger, better and bigger”.
Central SOEs are definitely getting bigger. They are temporarily stronger, too. SASAC’s H1 data shows that:
- H1 revenues are up 16.8% y/y to RMB 12.5 trillion.
- Net profits are up 18.6% to RMB 535 billion.
- 99 out of 102 central SOEs saw profits grow. 29 of them saw profits grow by over 20%.
Hold up: SASAC didn’t release debt/asset ratios for SOEs. That’s a fundamentally important metric for judging a company’s long-term health. So it’s tough to say that SOEs are getting “better”.
Get smart: A big portion of these profits came from a rise in commodity prices. That tailwind is temporary.
The Catch-22: Strong profits blunt any impetus to reform.
POLITICS & POLICY
7. A technical upgrade for judicial reform
The Chinese government is investing big in big data and artificial intelligence (AI). They want to use both technologies to improve governance.
They are also hoping they can improve the judicial system. That’s why Xi Jinping instructed attendees at a national conference on judicial reform to make use of such technology.
How can big data and AI help in the courts? Two examples:
- analyzing evidence
- sharing information across organizations and jurisdictions.
Get smart: Chinese courts are overloaded. Seeking to improve efficiency is a smart move.
The bigger picture: China’s tech giants are going to be the big winners. As the government relies more on technology, it wants that technology to be homegrown. It drives Chinese leaders crazy that they still have to use a US operating system (Windows).
- People’s Daily: 习近平对司法体制改革作出重要指示强调 坚定不移推进司法体制改革 坚定不移走中国特色社会主义法治道路
- People’s Supreme Court: 孟建柱在全国司法体制改革推进会上强调主动拥抱新一轮科技革命