DRIVING THE DAY
1. Building the national security state
Xi elevated the importance of national security in his first term. He will continue to emphasize it in his second.
At the heart of Xi’s push is the National Security Commission (NSC), which he established in 2014 to better coordinate national security.
The NSC held its first meeting of Xi’s second term on Tuesday. Xi praised the commission for its accomplishments (Xinhua):
- “The commission has solved many tough problems that were long on the agenda but never resolved.”
But, Xi warned, this is no time to get complacent:
- “The brighter our prospects, the more we have to strengthen our awareness of hardship, and be vigilant in peacetime.”
What Xi wants: He wants officials to have a “holistic concept of national security.”
What that means: Xi’s concept is expansive – it includes political, economic, social, cultural, and environmental aspects in addition to more traditional security concepts.
But they didn’t just sit around talking (Xinhua):
- “Tuesday’s meeting reviewed and adopted a regulation which stipulates the responsibilities of CPC committees and leading Party members groups at all levels in safeguarding national security.”
Get smart: Xi has said that financial security is a key component of national security – that’s why we do not expect to see any let-up in the drive to tackle financial risks.
Foreign businesses beware: The national security push could make it more difficult for foreign companies to operate in – or even sell to – China.
Xinhua: Xi calls for efforts to break new ground in national security
DRIVING THE DAY
2. RRR cut is less than meets the eye
China’s central bank (PBoC) cut the reserve requirement ratio (RRR) for the vast majority of commercial banks late on Monday.
What’s the RRR? It’s the proportion of deposits that banks must hold in reserve. That means they can’t be used to fund new loans.
Some context: China’s RRRs are unusually high, at 17% for large commercial banks and 15% for smaller ones.
Why the cut? This wasn’t about boostingoverall lending. It’s about making sure small banks have enough liquidity. Let us explain:
- The PBoC estimates that the reduction of RRRs will inject about RMB 1.3 trillion into the banking system.
- But RMB 900 billion of liquidity is about to expire via maturing medium-term lending contracts, offsetting the injection.
- The other RMB 400 billion will primarily go to small banks.
Why is that important? It all has to do with financial de-risking. Since December of last year, small banks have been telling the PBoC that they couldn’t reduce their interbank borrowing if they didn’t have other channels to fund themselves (see December 5 Tip Sheet).
The PBoC is listening: It’skeeping pressure on these small banks to deleverage, but without crippling them.
That’s why we expect more of these cuts throughout this year.
Caixin: Update: China Cuts Reserve Requirement for Most Banks
FINANCE AND ECONOMICS
3. Data dump – property activity
Yesterday we wrote about the big China data dump, covering Q1 GDP and March economic activity.
Overall, the message was one of solid Q1 growth, but with momentum tapering in the last month of the quarter.
That’s still the message, but there is one major part of the economy that bucked the trend.
Property activity accelerated in March:
- Investment in the sector grew at at 10.8% y/y – up from 9.9% growth in the first two months of the year.
- New housing starts skyrocketed, growing at 17.7% y/y – way up from the 2.9% growth in the first two months.
- But purchases were soft, growing at only 3.2% y/y – down a touch from 4.1% growth in the first two months.
What it all means: Regulators continue to struggle to control property activity. That’s good for short-term growth, but it means there is a risk of bubbles growing in the largest cities.
Financial Review: China’s property investment fastest in 3 years but sales slow from a year earlier
FINANCE AND ECONOMICS
4. The ZTE saga continues
The fallout continues for Chinese telecoms giant ZTE.
On Monday, the US slapped a 7-year “denial of export privileges” on the company. And the UK sent a warning letter to local companies about security risks emanating from ZTE (see yesterday’s Tip Sheet).
Things got worse Tuesday (Caixin):
- “ZTE said… that it would suspend trading on the Hong Kong stock exchange.”
- “The trading halt is ‘pending the release of an inside information announcement in respect of the activation of denial order by the Bureau of Industry and Security of the United States Department of Commerce,’ ZTE said.”
A quick reiteration: This move is separate from – but related to – the simmering trade war.
Still – this may well be a “death penalty” for ZTE.
The bottom line: Governments increasingly see technology as a battlefield. Even if a trade war gets de-escalated, tensions in the tech industry are likely here to stay.
