DRIVING THE DAY
1. Xi’s grip on discipline gets tighter
Monday’s plenary session of the discipline commission (CCDI) approved the CCDI’s work report for the 19th Party Congress.
What’s not normal is the process for submission. In contrast to past practice, which saw the CCDI run the show, this year’s report was first submitted to the Politburo Standing Committee (PBSC) and then the wider Politburo for review.
The CCDI is quick to point out that this is important:
- “This procedural adjustment looks like a superficial change, but changes in appearance contain within them great political significance”
The meaning: In the Chinese system policy documents don’t generally see substantial revisions throughout the review process. So the group (or person) that approves it first has the largest influence – in this case that was none other than Xi Jinping
Get smart: The CCDI is Xi’s primary tool for commanding the Party-state apparatus. The procedural change is one indication that he will control the body even if his pal Wang Qishan – the current head of the CCDI – retires.
Get smarter: The fact that the CCDI is going to great lengths to publicize this change means Xi wants people to know about it.
FINANCE AND ECONOMICS
2. China to tap global bond markets
This is a curious move – China’s central government is tapping global bond markets for the first time since 2004 (WSJ):
- “China’s Ministry of Finance said it intends to launch an offering of U.S. dollar sovereign bonds in Hong Kong in coming days.”
- “Half of the $2 billion in debt will consist of five-year bonds and the other half will be 10-year bonds, it said in a statement.”
China doesn’t really need the money. In fact, the move is largely symbolic:
- “If China can borrow from global markets at very low interest rates, it could signal investors’ confidence in China’s financial system after sovereign debt rating downgrades by international ratings firms this year.”
Why it matters: By issuing sovereign bonds offshore, China is trying to establish a benchmark for its SOEs to borrow in dollars at relatively cheap rates.
What to watch for: That might be nice for now, but the more foreign borrowing China does, the more it becomes vulnerable to external creditors.
FINANCE AND ECONOMICS
3. China wants RMB-denominated oil markets
As the biggest global trader, China wants more goods and services to be bench-marked off its own currency.
There would be no bigger boon than a CNY-denominated oil contract, which is what China is increasingly pushing for (Nikkei):
- “China is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold in what analysts say could be a game-changer for the industry.”
- “The contract could become the most important Asia-based crude oil benchmark, given that China is the world’s biggest oil importer. Crude oil is usually priced in relation to Brent or West Texas Intermediate futures, both denominated in U.S. dollars.”
- “China’s move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan.”
Get real: CNY-denominated contracts won’t truly become a global benchmark for decades, if ever.
But this is a perfect example of China’s foreign strategy. Start in the neighborhood, and get the smaller countries to adopt Chinese standards one-by-one. Before long it’s a fait accompli. Watch this space.
FINANCE AND ECONOMICS
4. China surpasses the EU in RandD
China’s 2016 RandD expenditure stats are out, and RandD intensity rose to 2.11%. That surpassed the EU-15 countries’ average of 2.08%, according to the stats bureau (NBS).
What’s RandD intensity you ask? RandD expenditure as a percent of GDP.
All told, industry players poured RMB 1.6 trillion into RandD last year. That’s a 10.6% growth rate compared to 2015 – after the previous four years each saw a contraction.
For its part, the government spent another RMB 776 billion, up 10.8% from 2015.
The government’s goal is to bump nationwide RandD intensity up to 2.5% by 2020.
Get smart: The focus on RandD intensity is classic China – the country is great at measuring economic inputs, but it’s the outputs that truly matter. What China really needs is to get more bang for its RandD buck.
But even if a lot of RandD spending is wasted, the top-level focus on funding innovation will benefit China.
POLITICS AND POLICY
5. China wants to dominate quantum
China wants to lead in emerging technologies, like quantum sciences. That’s why it’s building a USD 10 billion research center called the National Laboratory for Quantum Information Sciences.
One goal of the new center: a quantum supercomputer. This thing could be big (Popular Science):
- “the first general-purpose Chinese quantum computer could have a million times the computing power of all other computers presently in the world.”
The center will also study quantum metrology:
- “This has a key application for autonomous vehicles and submarines, which wouldn’t have to rely on GPS or other external navigation signals that could be jammed or used to detect their location”.
Get smart: China is pouring resources into frontier technologies, like AI and quantum science, where it thinks it can become the global leader. They won’t succeed in every single one. But they won’t fail in all of them either.
A note to foreign governments: China is making no secret of its plans to dominate in these areas. Just sitting back and hoping they fail is not a viable strategy.
China is opening a new quantum research supercenter
POLITICS AND POLICY
6. The food fight in trade is not yet done
After some hard lobbying, the US and EU recently convinced China to allow a two-year phase-in period for requirements that all food imports carry health certificates (link below).
That gives businesses time to prepare.
But now it’s China’s turn. State media is pushing the narrative that over 90% of Chinese food exporters face an “invisible high wall” when trying to sell goods to foreign countries (link below).
What’s the wall? Local quality inspection officials (from AQSIQ) and industry folks say this:
- “Foreign purchasers require [Chinese] companies to pass certifications conducted by foreign agencies on top of being qualified by the destination government”
- “standards and certificates are different market by market, we have to pass many approvals and they’re expensive.”
- “An AQSIQ survey showed that costs to go through the various certifications – and upgrade facilities accordingly – raise food exporters’ cost by 1%.”
The solution: Regulators will push to improve food quality while building an internationally recognized certificate authority. The next step will be to push for mutual recognition of certifications in countries along the Belt and Road and in those with which China has free trade agreements.
Get smart: China is tired of playing by other country’s rules – that is true from global finance to food safety standards – so it is trying to rewrite them in its favor.
Reuters: China delays deadline for implementing food import rules after industry pushback
Economic Info Daily: 我国食品企业面临出口认证“隐形高墙