DRIVING THE DAY
1. China prepares for the worst on North Korea
North Korea continues to lob missiles – it sent one flying over Japan early on Tuesday morning.
Northeast Asian relations were already tense. This just took it to the next level.
The Chinese continue to urge talks. But they are quietly taking increased precautions against a conflagration (Atlantic):
- “Since at least 2013, Chinese military units in the Jilin and Liaoning provinces that border North Korea have received considerable resources.”
- “A new border-defense brigade has conducted publicized drills and exercises.”
- “A 24-hour video surveillance system and drones watch the river for signs of intrusion.”
China also sent a strong signal when a senior US official visited only weeks ago:
- “General Joseph F. Dunford, the highest-ranking U.S. military official, visited China and was shown live fire drills at its northern theater command in Shenyang, not far from the North Korean border.”
- “Dunford also reported that he had discussed a North Korea ‘contingency’ with China.”
Get smart: The last thing China wants is a conflict. But not preparing for that potentiality would be a dereliction of duty.
- FMPRC: Foreign Ministry Spokesperson Hua Chunying’s Regular Press Conference on August 29, 2017
- The Atlantic: How China Sees North Korea
DRIVING THE DAY, CONT’D
2. China’s Foreign Ministry responds to North Korea
“The bell on a tiger’s neck must be untied by the person who tied it.”
That was the comment from China’s Ministry of Foreign Affairs regarding North Korea yesterday.
What does that mean? The bell represents two things:
- North Korea’s conflict with the US
- North Korea’s conflict with South Korea.
The message: The US and South Korea should untie these bells – it’s their responsibility to resolve the conflicts.
China’s perspective: Don’t blame us – we fully executed the UN sanctions, as agreed, and all we want is dialogue.
Get smart: No one wants responsibility for North Korea. But this is everyone in the region’s problem. And everyone’s – including China’s – bell to untie.
FINANCE & ECONOMICS
3. Is China’s economy set to accelerate?
Now this is controversial.
There is a growing number of Chinese academic, government and market economists that think the country’s growth rate has not only stabilized, but it may be on the cusp of a multi-year expansionary cycle.
Before readers write in telling us how naïve we are, we want to state that we don’t buy it.
But this shifting pole of the economic debate is indicative of the evolving conversation within China. The basic argument is this (Caixin):
- “The government’s supply-side reform campaign and a prolonged slump in the producer price index (PPI) . . . has paved the way for a new wave of industrial expansion.”
- “’China’s excess capacity cut has come close to the end,’ [the chief economist of Founder Securities] said. ‘Capacity investment expansion may come in 2019.’”
Solid global growth may also boost the demand side.
Hold up: The article highlights plenty of economists that disagree with this optimism and hold a more consensus view that growth will continue to grind downward.
Get smart: It’s easy to pooh-pooh any positive view on China’s economy. But it’s important to understand where the domestic debate stands.
FINANCE & ECONOMICS
4. An interbank bellwether
Keep an eye on Industrial Bank. It will be a bellwether for how institutions handle the growing scrutiny over interbank dealings.
The medium-sized bank has quite consciously positioned itself as a heavy player in the interbank investment business. That meant rising interest rates took a real toll in the first half of the year, as the bank’s operating income shrank by almost 16% y/y (see link).
Higher rates make it more expensive to take leveraged positions in the interbank market. That’s what authorities want, but it’s not exactly great for most banks’ profits.
Industrial Bank has already started to alter its balance sheet in response. Overall assets grew by nearly 10% in the first six months of 2017. But investment assets, which are largely interbank products, grew at a measly 0.72%.
Get smart: Industrial Bank’s chairman says they still want to be a big player in the interbank market, so the strategy hasn’t changed. As we’ve said before, regulators will have to pursue a sustained campaign against this activity to fundamentally change bank behavior.
POLITICS & POLICY
5. Xi signals continuity in his second term
The Leading Small Group on Comprehensively Deepening Reform (LSGCDR) met yesterday.
(We apologize for the unwieldy name – trust us, we’re not the ones that came up with it.)
Get smart: That group, formed in early 2014 and chaired by Xi Jinping, has become the most important policymaking body in the land. Items discussed at the LSGCDR filter down into government policy in the weeks and months following the meetings.
So what did they talk about? Among other topics, yesterday’s meeting discussed:
- Environmental protection
- Judicial reform
- Poverty alleviation
- Rural finance
The key message: “We’re not done.” The official readout said that reform is a never-ending process. Reforms started in the past five years will continue in Xi’s second term.
The takeaway: There will be a large degree of policy continuity in Xi’s second term. Areas of emphasis now – such as Party-building, environmental protection and poverty alleviation – will continue to be important for the next five years.
What to watch: Politburo meetings tend to be held in the days after a LSGCDR meeting. The next Politburo meeting is particularly important as it could set a date for the Party Congress.
- CPC: 习近平：站在更高起点谋划和推进改革
POLITICS & POLICY
6. Poverty alleviation tops the policy agenda
Xi Jinping has said that he wants to eradicate poverty, and when Xi talks, others listen.
That reality was on full display yesterday when two of China’s top officials held separate meetings to discuss the issue.
CPPCC chairman – and #4 in the Party – Yu Zhengsheng chaired a symposium to discuss policy options.
Meanwhile, vice premier Wang Yang chaired a meeting of the Party group that oversees poverty alleviation.
Some context (Xinhua):
- “China has set 2020 as the target year to complete the building of a ‘moderately prosperous society,’ which requires the eradication of poverty.”
- “To achieve the target, China needs to bring more than 10 million people out of poverty every year, meaning nearly one million people per month or 20 people per minute.”
Thought for business: Want to show you’re invested in China’s development? Focusing your CSR resources on poverty alleviation could be a good way to win kudos from officials.
- Gov.cn: 汪洋出席东西部扶贫协作经验交流会并讲话
- CPC: 政协常委会第二十二次会议举行全体会议 俞正声出席
- Xinhua: Premier stresses collaboration, targeted works in poverty reduction
POLITICS & POLICY
7. China’s courts weigh in on corporate governance
Corporate governance has long been a challenge in China – for private and state-owned companies, listed and unlisted. The courts are trying to get in the mix to improve the situation.
In fact, the Supreme People’s Court (SPC) just released its fourth judicial interpretation on the Company Law.
The latest goals:
- Beefing up shareholder rights to see a company’s books
- Clarifying shareholder, supervisor and board member rights to sue for nullification of certain decisions, especially if malfeasance can be proven
- Establishing a limited mechanism for courts to adjudicate profit distribution between shareholders
Why it matters: This latest legal update is meant to protect investor rights. In theory, that should improve businesses’ accountability to shareholders, and hopefully improve corporate governance. It may also encourage more equity financing, which could aid in corporate deleveraging.
What to watch: The new rules should apply to SOEs, as well, now that they are required to become legitimate corporate entities. That might help the mixed-ownership push, although we expect progress to be exceedingly slow.
How much will all this really improve investor rights? That’s one for the lawyers – forward the Tip Sheet to any smart China law folks, and let us know what they think.
- People’s Court News: 关于适用《中华人民共和国公司法》若干问题的规定（四）
- People’s Court News: 依法保护股东权利 促进规范公司治理
- People’s Court News: 《最高人民法院关于适用若干问题的规定（四）》新闻发布会