DRIVING THE DAY
1. China’s financial regulators get together
The long-awaited National Financial Work Conference starts today.
Don’t forget: This meeting is happening half a year late because of disagreements about the agenda.
The animating purpose of the meeting: to strengthen financial supervision and coordination. The idea is to shine a light on “blind spots” so there is less room for regulatory arbitrage (see link below).
Our understanding is that the major outcomes of the NFWC are likely to be threefold:
- Outlining a medium-term path to stabilize, and eventually reduce, economy-wide leverage
- Instituting a new body to synchronize policy among the four financial regulators
- Agreeing upon a new PBoC governor
The upshot: Expectations for the NFWC are high. Previous versions of this meeting have kicked off major new reform initiatives.
We counsel temperance. Most decisions made this weekend will not see immediate implementation.
The big picture: Xi Jinping himself will be involved in the NFWC. That underscores financial regulation as the current top policy priority.
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2. The authorities are putting the brakes on outward investment
They may not be “capital controls”, per se, but regulators are certainly attempting to control capital.
It seems to be working:
- China’s overseas direct investment (ODI) cratered by 45.8% y/y to USD 48.2 billion in H1.
- Investment in sectors flagged as off-limits tanked even more. Real estate, culture, sports and entertainment all imploded by more than 82%y/y. But together they account for only 3% of total ODI.
Get smart: The government won’t let up on its restrictions in those sectors. They view the frantic flow of cash into such investments as akin to Japan’s buying spree in the 1980s. That didn’t end well for Japan. China wants to avoid the same fate.
Get smarter: It’s not just about relieving pressure on the exchange rate. Once the FX market stabilizes, many of the measures will remain in place. That’s because they aren’t really new. Authorities are just trying to do a better job of enforcing what’s already on the books.
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3. Overseas investment – down but not out
We’ve told you before: The crackdown on outbound MandA for some of China’s corporate highfliers is not fundamentally about politics.
Regulators just want a more rational outbound investment climate. They don’t see a lot of value in snapping up soccer teams across the globe.
But if deals are economically sound, they can go forward. Here are two of the latest (Caixin):
- “Hainan HNA Infrastructure Investment Group Co., a subsidiary of…HNA Group, agreed to pay 108 million yuan ($15.9 million) for a controlling stake in the operator of Rio de Janeiro international airport.”
- “China International Capital Corp. (CICC) agreed to buy a majority stake in U.S.-based asset management firm Krane Funds Advisors LLC, as China’s largest homegrown investment bank clinches its first overseas acquisition.”
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4. China’s most famous dissident has passed away
Liu Xiaobo, winner of the Nobel Peace Prize, passed away on Thursday. He is the first peace prize winner to die while being detained by his government since Carl von Ossietzky in Germany in 1938.
Liu’s detention and death are a stark reminder that the Communist Party will brook no dissent.
James Palmer has an exceedingly thoughtful essay on Chinese attitudes toward Liu in Foreign Policy that is worth reading in full. Palmer’s reality:
- “Most Chinese have only vaguely heard of Liu if they’re aware of him at all.”
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5. Inside Xi Jinping’s head: it’s about more than just power
Xi Jinping genuinely cares about poverty reduction.
That’s why he has put major political capital into eradicating poverty (see link).
Why it matters: Analysis of Chinese politics too easily devolves into a who’s up, who’s down parlor game to assess individual power. Not enough time is spent discussing what these people actually care about.
Does Xi Jinping want power? Yes. But largely as a means to an end.
What end? A strong, powerful China. In Xi’s mind that is a China with more equality and fewer among the ranks of the poor.
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6. China’s Monroe Doctrine
Howard French explains Xi Jinping’s plan for a modern-day Monroe Doctrine:
- “What China’s leaders have said amounts to easily decipherable code language for their own version of this policy.”
- “They say Asia should be governed by Asians.”
- “[But] they say that since time immemorial the South China Sea has belonged to and has been controlled by China.”
French rightly points out that these geopolitical concerns are domestic in nature:
- “Beijing’s efforts to control the surrounding seas are as much about nationalism and political legitimacy at home as they are about its ambitions for geopolitical power.”
It’s a strong piece, although the conclusion is a bit facile:
- “What remains is a yearning to fulfill hopes of restored rights and resumed greatness unstintingly promoted through teaching and propaganda. And this will make compromise with neighbors seem dangerously akin to betrayal.”
Get smart: The domestic propaganda apparatus that French mentions is precisely what gives Chinese leaders significant flexibility to “compromise” — they can spin agreements any way they want.
But French’s larger point about nationalism as a driver is dead on.
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7. Despite US pressure, China’s trade with North Korea is increasing
In case you’ve been living under a rock: the US wants China to do more on North Korea. In particular, the Americans want China to limit trade with the DPRK.
Well, this is awkward: China’s own H1 customs data show it’s not happening:
- Sino-DPRK trade is up 10.5% y/y so far this year.
- Exports to the DPRK were up a whopping 29.1% y/y.
But, but, but. Imports from North Korea contracted by 13.2 %.
China’s explanation: Reduced imports starve the DPRK leaders of much needed foreign currency. But the increased exports are all about providing the North Korean people with desperately needed goods.
The backdrop: China’s ability to influence North Korea is limited. That’s a big part of the reason that China is leaning more on South Korea, whose peace initiative is the only new idea around (Xinhua link below). China has few real options of its own.
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