DRIVING THE DAY
1. Meet Xi Jinping, the pragmatic socialist
After they discussed the economy on Monday (see yesterday’s Tip Sheet), Xi gathered his Politburo colleagues for a study session.
The topic? The Communist Manifesto.
- “‘It’s… for the purpose of firming up Marxist belief and tracing back to the source of theory, for a Marxist party to maintain [its] advanced nature and purity,’ Xi said.”
Believe it or not: There were important messages hidden beneath the Party speak. Here’s what you should know.
First, Xi wants a more inclusive model of growth:
- “[We] must focus on satisfying the ever-increasing needs of the people…and unceasingly improve the people’s quality of life.”
- “[We must] make sure that the fruits of development… [are shared] more equitably, and benefit all people.”
But Xi is no ideologue. He sees Marxism as a more of a methodology than an ideology. It’s all about “scientifically” assessing a situation and coming up with applicable measures.
To that end, he expects Chinese officials to “Sinify” Marxism and adapt it to present circumstances:
- “Xi urged Party members to solve problems with new ideas, new thinking and new methods.”
Put it all together: Xi is a pragmatic socialist.
FINANCE AND ECONOMICS
2. Money markets don’t suggest stimulus
Yesterday, we wrote that markets are broadly misinterpreting the readout from the Politburo meeting on Monday. The readout’s reference to “expanding domestic demand” is not about stimulus, but about steeling for a trade war – if necessary.
That didn’t stop the Shanghai Composite Index from rising 2% on Tuesday — the largest single-day increase this year – on hopes of new government support for the economy.
That’s despite increasing tightness in money markets (see links):
- 7-day repo rates averaged 6.15% on Tuesday – up from a recent low of 2.78% on April 13.
Some context: We are in the middle of corporate tax payment season, meaning companies are demanding a lot of cash from banks. But that fact alone shouldn’t drive rates this high.
Why does that matter? Banks can’t exactly ramp up lending if money markets (i.e. bank funding markets) are tight. So it’s hard to see where any stimulus would even come from.
Our take: The money markets understand the reality, the equity markets don’t.
FINANCE AND ECONOMICS
3. Didi steels for competition
After totally dominating China’s ride-share market since 2016, Didi Chuxing is starting to see some renewed competition (Caixin):
- “The company’s monopoly — currently 90% of the market share — now looks increasingly uncertain as a slew of other competitors ramp up efforts to get into this business.”
- “Investors and industry experts said the ride-hailing market still has low barriers to entry, where Didi has yet to work out a stable business model and those willing to burn cash can launch an attack.”
So who is the new Number 2?
- “A serious new Didi rival is Meituan Dianping, the country’s largest on-demand online service platform, which in March officially launched its ride-hailing service in Shanghai.”
Some context: Meituan Dianping is best known for being China’s version of Yelp.
Why it matters: This is big business, so there’s a lot at stake. It also shows that many of China’s big tech companies are looking to aggressively expand into new areas.
What to watch: All of this should be good for consumers. Competition drives down prices and makes companies compete on service. Didi’s dominance made it lazy.
Caixin: Didi’s China Dominance Hits the Skids
Reuters: China’s Didi in talks for IPO as early as this year: WSJ
FINANCE AND ECONOMICS
4. An IC bottleneck the government can’t fix soon
China is so dead-set on developing its semiconductor industry that it’s letting some things slide.
That’s most clearly seen in the recent case of Canaan Creative, a Chinese cryptocurrency miner that also happens to make chips.
Some context: Chinese authorities are very wary of cryptocurrencies since they aren’t sure how to control them. So they’ve been aggressively tightening regulation over those companies.
That’s why comments from Jiang Yang, vice chairman of the securities regulator (CSRC), caught our eye.
He recently said the following to executives from Canaan (ifeng):
- “No matter what your chips are used for, [you] are a chip company by nature. [I] hope you go public in China.”
Get smart: The statement underscores how badly government officials want to support domestic chip production.
But there is still one big problem the government can’t overlook —the talent shortage. A 2017 white paper by the industrial regulator (MIIT) lays bare the problem (CYOL):
- In the integrated circuit sector, the country still has a deficit of 400,000 (!) qualified people.
Get smarter: Because of that reality, attracting talent in the tech sector is now a key government priority.
POLITICS AND POLICY
5. Belt and Road to nowhere
Xi Jinping held a joint meeting with the foreign ministers from Shanghai Cooperation Organization countries on Monday, including Indian External Affairs Minister Sushma Swaraj.
- “China stands ready to work with other member countries to… enhance cooperation on the Belt and Road Initiative.”
There’s just one problem – India’s not interested (Reuters):
- “India’s foreign minister did not express support for Belt and Road in the communique released after foreign ministers of the… organization met in Beijing.”
- “All the other foreign ministers… reaffirmed support for China’s Belt and Road proposal.”
Umm… awkward! Especially given that Swaraj had also met with Xi’s right-hand man Wang Qishan on Monday and State Councilor Wang Yi on Sunday.
India’s sticking point:
- “One key project [in the Belt and Road], the $57 billion China-Pakistan Economic Corridor [CPEC], runs through Pakistan-administered Kashmir that India considers its own territory.”
What we’ve heard: China knows it messed up on this one. They should have been more sensitive to India and less gung-ho on the CPEC.
What to watch: Xi is hanging out with Indian Prime Minister Narendra Modi in Wuhan on Thursday and Friday. Can he assuage Modi’s concerns about Belt and Road?
Xinhua: Xi expects SCO Qingdao summit to be a success
Reuters: China fails to get Indian support for Belt and Road ahead of summit
POLITICS AND POLICY
6. Anticorruption in business
In case you missed it: The fine folks at Beijing Normal University have compiled a report of all criminal cases involving businessmen.
What they found:
- In 2017, 2,292 businessmen were found guilty of a crime.
- 328 were SOE executives.
The SOE executives’ favorite crime?
- Accepting bribes
The private businessmen’s favorite crime?
- “Disrupting market order” (examples include selling or making fake products, fraud, and smuggling)
One more nugget: It wasn’t their favorite, but bribery cases involving private businessmen also increased in 2017. Not exactly surprising.
Get smart: The government is increasingly punishing people who give bribes, as well as those who accept them.
The big picture: Corruption isn’t going up – prosecution of corruption is. In fact, we reckon corruption is on the decline. But there is still a long way to go.