DRIVING THE DAY
1. Hainan opens up
On Friday, Xi Jinping announced big plans for the island province of Hainan (Xinhua):
- “[The island will become] the largest free trade zone…and…the country’s first free trade port.”
Some context: Xi telegraphed this move in the 19th Party Congress Report. According to the government, a free trade port will be larger and more open than China’s current free trade zones.
Politburo Standing Commitee member Wang Yang explains (people.com):
- “[A free trade port] is located in a country (region) territory but outside the customs territory.”
- “Goods, capital [and] personnel are free to enter and leave and most of the goods are exempt from customs duties.”
But the government doesn’t want just any old free trade area. They do not want Hainan to become just another processing and manufacturing center. They want the island to be:
- An ecological development pilot zone
- An international tourism and consumption center
- A place to develop new-generation information technology
How, exactly, the government plans to do that will become more apparent in the coming months (and years). For now, the government has signaled a few concrete measures:
- “Exchanges in international energy, shipping, commodities and carbon trading will be established in Hainan.” (Xinhua 2)
- “China said it would encourage horse racing and expand sports lotteries in the southernmost island of Hainan, [and]…may eventually open the door to gaming.” (Bloomberg)
Get smart: Beijing has said that it wants Hainan to rival other free trade ports like Hong Kong and Singapore. That won’t happen unless China establishes a credible rule of law system.
What to watch: Lots of folks think this presages greater opening to the global gambling industry. But our sense is we are unlikely to see Hainan turned into another Macau.
People.com: 习近平：党中央支持海南全面深化改革开放 争创新时代中国特色社会主义生动范例
Gov.cn: 中共中央 国务院关于支持海南全面深化改革开放的指导意见
Xinhua: China Focus: Tropical island on forefront of next phase of China’s reform, opening-up
Xinhua: China Focus: Hainan to take on bigger roles in reform, opening-up
Bloomberg: China to Support Horse Racing, Sports Lotteries in Hainan
FINANCE AND ECONOMICS
2. Data dump — March credit numbers
China’s loan growth decelerated in March. The PBoC released the data late on Friday.
- Outstanding Total Social Financing (TSF) grew at only 10.5% y/y — down from 11.2% in February.
Quick take 1: We are pretty sure that is the lowest monthly point for overall TSF on record. It is difficult to confirm since the PBoC has only recently begun to report the stock of TSF on a monthly basis. But we are fairly confident.
- New RMB loans came in at 12.8% y/y — the same pace as in February.
Quick take 2: That means the slowdown in overall credit was driven by weaker shadow bank lending.
What it all means: If we’ve said it once, we’ve said it a hundred times. Financial de-risking and slower credit growth are here to stay.
Some context: Top leadership has started talking publicly about reducing the macro leverage ratio. That puts pressure on the central bank to make sure credit growth stays restrained.
The upshot: So far, slower credit growth has not had a tangible negative effect on economic growth. The PBoC hopes things stay that way.
Bloomberg: China’s Credit Growth Trails Estimates Amid Debt Cleanup
FINANCE AND ECONOMICS
3. Financial liberalization with Chinese characteristics
China’s central bank is relaxing controlof interest rates for certificates of deposit (CD), according to a Reuters scoop.
Some context (Caixin):
- “Certificates of deposit are financial instruments with higher interest rates than conventional savings accounts that are open to individual and non-financial institutional investors.”
What’s happening (Caixin again):
- “The four big state banks…can now raise their CD interest rates as much as 50% above the PBOC’s benchmark rate, up from the previous 40% limit, according to the sources.”
- “Larger private stock-holding banks can raise their CD interest rates 52% above the benchmark compared to 42% before.”
What it means: It’s a baby step towards wider liberalization for deposit rates.
But but but… don’t get too excited (Reuters):
- “Although the People’s Bank of China (PBOC) scrapped the official ceiling for deposit rates in October 2015, the rates are still largely constrained by the regulator’s window guidance.”
In other words: Rates had been liberalized on paper, but not in practice.
Get smart: China’s financial system is not going to be fully liberalized any time soon.
POLITICS AND POLICY
4. The Party is in your business
Xi Jinping has been asserting the Party’s leadership in all aspects of Chinese society – especially in businesses, both foreign and domestic.
The New York Times gives examples of how this is happening in foreign companies:
- “Honda, the Japanese automaker, changed its legal documents to give the party a say in how its Chinese factories are run.”
