DRIVING THE DAY
1. Xi Jinping predicted the ZTE slap down
We can’t emphasize this enough – the ZTE slap down from the US is a big deal (see last two days’ Tip Sheet).
What’s crazy is that Xi Jinping predicted it would happen.
OK, that’s not actually true. But that is effectively the message that Party media is trying to send.
On Wednesday, CCTV aired a collection of Xi’s statements on technology.
Here are a few choice quotes:
- “Core technologies can’t be accessed by begging. Self-reliance is the only way.”
- “Without the advantage of core technology, there is no political strength.”
On semiconductors, Xi was more to the point:
- “If core components heavily rely on a foreign country … it’s like building your house on someone else’s foundation.”
That’s exactly what ZTE is seen to have done.
So, what is Xi’s solution? It’s a no-brainer:
- “Speed up the plan of developing China’s own controllable technology.”
Get smart: The ZTE case will throw the industrial policy push on semiconductors and other core technologies into hyperdrive.
FINANCE AND ECONOMICS
2. China seeks to fund industrial policy
For Chinese regulators, the move against ZTE is more fundamental and threatening than any number of tariffs on steel or even manufacturing exports.
In addition to airing Xi Jinping’s thoughts on the subject, state media also called for doubling down on efforts to produce semiconductors domestically (China Money Network):
- “China should prepare for the worst and form a plan to develop the key technologies domestically.”
- “‘We can’t let the U.S. trade policy…disrupt the pace of our developments, and now we are truly determined,’ stated an editorial in The Global Times, a state-owned paper.”
- “ZTE’s experience proves that U.S. supplies are not reliable.”
China is putting its money where its mouth is. A rare joint policy release between the securities regulator and the Cybersecurity Administration aims to leverage capital markets to boost funding for industrial policy in the tech space.
The New America Foundation has a smart blog post analyzing the document:
- “Chinese technology startups have long faced challenges in tapping capital markets.”
- “The new document reflects a sense of urgency to make China’s capital markets more accessible and functional for rising stars.”
The big picture: China’s industrial policy is the main reason for economic tensions with the US. China will not abandon its industrial policy, meaning that there seems little hope for a quick resolution to the looming trade war.
China Money Network: China Calls for Semiconductor Self Reliance Amid ZTE Import Ban
New America Foundation: Unleashing China’s Capital Markets to Build a ‘Cyber Superpower’
FINANCE AND ECONOMICS
3. Fiscal reform in focus
In case you missed it, the fine folks at the IMF recently published a solid paper on China’s fiscal reform agenda.
It’s a great primer on the current state of play and the government’s general goals for the next three years.
The paper details the most recent framework announced by the State Council in August 2016. There are three overarching goals:
- “The clarification of expenditure responsibilities to minimize overlapping mandates, improve service delivery and increase accountability.”
- “A recentralization of key functions that are currently under local government control.”
- “The consolidation and improvement of the transfer system, notably by increasing the fiscal resources of less-developed regions.”
As for the timeline:
- “The authorities intend to complete the reform by 2020, at which time they plan to introduce an Intergovernmental Fiscal Relations Act.”
Get smart: Based on our reading of the policy roadmap from this year’s “Two Sessions,” fiscal reform is at the top of the agenda.
Go deep: If you want to know where we’re at and what is coming with respect to fiscal changes, make the IMF piece your weekend read.
IMF: Intergovernmental Fiscal Reform in China
FINANCE AND ECONOMICS
4. Ant Financial – the super unicorn
Markets are buzzing about the latest valuations for Ant Financial (the parent company of Alipay), which are coming in at USD 150 billion. That’s up from USD 100 billion just a couple of months ago.
For a sense of scale (Reuters):
- “At a valuation of around $150 billion, Ant will trail only the big four state-controlled banks and insurer Ping An among financial-focused firms in China.”
- “It will also be about 50 percent more valuable than Wall Street titans Goldman Sachs and Morgan Stanley.”
Why the 50% jump so quickly?
- “Much of the rapid rise in its valuation is being attributed to the company’s disclosure of additional performance data, which although by no means its full financials, included some 2017 full-year figures that showed faster-than-expected growth.”
- “That helped investors and analysts tweak their financial models.”
But Ant is operating in a fast-moving regulatory space – internet finance. The sector has gained attention form the highest reaches of China’s government over the past two years because it brings together three critical policy priorities:
- Financial risk
- Consumer protection
There’s a lot of money staked on the company’s ability to navigate a tricky regulatory landscape.
Reuters: Explainer: Ant Financial’s $150 billion valuation, and the big recent bump-up
Financial Times: Ant Financial’s $150bn valuation belies glaring risks for investors
POLITICS AND POLICY
5. Xi headed to Pyongyang
As we pointed out in the April 16Tip sheet, the head of the Party International Department Song Tao was recently in North Korea.
Now we know why:
- “Chinese President Xi Jinping is preparing to visit the North Korean capital of Pyongyang, an official with knowledge of the discussions told CNN Wednesday.”
This might happen this summer:
- “The official, who didn’t want to be identified, said the visit will happen ‘soon,’ possibly after the planned summit between US President Donald Trump and North Korean leader Kim Jong Un, which is expected to take place in late May or early June.”
Get smart: Things are moving fast on the Korean peninsula, and China wants to be a part of whatever happens.
That’s truer than ever after reports on Tuesday that US CIA Director (and likely next Secretary of State) Mike Pompeo secretly met with Kim over Easter weekend (see NYT link).
Our questions: How much are China and the US discussing North Korea these days? And how does the looming trade war affect those talks?
POLITICS AND POLICY
6. Legislature to meet next week
Mark your calendars!
The National People’s Congress Standing Committee (NPSCSC) is meeting next week from April 25-27.
The legislators will review two draft laws:
- The People’s Jury Law
- The Heroes and Martyrs Protection Law
They will also deliberate on several proposals, including:
- One by the Supreme People’s Court to set up a financial court in Shanghai
- One by the NPCSC to adjust administrative duties prescribed by law that have been affected by the reform of State Council institutions
They will also review several reports by the State Council, including on:
- Environmental protection
- Protection of overseas Chinese’s rights and interests
- Supply-side Structural Reforms in rural areas
Get smart: We are expecting the legislature to play a larger role in overseeing the implementation of laws, so you should pay attention to those State Council reports that the NPCSC is reviewing.
Advice for companies: Stricter enforcement of environmental laws is a given, so make sure you – and your suppliers! – are compliant.
POLITICS AND POLICY
7. Government to support professional training
China’s demographics are changing fast: Because of the One Child Policy, the country is set to get old quickly.
And the economy is chaning fast as well: moving from one of low-skilled manufacturing to more high-skilled jobs.
That means that the work force needs to change fast as well, which is why Wednesday’s State Council meeting decided to promote a “lifelong professional skills training system.”
Premier Li Keqiang wants companies to be at the heart of training China’s work force (gov.cn):
- “We must give full play to the role of enterprises as the main players in lifelong professional skills training.”
What that means in practice (gov.cn):
- “Enterprises will…be encouraged to conduct professional skill training…through…government-subsidized training.”
Businesses pay attention: The government is going to be pouring money into worker training. We suggest you find out how to take advantage!
Gov.cn: China to promote lifelong professional skills training