DRIVING THE DAY
1. China signs on to new sanctions on North Korea
Xi Jinping is pissed off.
He was not happy that Kim Jong-un decided to test a nuclear weapon during his speech at the BRICS summit.
That’s why he has signed off on new UN sanctions against North Korea, which were passed Monday. The new resolutions aim to (Bloomberg):
- “cut imports of refined petroleum products to 2 million barrels a year”
- “ban textile exports”
- “give countries the ability to freeze assets of cargo ships whose operators don’t agree to inspections on the high seas”
Some context: The Americans wanted an all-out oil embargo, but China and Russia wouldn’t go for it.
Our take: Xi is angry, but he still doesn’t want to destabilize the North Korean regime.
Instead, China continues to push a diplomatic solution. Per, China’s Ambassador to the UN (Xinhua):
- “The nuclear issue of the Korean Peninsula must be resolved peacefully.”
What to watch: The situation on the Korean peninsula is not improving. The Chinese are increasingly frustrated. Something’s got to give. Could we see a change of approach after the 19th Party Congress?
- Bloomberg: UN Approves New North Korea Sanctions, Stopping Short of Oil Embargo
- The Paper: 中方：望联合国对朝制裁新决议全面完整执行，美韩应避免生乱
- Xinhua: UN Security Council adopts new sanctions against DPRK over nuke test
DRIVING THE DAY, CONT’D
2. China looks to cut off cash from North Korea
The PBoC released regulations yesterday (link below) to inspect foreign bank accounts (Reuters):
- “The People’s Bank of China said that Chinese financial agencies and specific non-financial institutions are required to record the related individuals and entities in their system and conduct retrospective investigation once they receive the ruling from the country’s foreign ministry.”
The regulations are mysterious – they don’t specify which countries are subject to inspections.
But North Korea appears to be the target.
These regulations come on the back of numerous reports that China’s big banks are closing their doors to North Koreans (FT):
- “Multiple bank branches, including those of the country’s top four lenders, told the Financial Times they had imposed a freeze on new accounts for North Korean people and companies.”
- “Some are going even further, saying they are ‘cleaning out’ existing accounts held by North Koreans by forbidding new deposits.”
Get smart: China is trying to hit the North Koreans where it hurts – their wallets. They are also trying to pre-empt secondary sanctions from the US that might target Chinese banks.
- Sina Finance: 央行：对安理会决议所列个人和实体可暂停金融交易
- Sina Finance: 中国人民银行关于落实执行安理会执行相关决议的通知 (PDF)
- Reuters: China central bank issues notice on implementing U.N. resolutions
- FT: China’s biggest banks ban new North Korean accounts
FINANCE & ECONOMICS
3. Hold your Tungsten
Remember the inflation data that we flagged on Monday?
Here is one reason why upstream price increases have been stickier than most expected (Bloomberg):
- “Tungsten, used to harden steel in ballistic missiles and in drill bits, has surged more than 50 percent in the last two months amid growing concern about supply cutbacks in China, where about 80 percent of the metal comes from.”
- “The country is clamping down on polluting mines and enforcing production quotas.”
The Tungsten story is the same as steel, coal and aluminum before it – disruptions to Chinese supply are driving global prices.
Get smart: Most people are focused on China’s capacity cuts and whether or not they are genuinely happening. But what regulators are focused on is output. That’s a big reason for so much upstream consolidation – get everyone under one roof, so you can better control production.
Get smarter: One big reason for scaling back output of commodities domestically is environmental protection. That imperative is not going away any time soon, so upstream price support may continue to persist.
FINANCE & ECONOMICS
4. Knock-on effects of China’s EV push
We’re sticking with the price theme, but looking at it from a different angle.
The jump in tungsten discussed above is all about cutbacks to supply. But similar movements in lithium are all about increasing Chinese demand – for a specific reason (Bloomberg):
- “On Saturday, Xin Guobin, China’s vice minister of industry and information technology, said the government is working with regulators on a timetable to end production and sales of internal-combustion vehicles.”
- “The shift to electric vehicles is spurring a surge in demand for lithium batteries and the companies that supply the raw materials.”
Why it matters: China claims a huge chunk of the global economy these days. So shifts in domestic policy up-end markets all over the place. It may well be great for the environment if China goes full-bore on electric vehicles, but companies need to be thinking about the knock-on effects – and planning for how to deal with them.
POLITICS & POLICY
5. State Council goes after King Coal
The State Council has released a new plan for the development of Shanxi province (link below).
That’s a big deal – it’s not often that the central government issues policies for a specific province.
So what’s the policy all about? Getting Shanxi to move away from its dependence on the coal industry.
They are tackling the industry from two directions:
- On the supply side, there will be further pressure to cut capacity and production.
- On the demand side, the government wants to decrease consumption, particularly from coal-fired power plants.
Why the high-level attention to Shanxi? Because the province is a mess. Growth was only 4.5% in 2016, second-lowest in the country. And fiscal revenue contracted by 5.2%.
Why it matters: Shanxi is the “king of coal production” in China. In 2016, the province cut more production than any other, but it still accounted for 24% of total coal production. What happens in Shanxi will ripple through China’s coal and energy markets.
- Gov.cn: 国务院关于支持山西省进一步深化改革促进资源型经济转型发展的意见
POLITICS & POLICY
6. Shanxi’s flawed SOE reforms
The State Council’s new Shanxi policy is not just about coal.
It’s also about SOEs.
Some context: Shanxi’s state-owned companies are drowning in debt – even more than most. Their average debt-to-asset ratio is upwards of 80%. Governor Lou Yangsheng acknowledged the need to clean them up in his 2017 work report.
We agree with Lou that Shanxi’s SOEs are a problem. But we’re not sure the new policy offers a good solution.
Here’s the game plan:
- Consolidate state assets in traditional sectors and along the value chain via M&A
- Invite private capital to take minority positions in 30 companies
Our take: In general, we’d like to see less consolidation – and more competition. And mixed ownership only works if you let the private investors have a say in how the company is run. Historically, that hasn’t happened.
It’s not all bad news. Shanxi recently transferred all state-owned assets into a newly established holding company. That should help to shield the companies from government intervention to some extent.