- “Cummins, the engine maker from Indiana, felt the party’s reach, too, when it tried to appoint a new manager for one of its China businesses. The party said no.”
It’s not just foreign companies:
- “Dozens of Chinese state-controlled companies have changed their articles of incorporation to give the party a greater role.”
- “The insurance giant China Pacific Insurance…recently amended its articles of association to say that in key corporate decisions, ‘the board of directors shall first seek for the opinion of the leading party group of the company.’”
Get smart: Technically, state-owned enterprises have been required to get Party approvals for major decisions for decades. But they usually acted independently. That’s happening less and less under Xi.
Advice for foreign business: If you don’t know your Party committee(s), you should! They’re not going away, so best to have productive relations.
NYT: China’s Communists Rewrite the Rules for Foreign Businesses
POLITICS AND POLICY
5. China and Japan ties warming
State councilor and foreign minister Wang Yi is in Japan.
That’s a big deal. A Chinese foreign minister has not visited Japan for years amidst strained bilateral relations. Wang and his counterpart hosted an economic dialogue this morning for the first time since 2010.
Get smart: Wang is a Japan expert. He’s fluent in Japanese and was the former ambassador to Japan.
Wang said his visit was due to changes in Japan’s approach (Reuters):
- “Since last year Japan has, in relations with China, displayed a positive message and friendly attitude.”
But here’s another reason for better ties: Donald Trump. Two things:
- Trump’s unexpected agreement to meet with Kim Jong-un has both countries afraid that they could be left out of peninsular politics.
- Trump’s decisions to impose steel and aluminum tariffs on both countries has made them more eager to shore up bilateral economic ties.
What’s next: Japanese foreign minister Taro Kono says we will see some visits between top leaders (Kyodo):
- “We agreed to carry out high-level visits, first with (Chinese Premier) Li Keqiang coming to Japan for a Japan-China-South Korea summit, then Prime Minister Abe visiting China and Xi Jinping visiting Japan.”
Reuters: Japan and China’s foreign ministers pledge to pursue improved ties
Bloomberg: China, Japan Hold First Economic Talks in 8 Years in Trade War Shadow
NHK: Rebooting Japan-China economic dialogue
Bloomberg: China and Japan Vow Cooperation to Get North Korea to Quit Nukes
Kyodo News: Japan, China agree to mutual official visits by Abe, Xi
POLITICS AND POLICY
6. Song Tao in Pyongyang
Song Tao,Head of the Party’s International Department, went to Pyongyang over the weekend.
He received a warm reception and had a meeting with North Korean leader Kim Jong-un.
That’s in stark contrast to Song’s visit to the DPRK in November last year. On that visit, Song was snubbed by Kim.
What it means: Sino-North Korean relations have improved remarkably.
Get smart: It’s no coincidence that the Chinese are pouring more energy into the relationship now that a potential Kim-Trump meeting has been mooted.
Xinhua: DPRK pledges to consolidate friendship with China
POLITICS AND POLICY
7. Environmental NGOs flexing muscles
Last week saw two high-profile lawsuits between environmental NGOs and corporations.
The first saw Friends of Nature (FON) suing two subsidiaries of State Grid over their refusal to purchase clean energy. Caixin has more:
- “Under China’s Renewable Energy Law enacted in 2006, power-grid operators must purchase electricity generated by wind and solar farms in their areas in accordance with agreed-upon contracts and prices.”
- “But state-owned grid companies often flout such requirements and use fossil fuels or hydropower facilities instead, leaving power generated at wind and solar farms unused.”
The damage: The National Energy Administration (NEA) says that 12% of wind power generated in 2017 went to waste (link below).
In the second case, China Biodiversity Conservation and Green Development Foundation (CBCGDF) claimed that a local glass company was in violation of emissions laws. A Hebei court agreed and is making the firm pay RMB 1.5 million into a municipal fund for environmental remediation.
Get smart: Environmental groups are being given more leash to police companies. Businesses need to make sure they include NGOs in their stakeholder mapping.
Get smarter: The government’s prosecutor, the People’s Procuratorate is looking to get in on the action. We hear they are actively looking for cases of environmental malfeasance.
Caixin: Group Sues State Grid Unit for Refusing to Buy Clean Energy
The Paper: “弃风弃光”被环保组织索赔3亿，宁夏电网：做不到全额收购