DRIVING THE DAY
1. China and Taiwan disagree
We have long argued that the biggest potential flash point in East Asia is not the Korean peninsula, or the South China Sea, or the Diaoyu/Senkaku islands.
Recent events show why:
- Tuesday, the Taiwanese premier said, in parliament, that Taiwan is an independent country.
- Wednesday a mainland official responded by saying (Xinhua) “Taiwan has never been a country, and will not become a country.”
- The Taiwanese government shot back saying that (Reuters): “it did not matter what Beijing said, it was an ‘objective reality’ that the Republic of China was a sovereign state.”
Get smart: There is no mutually acceptable solution here. China believes Taiwan is part of China. Taiwan increasingly asserts that it is not a part of China.
What to watch: We think that Xi Jinping’s personal Chinese Dream is to reunify Taiwan with the mainland. We’ll be watching closely for how Xi discusses the issue in his 19th Party Congress report.
What else to watch: The government’s point man on Taiwan – Taiwan Affairs Office Director Zhang Zhijun – reaches retirement age in February. It will be important to see who replaces him.
- Reuters: China says Taiwan not a country, Taiwan says China needs reality check
- Xinhua: Mainland opposes “Taiwan independence” in any form: spokesperson
FINANCE & ECONOMICS
2. China’s aluminum insanity
Are you dumbfounded by what’s going on in China’s aluminum market? Probably not, because you probably don’t think about it much.
But it matters – for global prices, for China’s indebted aluminum industry and for China’s efforts at environmental protection.
Caixin has a nice rundown of the current dynamics:
- “China’s aluminum industry is being hit by a double whammy — forced closures of unapproved plants to curb overcapacity and heavy cuts in production over the winter months to ease choking pollution.”
- “The price of the metal, which is used in a wide range of industries including aerospace, construction and packaging, has surged in domestic markets as speculators anticipated a repeat of the bull market already seen in coal and steel after the government ordered cuts in capacity and output in those industries.”
Why it matters: We’ve pointed this out a lot – anything that the Supply-Side Structural Reform (SSSR) program touches will see similar price movements. And as the Caixin article points out, SSSR is not just about capacity, but about getting better control of output to keep prices up and pollution down.
Get smart: These cuts tell us a lot about recent changes to policy priorities and implementation (next entry).
FINANCE & ECONOMICS
3. What aluminum illuminates about policy
What does the government’s push to improve the aluminum industry suggest about policy?
First, implementation may be improving (Caixin):
- “By August, when news of the closure of Hongqiao’s unauthorized plants emerged, it was clear the authorities were serious. Shandong province’s economic planning agency also told Shandong Xinfa Aluminum Group, another privately owned manufacturer, to cut 530,000 tons of capacity built without government authorization.”
- “’This year has been different — we have had to follow the (government’s) orders to shut down (unauthorized plants),’ an executive with Xinfa Group told Caixin. ‘There is no room for bargaining and we must carry out the instructions 100%. Both the municipal and the provincial governments have imposed tough requirements.’”
And environmental protection is the priority:
- “The industry is facing a separate broadside from the government’s drive to lower the toxic air pollution that chokes vast swathes of the country, especially in winter. In February, authorities led by the Ministry of Environmental Protection required 28 cities in northern China to reduce their aluminum production by at least 30% for four months starting from Nov. 15.”
What to watch: We expect both of these dynamics to intensify in Xi Jinping’s second term.
FINANCE & ECONOMICS
4. China’s money markets are gyrating again, but the PBoC seems chill about it.
Short-term interbank rates have jumped up into high single digits as September comes to a close.
As ever, market actors are getting nervous and calling for the central bank to inject some liquidity. But the PBoC has been reticent – it has withdrawn money from the banking system over the past four days.
Some context: Money markets tense up at the end of each quarter. That’s because corporates need cash to pay tax bills and banks need cash to pass regulatory checks – namely the PBoC’s Macro-Prudential Assessments.
More context: This time of year is particularly tense because the country is on holiday all next week to celebrate National Day. That means individuals will also be getting out cash for travel purposes.
What to watch: The central bank understands that this is a seasonal development. So it’s not going to panic and open the liquidity floodgates. Money market rates will come down after the holiday and then it’s all about keeping things steady ahead of the Party congress.
- 21st Cent Biz: 9%! 逆回购利率节前飙涨 MPA考核与非银杠杆上升叠加
POLITICS & POLICY
5. China’s SOE behemoths are coming after you, MNCs!
The number of central SOEs has dropped from 117 to 98 in the past five years.
It’s going to drop further. Yesterday’s State Council meeting called for consolidating central SOEs in the following sectors:
- equipment manufacturing
Those last two sectors are new to the list, at least as far as we know.
Speaking about the consolidation, the head of SASAC, Xiao Yaqing, said the following this morning (SCIO):
- “[a big] problem is that in certain sectors you have dozens of companies doing the same thing”
Get smart: The government is creating these massive national champions to reduce domestic competition and increase competition with MNCs in global markets. It is happening and happening now.
POLITICS & POLICY
6. Regulators to name and shame companies with substandard products
File this one under “boring but important”. The State Council has just released a to-do list for various ministries to better monitor the the quality of import and export products.
Here’s how they plan to do it:
- Focus on improved monitoring in ports and markets
- Utilize mobile internet technology to collect bottom-up quality reports by individuals and enterprises
- Set up a national data-sharing system for risk monitoring
- Use internet and social media to keep the public informed of violations
- Expand the scope of products that should be recalled if flaws are found
What it means: Business will face more scrutiny on quality from both government and the public. Incidents of substandard products could quickly evolve into a public relation crisis. Even worse, it could result in a business being downgraded in the government’s social credit system.
Get smart: Sub-par product safety and quality is a big challenge for China. And the government knows it, which is why they are putting more resources into addressing the issue. Focusing on product quality also dovetails nicely with larger industrial policies that aim to turn China into a manufacturing superpower.
- Gov.cn: 国务院关于完善进出口商品质量安全风险预警和快速反应监管体系切实保护消费者权益的意见
- Gov.cn: China to reduce quality risks in import and export commodities
POLITICS & POLICY
7. Loan guarantee companies
Yesterday’s State Council meeting also promised to alleviate small businesses’ financing difficulties.
The solution? Make it cheaper for banks to lend to SMEs. The measures:
- Interest derived from large loans to small and micro businesses, farmers and the self-employed will be exempt from from VAT between Dec 1, 2017, and Dec 31, 2019.
- The stamp tax exemption for loans to small and micro businesses and will be extended to 2020.
- Commercial banks with a certain portion of loans going to small businesses will be subject to a lower reserve requirement ratio
But here’s the big news: To cover the banks’ risk exposure, the government will also set up loan guarantee companies to fully cover these loans.
Get smart: Banks have always been afraid to lend money to SMEs because they see them as too risky. These loan guarantee companies could help to change that dynamic.
Get smarter: Loan guarantee companies carry a strong whiff of moral hazard. We’ll be looking to see how the issue is addressed.
- Gov.cn: 李克强主持召开国务院常务会议 听取推进中央企业重组整合工作汇报等