DRIVING THE DECADE
1. The tech war rages on
Chinese regulators are riled up about the ZTE case. According to reporting from this morning, things will only get worse.
What’s happening? A second Chinese tech company is now being looked into for violating US sanctions:
- “The Justice Department is investigating whether Huawei Technologies Co. violated U.S. sanctions related to Iran…a move that opens a new avenue of scrutiny of the Chinese cellular-electronics giant on national security grounds.”
The move takes things up a notch, given Huawei’s absolute size:
- “Huawei in 2017 led the global telecom-equipment market with a 27% share, while ZTE ranked fourth, with 10%, according to research-firm Dell’Oro Group.”
For their part, Chinese regulators are frustrated with ZTE (and now perhaps Huawei) because they see these violations as stupid mistakes.
But still, if Huawei gets dinged by the US, then China’s sense of encirclement will be ratcheted up to eleven.
Get smart: This stuff makes the trade war look like child’s play. The Chinese have largely tried to take the high road on trade. That won’t be the case on tech.
WSJ: Huawei Under Criminal Investigation Over Iran Sanctions
FINANCE AND ECONOMICS
2. Doubling down on the IC fund
Even before the Huawei report came out, Chinese regulators had been getting ready to double down on the push to support the domestic semiconductor industry.
On Wednesday, Chen Yin, spokesman for the Ministry of Industry and Information Technology, spoke in direct response to the ZTE case, saying (SCIO):
- “China’s integrated circuit industry has developed rapidly, and the overall strength has been significantly enhanced.”
- “But we also know that there is still a gap in chip design, manufacturing capabilities, and talent teams, and we need to further speed up our development.”
That gap is why the government is putting its money where its mouth is. It is starting its second round of fundraising for the national integrated circuit fund, which is planned to pool together around RMB 700 billion. A large share of that money will be poured into the upper value chain, like chip design.
The government is acting as a powerful entity that seeds money to companies investing in every part of the semiconductor supply chain and also actively consolidates and integrates the supply chain.
And they are widening participation:
- “For the second phase of fund raising…all enterprises are welcome to participate.”
The technological arms race is well on its way.
FINANCE AND ECONOMICS
3. Mnuchin and co. are heading to Beijing
Lest we forget, amidst the tech tensions, there is still a trade war brewing.
To address the latter issue, the US administration is sending some of its top economic personnel to China next week to negotiate.
The list includes (WSJ):
- Steven Mnuchin, treasury secretary
- Robert Lighthizer, US trade representative
- Larry Kudlow, director of the National Economic Council
- Peter Navarro, trade advisor
US President Trump says he’s optimistic that a deal can be made.
We wish we could share his outlook.
At best, we’d expect a temporary deferral on tariffs, not a grand bargain. So even if something positive does happen, we are likely looking at a short reprieve.
Importantly, the tech issues will totally overshadow the trade moves, and on that, it’s unclear if there is room for either side to negotiate.
What to watch: It will be interesting to see who they end up meeting with from the Chinese side.
WSJ: Trump to Send Mnuchin to China for Trade Talks Next Week
FINANCE AND ECONOMICS
4. The next leg of the financial regulatory storm
On Tuesday, we pointed out that Lai Xiaomin has become the latest senior executive of a state-owned financial institution to be taken down for corruption.
Some context: Lai was the head of Huarong Asset Management Company, one of the four national AMCs established in the late 90s to help banks dispose of bad loans. But in reality, the company has become a shadow bank.
It looks like Lai and Huarong might just be the tip of the iceberg for China’s asset management companies (AMCs).
The industry as a whole is starting to gain more attention from regulators. And it’s not just the national guys, but the provincial entities that look to be in the crosshairs.
That’s largely because there is no set of unified national regulations to oversee AMCs. The banking and insurance regulator (CBIRC) wants to change that (The Paper):
- “In the future, [the CBIRC] is bound to introduce regulatory rules, but the daily supervision should be done in the local financial institutions.”
Get smart: They can’t come soon enough. With banks set to ramp up their bad loan disposal this year (See Tuesday’s Tip Sheet), the AMCs needs to be closely supervised.
The Paper: 银保监会临时摸底地方资产管理公司运营风险，释放了啥信号？
POLITICS AND POLICY
5. Xi’s political skills
Xi Jinping is down in Hubei, doing his thing.
The big man played with children, washed some clothes in a village’s communal basin, and then went to the Three Gorges Dam and gave a rousing speech about making China great again.
Get smart: Xi’s got the instincts of a retail politician (with Chinese characteristics). It’s one reason why he’s extremely popular.
Xi used the trip to the dam to hammer home China’s need to become self-reliant:
- “If we want our country to be great… [we] must rely on our own hard work.”
- “Just think if we had relied on outside help to build the Three Gorges Dam! We wouldn’t have any of the outstanding capabilities that we have today.”
Get smarter: China can build a good dam. Now Xi wants them to build up their high-tech capabilities. And he’s going to put all he’s got into making that happen (see entries #1 and #2).
POLITICS AND POLICY
6. State Council cuts taxes – again!
Premier Li Keqiang chaired a State Council meeting Wednesday.
The agenda: Tax cuts.
Small businesses will get a boost:
- “The annual taxable income threshold of small and micro businesses eligible for halved income tax will be raised from 500,000 to 1 million yuan.”
So will RandD:
- “The per unit value of newly-purchased RandD instruments and equipment eligible for one-time tax deduction will be raised from 1 million to 5 million yuan.”
As will start-ups:
- “The tax incentive enjoyed by venture capital firms and angel investors that sees 70 percent of their investment deducted from the taxable income of the seed and early stage high-tech startups they finance will be extended nationwide.”
The goal: To help small business and spur innovation.
The impact: The State Council says that these and other measures introduced Wednesday will reduce corporate taxes by RMB 60 billion.
Get smart: Nobody pays attention, but these and other efforts to support entrepreneurship and innovation have had positive effects in recent years – we’ve seen ’em.
Gov.cn: 李克强主持召开国务院常务会议 决定再推出7项减税措施 支持创业创新和小微企业发展等
Gov.cn: China will roll out fresh tax cuts to aid small businesses