DRIVING THE DECADE
1. Taiwan risk is rising
Xi Jinping met with Vincent Siew, former vice president of Taiwan yesterday.
He called on the Taiwanese to reunify with the Mainland (Xinhua):
- “Friends in the island’s business community should take a stand and firmly…oppose ‘Taiwan independence’ and firmly promote the peace and stability of cross-straits relations,”
- “We hope that compatriots across the straights can…push for the peaceful reunification of the motherland.”
The rub for Xi: Siew and his relatively pro-Mainlaind ilk are not in power in Taiwan.
The independence-minded DPP is running the Taiwanese government. They had little time for Xi’s remarks (Reuters):
- “’Respect the choice of the Taiwanese people regarding relations across the straits and the future of Taiwan, do not adopt threatening measures again when handling cross-straits relations,’… [they said] in a statement.”
Get smart: The trade war is sucking up everybody’s attention. But rising cross-strait tensions could bring on a real war. Three reasons that is more likely than it used to be:
- Xi Jinping has staked out a more aggressive posture towards reunification.
- The Taiwanese government and people are increasingly independence-curious.
- The Trump administration is increasingly staffed by Taiwan independence advocates spoiling for a fight.
That’s why Taiwan is the number one geopolitical risk in Asia.
Reuters: China’s Xi urges Taiwan business community to shun independence
FINANCE AND ECONOMICS
2. Yi Gang on financial opening
China’s new central bank governor Yi Gang spoke at the Bo’ao Forum on Wednesday.
He followed up Xi Jinping’s Tuesday speech that promised to accelerate China’s opening by offering some specifics for the financial sector.
The concrete measures Yi mentioned include (See Bloomberg):
- Increasing next month the daily quotas for trading in the stock connect between Shanghai and Hong Kong
- Removing caps on foreign ownership of banks and asset management companies
- Allowing foreign banks to set up branches and subsidiaries
- Raising foreign ownership ceilings for brokerages, fund management companies, futures companies and life insurance companies to 51%
The timeline: China promised to do the last three back in November 2017, and Yi said that the implementation is set to take place in June.
Our takeaway hasn’t changed. As we’ve been writing for several weeks now, China is serious about accelerating financial opening in 2018.
It’s partly a conciliatory reaction to pressure from the US, but it’s mainly because domestic financial institutions are too massive for foreign banks to truly compete (see our Bloomberg op-ed below).
The last bit is not as true for insurance and fund management, which is why ownership caps will be raised but not eliminated.
Check the first PBoC link for a complete list in Chinese
Bloomberg: PBOC’s Yi Pledges More Steps to Further Open China’s Economy
Bloomberg: China’s Financial Opening Isn’t Quite What It Seems
FINANCE AND ECONOMICS
3. A trade war won’t hurt China
That’s the message from Wang Changlin, vice president of the National Development and Reform Commission’s Macroeconomic Research Institute (Xinhua 1).
- American tariffs on USD 50 billion of Chinese exports will dent growth by less than 0.1 percentage points – that won’t affect employment.
- Even if soybean prices rise by 25%, CPI will stay in the 3% range.
- Tariffs on steel, aluminum, and chemicals barely matter because China doesn’t sell much of those to the US.
- China’s huge domestic market, as well as other export destinations, can offset the loss of the US market.
The stats bureau echoed Wang (Xinhua 2):
- “Domestic demand is the main pillar supporting China’s economy.”
Get smart: The government might be right about the macro effects. But Chinese businesses and investors are feeling increasingly anxious about the looming trade war.
The outcome: This trade war is increasing government resolve to rebalance the economy towards more domestic consumption.
FINANCE AND ECONOMICS
4. Data dump – Inflation
March inflation data dropped on Wednesday.
- Consumer prices were up 2.1% compared to 2.9% in February.
- Producer prices were up 3.1% compared to 3.7% in February.
Quick take 1: The PBoC will have been glad to see consumer price growth slow a bit. That confirms that February’s jump was due to seasonal dynamics around the Chinese New Year holiday. So overall inflation remains well within the comfort zone, meaning that interest rates won’t have to be raised this year. Solid.
Quick take 2: Upstream price growth continues to decelerate fairly quickly. If that indicator continues to trend down to 2%, the PBoC will start to worry. The last thing the bank wants it to slip back into upstream deflation. If we get there, expect renewed restrictions on production of key commodities like coal and steel to try to jolt price growth back up.
POLITICS AND POLICY
5. Party getting more involved in business
Xi wants the Party in charge of everything – including private businesses. That’s why the Party has been aggressively promoting Party cells within companies recently.
But there’s a problem – these efforts are not working. That’s according to Lin Zeyan, head researcher at the All-China Federation of Industry and Commerce (Study Times via People.com).
Some context: The ACFIC is a Party-sanctioned chamber of commerce for private businesses.
- Many Party members still haven’t set up Party committees.
- Many Party committees don’t hold activities.
- Many committees have no funds.
- The Party committees are not integrated into business decisions.
- Set up Party cells in all businesses with three or more Party members.
- Set up cross-company Party cells for companies with less than three Party members.
- Make business owners more aware of the value or Party-building.
- Send in retired officials to guide the Party-building.
- Recruit more middle- and upper-management into the Party.
Get smart: Party-building drives in private companies are not going to relent any time soon.
POLITICS AND POLICY
6. Li Keqiang in Shanghai
Li Keqiang is in Shanghai visiting the Free Trade Zone there.
Official media is making a big deal out of the fact that it’s his first trip since being re-elected as Premier last month.
Get smart: Li is closely associated with Shanghai FTZ. He visited soon after it opened in 2013 and this marks his fourth visit to the zone.
Get smarter: The zone is widely viewed as a disappointment – much like Li’s premiership.
This caught our eye: Li remarked that companies in the FTZ were getting cheap financing from overseas – and that was a good thing. Li suggested that maybe it would spur domestic banks to lower borrowing costs for Chinese SMEs.
Our thought: That won’t happen. But here’s a suggestion, Premier Li – if you want Chinese banks to compete with foreign ones, open your capital account!