DRIVING THE DAY
1. Low expectations for the CED suit China just fine
The US-China Comprehensive Economic Dialogue (CED) kicks off today in Washington.
Expectations in the US are fairly low, which suits the Chinese just fine.
As one of the key people responsible for the US-China economic relationship on the American side, Commerce Secretary Wilbur Ross has been fairly straightforward that his aim is modest but measurable progress (Fortune):
- “’Our objective…will continue to be specific deliverables by specific dates so that everyone on both sides can measure the results on a continuing basis,’ [Ross] said.”
- “China trade experts said they expect new announcements on small openings of China’s markets or specific purchases of U.S. goods, but these will not substantially alter the bilateral economic relationship.”
China’s angle: Yesterday we told you that Xi Jinping and his economic lieutenants held a strategy session early in the week. They are coming prepared with plenty of small, measurable giveaways. That may placate the US side temporarily.
But there’s risk for China here: We’ve pointed out several times that one of China’s tactics is having Xi Jinping provide regular, personal assurance to Donald Trump that the relationship is on solid footing. But these meetings at the cabinet level will be more hazardous.
If the US side understands that China is effectively stonewalling, there’s no cabinet-level bromance to fall back on to offset those frustrations.
Fortune: U.S. Officials Want Beijing to Take ‘Concrete’ Steps to Open Chinese Consumer Markets
SCMP: Chinese, US executives call for ‘prompt resolution’ of economic rows amid fears of trade war
FINANCE AND ECONOMICS
2. The CBRC tries to diffuse a deposit war
China’s banking regulator is telling banks to cool it.
Blomberg has the skinny (link below) — the regulator is instructing banks to lower yields on Wealth Management Products.
The policy is largely aimed at a specific segment of the banking system. Regulators want to keep city-level banks from reigniting the deposit war that we saw in June. Bloomberg’s money quote:
- “’The regulators’ aim is for banks to start investing in lower-yield, safer investments, partially removing the risky element,’ said Jonas Short, who heads the Beijing office of Sun Hung Kai Financial. ‘For funding costs, this is likely to affect small and medium-sized banks, as they rely on WMP issuance for deposits, more so than the large deposit-taking banks.’”
Get smart: The smaller banks are the real culprits driving China’s “financial chaos”. It looks to us like regulators are increasingly zeroing in on them. Get ready for some consolidation in the sector as big banks take over the smaller ones in due course.
Bloomberg: China Tells Banks to Lower Returns on Wealth Products
FINANCE AND ECONOMICS
3. Regulators can’t tame the property market
Property restrictions are working, but they are also not working.
That’s our takeaway from the most recent housing price data released by the stats bureau.
Basically, prices in Tier One cities are cratering. That’s because transactions in those cities have essentially been frozen via administrative restrictions.
Meanwhile prices in smaller cities are soaring (Reuters):
- “Luoyang, a third-tier city in central Henan province, topped the list in June, with prices of new units up 2.3 percent on month, compared with a 1.3 percent gain in May, taking the annual growth to 10.2 percent.”
That shows liquidity is simply migrating from the biggest cities to those nearby.
Why it matters: The property bubble is merely a symptom of more fundamental economic imbalances. Credit and liquidity growth are more measured than they have been in the past, but they are still growing too quickly.
Until policymakers deal with the underlying causes of China’s economic imbalances, policies meant to deal with the symptoms — like runaway property prices — will only be partially effective.
Reuters: China’s property market slows, Beijing prices down for first time since 2015
21st Cent Biz: 一线城市房价环比平均首降，三四线继续领涨
FINANCE AND ECONOMICS
4. A shorter shopping list for China’s overseas purchases
The hits just keep on coming.
We previously highlighted that China’s outbound investment cratered in H1 2017, and the measures to control such investment will remain in place in H2.
The latest evidence – on Tuesday a National Development and Reform Commission (NDRC) spokesman expressed the regulator’s advice that businesses should make “prudent investment decisions” when it comes to outbound deals in real estate, hotel chains, cinema, entertainment and sports clubs.
Why that matters: Without the NDRC’s approval, businesses can’t obtain foreign currency from the FX regulator to make outbound investments.
The latest victim of these policies is Dalian Wanda, whose overseas acquisitions are being quashed (Reuters):
- “Banks have been told not to finance the deals or to allow Wanda to use its offshore assets as collateral for financing.”
The upshot: That latest slap down would seem to explain Wanda’s hasty disposal of over RMB 60 billion in assets to pay down bank debt.
Chinese MandA activity in these restricted sectors will be on ice for the foreseeable future.
Reuters: China cracks down on Dalian Wanda’s overseas deals: sources
POLITICS AND POLICY
5. Inside Xi Jinping’s head: thoughts on foreign policy
US-China relations are important to Xi Jinping, but there is much more to China’s foreign policy.
A new essay in Qiushi by State Councilor Yang Jiechi outlines Xi’s thoughts on the matter (link below).
Fundamentally, the strategy is to create a solid network of bilateral relationships with neighbors and global powers. Building such a network, with China at the center, is thought to create a balance so that each individual association can withstand its inevitable ups and downs.
A sense of confidence also helps:
- “We are unprecedentedly close to the center of the world stage, unprecedentedly close to realizing the Chinese dream of rejuvenation and we have unprecedented capability and confidence to achieve those goals.”
With that attitude, we can get used to a more assertive type of diplomacy from China. When Yang argues that confidence in China’s political system and political path is the “root and soul” of all external activity, we know that Xi Jinping truly believes it.
Qiushi: 深入学习贯彻习近平总书记外交思想 不断谱写中国特色大国外交新篇章
POLITICS AND POLICY
6. The Party’s must-see TV
Any serious China watcher needs to check out CCTV’s latest, greatest programming.
It’s a ten-episode documentary called “Carry Reforms through to the End” that began Monday and will run over the next ten days (you can access episodes at the link below).
What is it? A propaganda piece that reviews China’s reform programs throughout Xi Jinping’s first administration. It aims to rally support for further implementation of Xi’s ideas during his next term.
In a related move, Mu Hong — the executive deputy of the central leading group on reform — just published an essay teasing that there will definitely be some new reform elements after the Party Congress (link below). Of course, he didn’t give a lot of detail.
Why it matters: Every Chinese official – not to mention foreign businesses, investors and governments — is looking for any indication of the direction of reform after the 19th Party Congress.
Besides being a surefire blockbuster, “Carry Reforms through to the End” may tip Xi’s hand as to what’s next.
POLITICS AND POLICY
7. Steeling for a financial earthquake?
Absolutely everyone is getting on board with directives from the National Financial Work Conference.
In a bizarre release, even China’s Earthquake Administration says it is studying the outcomes of last weekend’s National Financial Work Conference (see link).
You can’t make this stuff up.
The positive spin: Financial policy has become so important that everyone is jumping in line to get their financial houses in order.
The negative/realistic spin: Xi Jinping is focused on financial regulation, so it is politically correct for everyone else in the system to pretend to do so as well.
We hope the actual financial regulators are studying the outcomes of the NFWC more closely than the earthquake administration is.