DRIVING THE DAY
1. China hypes BRICS summit, nobody else does
Most observers don’t exactly have high hopes for the BRICS summit that kicked off in Xiamen Sunday (Economic Times):
- “Expect a muted BRICS summit as participants tread on eggshells to prevent exposing divisions, said Shi Yinhong, an international relations professor with Beijing’s Renmin University.”
- “’They will try not to do what they can’t, and try not to say what they shouldn’t,’ [said Shi].”
China’s media has a different take. They highlight the BRICS summit as the second major international gathering China has hosted this year – the other was the Belt and Road Forum.
In his opening statements on Sunday, Xi Jinping asked participants to shelve their differences and promote globalization (MFA):
- “[W]e should promote the building of an open global economy, [and] advance trade and investment liberalization.”
Get smart: BRICS was a catchy concept made up by an economist at an investment bank. It has never made sense as a geopolitical body. Now nearly a decade old, the group is still trying to find its raison d’être.
The wild card: North Korea undertook an unprecedented nuclear test on Sunday – it over shadowed the summit and China wasn’t exactly happy.
- Economic Times: Common ground in short supply as China hosts BRICS
- FMPRC: Full text of President Xi’s speech at opening ceremony of BRICS Business Forum
DRIVING THE DAY, CONT’D
2. China is furious about North Korea’s latest nuclear test
Xi Jinping’s speech at the opening of the BRICS summit was upstaged by North Korea’s latest nuclear test.
The North Koreans claim to have successfully tested a hydrogen bomb. That’s not confirmed yet, but something big definitely happened – tremors were felt in China.
Xi is not happy about any of this.
In the hours after the test, the Ministry of Foreign Affairs (MFA) released its strongest statement to date. It voiced China’s “absolute objection” to and “strongest condemnation” of the test. The latter phrase is new to MFA statements on North Korea.
Get smart: China has long calculated that a nuclear North Korea is a problem for the world, while a denuclearized but collapsed North Korea would be a problem for China. But we know that Xi doesn’t like Kim Jong-un. North Korea’s continued provocations could start to change China’s calculus.
FINANCE & ECONOMICS
3. Much ado about Dongbei
What’s to be done about China’s ailing industrial Northeast? That is the question Chinese economists are hotly debating right now.
The debate started with the release of a report written by former chief economist of the World Bank, Justin Yifu Lin (link below). The report was commissioned by the Jilin provincial government.
The always insightful Andrew Batson has published a smart take, outlining the debate. It’s worth a read in full, but here is the cheat sheet (see link below):
- Some think the Northeast should focus on boosting light industry with low labor costs to recreate the development model of southeast China.
- Others say that’s nonsense – labor costs are not particularly low in the Northeast, and private manufacturers don’t want to move there anyway.
- Neither side has a clear-cut solution.
Why it matters: Part of Dongbei’s problem is the entrenched presence of SOEs in the region. The debate over Jilin is a proxy battle between those who want more state intervention and those who want more scope for markets.
- Center for New Structural Economics: 吉林省经济结构转型升级研究报告 (征求意见稿) (PDF)
- 21st Cent Biz: 林毅夫团队回应质疑全文：产业缺位是东北体制固化的根本原因
- Andrew Batson: My guide to the debate raging over China’s Northeast rust belt
FINANCE & ECONOMICS
4. Financial regulators assess new risks
Non-traditional financial products are testing China’s regulators. The newest items in the crosshairs are bitcoin and online money markets funds.
On the bitcoin side (Caixin 1):
- “Authorities shut down a blockchain conference over the weekend on concerns that unregulated initial coin offerings (ICOs) were being used to raise funds illegally.”
And today the central bank and other financial regulators announced an immediate ban on ICOs (People.cn). The announcement tanked the price of bitcoin by 10%.
On the funds side, regulators have drafted new rules to mitigate liquidity risks for funds and the banks they are investing in (Caixin 2):
- “The new guidelines require a money market fund to invest . . . no more than 2% in products issued by a single institution.”
- “A fund manager’s total money market investments in a single commercial bank’s deposits and other assets should not exceed 10% of the bank’s net assets.”
Why it matters: China’s financial system is becoming ever more complex, and regulators are playing catchup. They’ve accomplished a lot in 2017, but plenty of unknown risks to the system remain.
- Caixin 1: Regulators See ICOs as Illegal Fundraising Vehicles in Disguise, and Will Soon Issue Rules
- People.CN: 央行等七部委:立即停止各类代币发行(ICO)融资活动
- Caixin 2: Regulators Mull New Rules for Major Money Market Funds
POLITICS & POLICY
5. China’s legislature does its thing
China’s legislature, the National People’s Congress Standing Committee, concluded its bi-monthly session on Friday.
The session approved two new laws:
- Nuclear Safety Law, which stipulates procedures and standards for civil nuclear power
- National Anthem Law, which “ensure[s] appropriate use of the song”
The session also amended nine laws, including substantive amendments to the SME Promotion Law and the Judges Law.
Amendments to five other laws were discussed, but not passed:
- Anti-Unfair Competition Law
- Standardization Law
- Law on the Organization of People’s Courts
- Law on the Organization of People’s Procuratorates
- Tobacco Leaf Tax Law
Why it matters: These bimonthly sessions are pretty boring, but they are important. China’s legal and regulatory landscape is changing all the time and the ongoing revisions to the Anti-Unfair Competition Law and Standardization Law will have broad implications for business.
POLITICS & POLICY
6. SMEs get a tax break, maybe
The revised SME Promotion Law mandates tax breaks for China’s small businesses.
But business owners shouldn’t get too excited. A spokesman for the legislature made it clear that there is not actually much fiscal room for tax breaks.
Some context: SMEs drive China’s economy. They account for:
- 90% of all businesses
- 80% of all jobs
- 70% of all patents
- 60% of GDP
- 50% of fiscal revenue
Get smart: The law won’t help SMEs much. It basically just enshrines already existing policies in law.
- NPC: 全国人民代表大会法律委员会关于《中华人民共和国中小企业促进法（修订草案）》修改情况的汇报
- NPC: 全国人民代表大会法律委员会关于《中华人民共和国中小企业促进法（修订草案）》审议结果的报告
- NPC: 全国人民代表大会法律委员会关于《中华人民共和国中小企业促进法（修订草案三次审议稿）》修改意见的报告
- 21st Cent Biz: 中小企业促进法出台：特殊保护中小企业，让它们有获得感
POLITICS & POLICY
7. MEP steps up its game
Keeping cadres personally accountable. That’s how rules get enforced. And it’s how China’s environmental regulator (MEP) is stepping up its game. So far in 2017 (SCMP):
- “Some 18,000 polluting companies have been punished, fines of RMB 870 million issued and more than 12,000 officials disciplined, as government teams fan out to complete inspections of environmental protection across China.”
- “The results of the checks . . . have affected the promotion prospects of thousands of officials.”
Of course, it helps that they have some serious back up when doing inspections:
- “The two Party agencies involved in the inspections, the graft-busting Central Commission for Discipline Inspection and the Central Organisation Department, are seen as having a big say in determining officials’ promotion prospects.”
- “In the past, enforcement officers from the Environmental Protection Ministry were often met with defiance and resistance, but not this time around.”
Why it matters: The discipline commission is taking a greater role in policy implementation. Expect that to go into hyper-drive in Xi Jinping’s second term. That may mean that Xi’s policies see better implementation.
- Straits Times: China punishes 18,000 companies for pollution