DRIVING THE DAY
1. More on the ZTE saga
The ZTE fallout is ongoing (see past three days’ Tip Sheets).
In China, even average citizens are starting to ramp up the nationalist rhetoric in response (Reuters):
- “In one widely circulated photograph online, an unidentified restaurant erected a banner with patriotic slogans calling for solidarity and offering ZTE employees free meals.”
- “’If it were not because of ZTE’s strength and ability to represent China, it would not have been punished like this,’ the banner said.”
Some commentators on the US side argue that the protestors don’t have a leg to stand on – ZTE admittedly broke US sanctions by shipping banned parts to Iran and North Korea. They agreed not to do it again, but broke that promise.
But that misunderstands the Chinese perspective. Simply by enforcing those initial sanctions, the US is saying “if you want to do business with us, you have to play by our rules.”
The Chinese don’t like the rules that the US has established. They want to create their own.
They also see hypocrisy in a US stance that goes after ZTE while saying the Chinese don’t treat American businesses fairly.
Don’t kill the messenger: We aren’t saying the Chinese are right. But it’s important to understand their logic.
Reuters: U.S. ban on sales to ZTE triggers patriotic rhetoric in China
FINANCE AND ECONOMICS
2. Bond market reaction to the reserve cut
Chinese markets are reacting to the news that the central bank is cutting reserve requirements for commercial banks (see April 18 Tip Sheet).
What’s happening: Bond yields dropped precipitously on Wednesday on the news of the impending cut. They generally stayed low on Thursday.
What’s more, the one-day drop comes after a general downward trend since the beginning of the year.
- One-year government bonds have dipped 52 basis points since the beginning of the year.
- 10-year government bonds have dipped 25 basis points since the beginning of the year.
Why that matters: Often when bond yields trend down like that, markets are expecting weaker growth, more liquidity, and more credit. So, it could be read as an expectation of policy stimulus.
Don’t get carried away. It will take some time for the market to fully digest the news of the RRR cut.
What we expect: Yields will remain low through the end of this month, before inching back up in June as the mid-year liquidity squeeze approaches.
Companies will take advantage of the window to issue cheap bonds, but it’s not a huge new round of debt expansion.
POLITICS AND POLICY
3. The Party’s mouthpiece just got bigger
China Media Group – better known as Voice of China – opened its doors on Thursday.
The new behemoth consolidates several of China’s best known state-owned media outlets (Xinhua):
- “China Media Group is a new broadcasting platform made up of China Central Television, China National Radio and China Radio International.”
Party propaganda chief Huang Kunming was on hand for the official unveiling. He explained the reason for the merger:
- “The restructuring is significant in following the principle of the Party exercising leadership over media.”
Get smart: The MASSIVE Party-state re-org made clear that the Party would exert tighter control over media. Expect China’s propaganda-laden media environment to become even more so.
Get smarter: The Propaganda Department is putting a lot of resources into improving its delivery channels. But they key to good propaganda is a good message. On that front, the department still has some work to do.
POLITICS AND POLICY
4. China’s foreign aid gets more strategic
China Media Group (see Entry 3 above) wasn’t the only organization to open its doors.
China’s new overseas aid agency, the China International Development Cooperation Agency (CIDCA) also opened Wednesday.
Some context: Unlike most major economies, China did not previously have a dedicated development agency. Instead, the Ministry of Commerce oversaw most of China’s foreign aid.
The CIDCA’s mandate (ECNS):
- “Drafting strategic guidelines, plans and policies for foreign aid”
- “Coordinating and providing policy advice on major issues”
- “Drafting plans and evaluating foreign aid tasks”
That’s not all: The agency will also focus on promoting the Belt and Road, according to Politburo member Yang Jiechi.
What it all means: China is increasingly focused on spreading its influence abroad. The CIDCA will help to ensure that foreign aid serves China’s larger strategic goals.
The big question: How will the CIDCA interact with the China Development Bank and China Export-Import Bank? Those two banks have been the main channels for overseas aid in recent years.
POLITICS AND POLICY
5. Waste trade gets an update
On Thursday, regulators issued updated rules for imports of waste products.
That may not seem like a big deal, but as we’ve written before, the waste and recycling trade is a big global business.
China’s fast-changing rules are shaking up the market.
So, what’s the latest?
The new Ministry of Environment and Ecology (previously the Ministry of Environmental Protection) led a consortium of regulators to update the import waste catalogue, widening China’s ban on various types of waste imports.
This is a two-step plan:
- Starting in the end of 2018, 16 categories of waste, which previously could be imported on a restricted basis, will be banned completely.
- Starting at the end of 2019, further categories of waste that can currently be fully imported or imported on a restricted basis will be banned completely.
Get smart: This policy is driven by Xi Jinping himself. He doesn’t like that China is buying up everyone else’s waste. Xi’s frustration is increasingly shared by the public, as China media decries importing of “foreign trash.”
Stopping the practice is part of Xi’s vision to make China strong and beautiful.
POLITICS AND POLICY
6. Why pollution control is deemed a “tough battle”
There is a reason that Xi Jinping has identified curbing pollution as one of the “three tough battles” for regulators to fight in 2018: it isn’t going to be easy.
On Thursday, a spokesman for the Ministry of Ecology and Environment (MEE) admitted that regulators have hit a temporary stalemate thanks to two factors.
The first is adverse weather (Reuters):
- “Air pollution rose by more than a quarter in parts of northern China in March, and the region has been hit by another bout of smog in the second half of April, which the Ministry of Ecology and Environment (MEE) has blamed on weak air circulation.”
The second factor is more difficult to address. And that is the fact that the easy gains have already been made:
- “But experts have warned that China’s anti-smog campaign is getting even harder, with improvements in air quality starting to level off now that relatively straightforward programs like the desulphurisation of power plant emissions have been completed.”
A tough battle indeed.
But regulators aren’t giving up. At the very least, companies should expect much stricter compliance checks. We’ve noticed that Chinese media has been more active recently in exposing business pollution cases.
What to watch: A more ambitious drive to upgrade power production facilities may be coming soon.
China environment ministry warns of ‘stalemate’ in war on smog