What China’s leaders are thinking: They need to speed up efforts to become technologically independent (see Entry #5 below).
Caixin: ZTE Suspends Trading After U.S. Ban
Financial Times: ZTE suspends trading following US and UK restrictions
POLITICS AND POLICY
5. Liu He wants better industrial policy
Vice Premier Liu He went to the Ministry of Industry and Information Technology (MIIT) Tuesday.
Some context: MIIT is in charge of many of China’s industrial policies, including Made in China 2025.
Get smart: Liu’s visit is a sign that he will be the top official overseeing industrial policy.
- Advanced manufacturing is the core of the country’s economy.
- MIIT’s job is to help China become a “manufacturing superpower” and a “cyber superpower.”
Liu told MIIT officials they need to up their game:
- “[You] must… cultivate strategic thinking… [and] unceasingly improve the overall quality of [your] work.”
Liu is the right man for the job: He’s an industrial policy pro. He cut his teeth as an industrial policy maker in the 1980s and 1990s, with an emphasis on hi-tech sectors.
What it means: China will continue to put resources into next-generation technologies.
POLITICS AND POLICY
6. SOE debt in focus
China’s 98 central state-owned enterprises (SOEs) have combined assets of over RMB 54 trillion.
So how are those assets performing?
Well, SOEs made a lot of money in Q1 2018:
- Revenues grew by 8.7% y/y to RMB 6.4 trillion, though that does represent a slowdown from the double-digit growth we saw throughout 2017.
- Profits grew by a heady 20.9% y/y to RMB 377 billion, compared to 15.2% y/y growth in 2017.
Those profits helped to reduce debt burdens:
- The overall liability-to-asset ratio for central SOEs fell 40 basis points to 65.9%.
What to watch: The SOE regulator (SASAC) aims to get the ratio down to around 64% by 2020.
Why it will happen: Xi Jinping is pushing for it. Two weeks ago, Xi said:
- “Leverage at SOEs, in particular, should be lowered as soon as possible.”
When Xi talks, officials listen.
POLITICS AND POLICY
7. China’s next round of opening
Last week, Xi Jinping promised that China would open more sectors to foreign investment, including manufacturing of autos and aircraft (see April 10 Tip Sheet).
But…this is not going to happen overnight.
The National Development and Reform Commission has some details on timing (NDRC):
- China will release two new negative lists in H1 – one for the whole country and a smaller one for free trade zones.
- These lists will include relaxations on foreign investment in the finance, auto, energy and resource, infrastructure, transport, and specialized services sectors.
- H1 will also see the release of a plan for further openings in coming years, to “stabilize expectations.”
Reuters has helpfully translated some details regaring manufacturing. China will:
- “remove limits on firms making fully electric and plug-in hybrid vehicles in 2018, commercial vehicle firms in 2020 and the wider passenger vehicle market by 2022”
- “scrap foreign ownership limits in the ship and aircraft manufacturing industries in 2018”
Get smart: These are positive developments. But they also look like too little, too late for a foreign business community that has already soured on China.
Reuters: China to scrap foreign auto ownership limits by 2022
POLITICS AND POLICY
8. Power to the people
It’s not easy to be an internet company in China these days.
First, the government tells you to promote “socialist core values” (see April 12 Tip Sheet).
But go too far, and you risk offending netizens.
That’s what happened to Sina Weibo when they announced Friday that they were launching a campaign to take down “sexually suggestive…content…relating to gay topics” as part of an effort to comply with cybersecurity regulations.
It triggered a HUGE backlash:
- The hashtag #I’m gay# generated over 500 million views within 72 hours (Weibo).
- And pro-LGBT protests took place throughout the country.
The uproar forced People’s Daily to clarify that the Party is not “anti-gay.” An article published Monday on its official WeChat said that there is nothing wrong with being homosexual, and that LGBT-related content should not be removed from the web (link below).
The result: Weibo reversed its policy on Tuesday.
Get smart: This is another example of over-implementation as actors throughout the system (including private companies like Sina) seek to demonstrate that they are on board with Xi’s agenda.
Get smarter: It also shows how the government constantly calibrates – and re-calibrates – its policies in light of public reaction.
NYT: ‘I Am Gay, Not a Pervert’: Furor in China as Sina Weibo Bans Gay Content
People’s Daily WeChat: “不一样的烟火”，一样可以绽放