DRIVING THE DAY
1. CED goes bust
The US-China Comprehensive Economic Dialogue (CED) seems to have been a bust.
We told you yesterday that expectations were low going in, and that was just fine by the Chinese side. But the meager outcomes seem to have fallen short of even those modest hopes.
It’s never a good sign when both sides cancel their scheduled post-negotiation press conferences (Wapo):
- “U.S. officials fell short of securing ambitious gains in trade with China in a meeting Wednesday and news conferences planned to cap off the event were canceled as the two countries wrapped up 100 days of trade talks.”
- “The United States unsuccessfully pressed China to make a substantial commitment to cut its steel production, according to people with knowledge of the matter.”
There has been little coverage of the CED outcomes in Chinese media, but Xinhua tried to play up progress toward a one-year framework for economic cooperation (link below).
Get smart: The Chinese want a one-year framework to lock in a specific timeframe for discussions, just like the initial 100-day plan. The hope for the Chinese is that setting out a roadmap that is tied to a specific calendar will blunt any impetus within the US administration to take unilateral action.
What to watch: The US administration continues to contemplate action on a steel tariff. They have been toying with the idea for a while. But if a move like that came soon after a face-to-face sit down with the Chinese, it would really be a negative sign for the state of the relationship.
The backdrop: Such an action by the US wouldn’t be China-specific, so lots of countries would join China in opposing it. It would play right into the “China as defender of free trade” narrative.
- Xinhua: 汪洋与美国财政部长、商务部长共同主持首轮中美全面经济对话
- Washington Post: Trade talks fizzle as China rebuffs key Trump team demand
- Reuters: U.S. steel tariffs likely to trigger swift EU ‘safeguard’: sources
FINANCE & ECONOMICS
2. The evolution of China’s FX regime
Markets have temporarily lost interest in China’s currency because the CNY has been so stable.
So it’s a good time to step back and examine China’s overarching framework for the currency. A hot-off-the-presses e-book from the IMF does just that.
Ma Jun, chief economist of the PBoC’s research bureau has a particularly solid essay. Ma’s key takeaways (link below):
- China’s exchange rate management is currently all about influencing investor expectations, not just the immediate price of the currency. That’s one reason the PBoC always zigs when the market wants to zag.
- The PBoC understands its recent capital controls are ultimately self-defeating.
- The direction of travel is still toward loosening the exchange rate mechanism.
The upshot: It’s easy to be skeptical on this last one, but the PBoC’s intention is still to step back from such active currency management over time. Investors would welcome such a move.
What to watch: As we indicated in our weekly finance note, we expect a widening of the CNY trading band fairly soon.
Get in touch and we’ll share.
FINANCE & ECONOMICS
3. Daily reads from the PBoC
Speaking of the PBoC, we’ve got some new daily reading for you.
The central bank now publishes a short commentary on its open market operations every single day. Tracking these over time leads to some clear revelations (Bloomberg):
- “It’s becoming apparent that a key reason for adding or removing liquidity from the market has been how much, or how little, cash is flowing through the economy from government coffers.”
- “As the PBOC tries to keep liquidity ‘neither tight nor loose,’ clear statements are helping investors understand that the central bank isn’t trying to shift policy in either direction.”
Get smart: There are lots of legitimate complaints about non-market forces in China. But the PBoC is actively improving on two fronts:
- Nimbler liquidity adjustments to reduce volatility and improve interest rate transparency
- Communicating with the market.
There is still a long way to go on both fronts, but people who complain that the central bank doesn’t communicate enough are often just not listening.
FINANCE & ECONOMICS
4. SOE consolidation is in vogue
We wouldn’t call it reform, per se, but SOE consolidation is heating up.
We’ve touched on this plan before, but now Caixin has some more color:
- “In a recent briefing, SASAC defined…three [SOE] categories and disclosed future directions for their development.”
- “After completing the grouping, SASAC will use consolidation to reduce the number of companies under its supervision from the current 101 to about 80. Among those, about 20 will be investment companies; two or three will be from the financial services group; and about 50 will come from the industry category, the source said.”
- “The three types of firms will exert different levels of control over their affiliated companies under the broader reform.”
The key point: This plan is meant to shift the government away from direct management of industrial assets. They want to focus on returns for government capital instead. In theory that could make for better SOE management, but we won’t hold our breath.
POLITICS & POLICY
5. Xi pushes officials on reform AGAIN
It’s been a busy week for Xi Jinping already.
Wednesday, he chaired the 37th meeting of the central leading group on reform.
Here are a couple of key themes from the meeting:
- Xi will allow mistakes, but won’t tolerate a lack of action.
- Xi wants to improve the quality of officials in posts deemed “highly skilled”.
Why it matters: After five years of scaring cadres still, Xi Jinping is trying to jolt them into action. He’s also focused on getting the right people in the right positions.
The solutions: The Party will increase the weight of “reform innovation” in officials’ performance assessments. And compensation for those highly skilled positions will be made more competitive.
What to watch: Many folks are hoping for a concerted policy pivot from Xi and company after the 19th Party Congress. We are skeptical of a big change to the overall policy trajectory, but a greater attempt to address local inertia does seem to be on the cards.
- People’s Daily: 习近平主持召开中央全面深化改革领导小组第三十七次会议强调敢于担当善谋实干锐意进取 深入扎实推动地方改革工作
POLITICS & POLICY
6. The State Council’s new manufacturing green zones
Despite rhetoric about building a service-oriented economy, Chinese leaders still see manufacturing as the crown jewel of real economic activity.
That’s why the State Council’s Wednesday meeting decided to set up new manufacturing demonstration zones across the country.
Business benefits in the new zones will include:
- Less red tape and a clear negative list
- Preferential policies on taxes, financing, land use and talent recruitment
- Supposedly equal treatment between Chinese and foreign businesses
Get real: The promise of putting foreign companies on an equal footing needs to be field tested.
The government’s endgame is to have more global Chinese brands in the manufacturing space and to localize all core technologies. Those goals don’t seem to square with equal foreign treatment.
- People’s Daily: 李克强主持召开国务院常务会议