DRIVING THE DAY
1. China’s approach to the trade war
The Ministry of Commerce (MofCom) did not have a restful Qingming Holiday.
The ministry had to scramble and call a press conference on Friday to respond to US President Trump’s threat to impose tariffs on an additional USD 100 billion of Chinese goods (MofCom).
MofCom had three messages:
- If Trump follows through, there will be no limits to Chinese retaliation.
- China has a strategy for a trade war and has already prepared its countermeasures.
- There is no way to negotiate amidst threats.
But…that last one might not be true. We’ve heard that Xi Jinping actually wants more opportunities to sit down with the US business community.
Get smart: China knows that the US business community does not want a trade war.
Tip for MNCs: If you get a meeting with Xi – be prepared! Know what you want and where your bottom lines are!
DRIVING THE DAY CONT’D
2. Will a trade war disrupt the domestic agenda?
Government advisers are concerned that a trade war could disrupt the domestic agenda. They are particularly worried about how it could affect China’s ability to move up the value chain.
That’s why senior adviser at the State Council Development Research Center says China should speed up implementation of these aspects of “Made in China 2025”:
- Subsidizing RandD for key industrial technologies and core future technologies
- Applying preferential RandD tax policies to foreign and domestic businesses
- Increasing support for RandD infrastructure and hardware
- Increasing support for technological training
Get smart: A trade war with the US will only deepen China’s conviction that it needs to control its own technology.
Related: In the past week, the government has granted tax breaks for semiconductor manufacturers and released a supportive policy for the pharmaceutical industry (links below).
DRIVING THE DAY CONT’D
3. Semiconductors and the trade war
Last week we wrote that, for China, trade issues are not about deficits and surpluses, but about who will dominate the technologies of the future.
A perfect example of this comes from recent data released by China’s Semiconductor Industry Association.
The group just released a report with these gobsmacking stats:
- In 2017, semiconductors officially passed crude oil as China’s largest import.
- The country imported USD 240 billion worth of the goods, for a trade deficit of USD 193 billion in just that sector.
Think about that: China’s largest single import is semiconductors.
And China is facing increasing challenges to catch up:
- Domestic players see the gap with foreign industry leaders as widening.
- The domestic industry will have a talent shortage of 80,000 people by 2020.
The takeaway: That is precisely why China developed “Made in China 2025” – they see reliance on critical foreign technology as a national security risk. They will do anything to reduce that risk and develop domestic capabilities.
Get smart: That means the underlying issue in the US-China trade spat – intellectual property – is almost impossible for the Chinese to deliver on if they also want to achieve technological independence.
FINANCE AND ECONOMICS
4. Data dump – FX reserves
China’s foreign exchange reserves data for March were released on Saturday.
There wasn’t a lot to see as the FX stockpile inched up by a modest USD 9 billion over the month – standing at USD 3.143 trillion in March, up from USD 3.134 trillion at the end of February.
The quick takeaway: Capital flows were fairly balanced for the month, and the slight increase was due to a weaker US dollar last month. As the dollar weakens, the value of China’s euro- and yen-denominated reserves arithmetically increase.
Some context: The CNY appreciated by 0.8% versus the dollar last month and posted its strongest quarterly gain in a decade in Q1.
Get smart: The CNY can’t appreciate fast enough to substantially reduce China’s trade deficit with the US.
Why it matters: Overall, balanced capital flows are a reminder that, for now, we are still in rhetorical territory when it comes to a potential trade war. While equity markets have gotten nervous, actual trade and capital flows have yet to be disrupted.
What to watch: Obviously, when we move from rhetorical territory to concrete tariffs, that all will change.
NASDAQ: China forex reserves rise slightly as U.S. dollar weakness continues
FINANCE AND ECONOMICS
5. Governments scrap trillions in PPP projects
Public-private-projects (PPPs) were the flavor of the year in 2017 for local governments to get around borrowing restrictions and fund unviable infrastructure projects.
But the Ministry of Finance (MoF) is finally getting wise.
By some estimates, local authorities have scrapped 2,334 PPP projects with a combined value of RMB 2.25 trillion since the beginning of the year (Caixin).
A quick breakdown shows the provinces that were hit the hardest by the clampdown:
- Xinjiang – RMB 443 billion
- Yunnan – 435 billion
- Inner Mongolia – 299 billion
- Gansu – 220 billion
- Ningxia – 116 billion
The major sectors that are in the crosshairs:
- Public utilities
- Affordable housing
Some context: MoF has issued requirements for local governments to weed out unqualified projects and delist them from the central registration system by the end of March. That’s why we saw the recent ramp-up in scrapped projects.
Get smart: It’s easy to be skeptical that much will ever get done on fiscal reform in China. But the stars seem to be aligning. Xi Jinping himself has talked fairly extensively about the issue in the last six months. And a fiscal policy wonk is now running MoF.
Expect more moves on this front in 2018.
Caixin: PPP清库结束 新疆内蒙古云南最受伤
Caixin: Public-Private Partnership Deals Worth $357 Billion Scrapped
POLITICS AND POLICY
6. Asia for Asians
A new propaganda video prepared for the Bo’ao Forum asks “What is Asia?”
The not so subtle answer: A region led by China (and Xi Jinping) and connected by Chinese infrastructure.
The message: A Chinese-led Asia will be a richer, more just Asia.
Some subtext: This vision of “Our Asia, Our Community” leaves little place for the United States, the current dominant player in the region.
The big question: How do other Asian leaders – and peoples – feel about Chinese leadership?
Watch the video – it’s only 3 minutes.
Xinhua: Our Asia Our Community
POLITICS AND POLICY
7. Patriotic education staring earlier and earlier
Xi Jinping has talked a lot about promoting “red genes.”
One Beijing hospital is taking him literally (SCMP):
- “The Third Hospital of Peking University launched a sperm donation campaign from Wednesday to run until May 23.”
- “In addition to being in good health, the hospital says donors must have ‘favourable political qualities.’”
- “’[The donors must] love the socialist motherland and embrace the leadership of the Communist Party,’ the notice said.”
- “’[He must] be loyal to the party’s tasks, be decent, law-abiding and be free of any political problems.’”
Some context: There actually is a shortage of donated sperm in Beijing.
Our thoughts: Political correctness gone too far!