DRIVING THE DAY
1. Trade talks in Beijing still not looking good
According to Keith Bradsher at the Times, China might be less prepared than they are making out:
- “As part of the [MASSIVE government] reorganization, China’s commerce ministry was broken in March into three separate groups each focused on different issues.”
- “The ministry’s office of trade negotiations still exists,…but people involved with the negotiations say the shuffling has robbed the office of resources and support.”
You won’t read any of this in the Chinese press (Bloomberg):
- “China’s largest news outlets have been ordered to refrain from reporting any material beyond official press releases related to trade talks in Beijing with the U.S., according to people familiar with the matter.”
- “The Communist Party’s propaganda department has told news websites to strictly use statements released by the official Xinhua News Agency, without any extra interpretation, according to the people, who asked not to be named as they’re not authorized to speak on the matter.”
Get smart: We don’t have high hopes for these talks. They may ratchet down trade tensions, at best. But they will not make progress on the core issue of state-supported innovation.
READ MORE
NYT: As U.S. and Chinese Teams Meet on Trade, One Side Has an Edge in Expertise
Bloomberg: China to Order Reporting Ban on Mnuchin-Led Trade Talks
FINANCE AND ECONOMICS
2. China’s industrial policy evolution
We have argued for some time that Chinese industrial policy is undergoing a structural shift.
The big change? Moving from widespread subsidies to a venture capital framework – with the integrated circuit fund acting as the model.
A recent piece in the China Securities Journal supports our view:
- “At present, there are 17 special funds under the central government, with a total volume exceeding 800 billion yuan.”
- “[They are] focusing on the fields of integrated circuits, new materials, industrial Internet and others.”
Amidst the proliferation in funds, it’s important to watch what happens to the granddaddy of them all:
- “The national integrated circuit investment fund’s second phase plan has been… approved… and will exceed RMB 150 billion.”
- “It’s estimated that… 20%-25%, or RMB 30 billion to 50 billion will be invested [specifically] in chip design.”
Why it matters: This second round of funding looks geared to crack the hardest part of the semiconductor value chain. Expect the same in the other fund-backed industries.
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China Securities Journal: 万亿国家级引导基金助力新经济发展
FINANCE AND ECONOMICS
3. Breaking moral hazard for insurance
The regulatory deluge continues in the financial sector.
A spate of documents governing everything from WMPs to foreign ownership of securities companies came out last Friday (see May 2 Tip Sheet).
Regulators are at it again. On Thursday, the banking and insurance regulator issued new rules concerning related-party transactions in the insurance sector.
The idea is to more clearly delineate who constitutes a “related party” so that insurers don’t concentrate their investments with buddy-buddy institutions (Shanghai Securities):
- “The regulation formally re-establishes the rules for related transactions in insurance… strengthening the… supervision of related party transactions.”
- “In recent years, with the full liberalization of insurance investment channels, the related parties in the insurance industry have increased rapidly.”
- “The scale has increased from tens of billions of RMB to hundreds of billions of RMB.”
- “The potential risks have also gradually enlarged, and the trading structure is complicated.”
Some context: Stricter supervision over related parties was beefed up for banks last year, so it’s no surprise that its now happening in insurance.
The goal: Reduce moral hazard by making sure investments are based on merit, not on personal or institutional relationships.
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Cnstock: 监管为保险关联交易“立规矩”
CIRC.gov: 对《保险公司关联交易管理办法（征求意见稿）》公开征求意见
FINANCE AND ECONOMICS
4. UBS jumps in
That was fast. Financial regulators lifted caps on foreign ownership of securities companies just one week ago (see May 2 Tip Sheet).
The first application for majority ownership by a foreign firm came within days (Caixin):
- “UBS Group AG submitted an application to acquire a majority stake in its Chinese securities venture, becoming the first global bank to take advantage of Beijing’s latest commitment to open its financial markets to foreign firms.”
Now the hard work begins: Even if UBS gets official approval, there will still be plenty of hoops to jump through. Lots of additional paperwork will be required to execute any transaction.
And remember: UBS still has to convince its current JV partner to sell the stake. The Swiss bank is clearly anxious to get this done, so we wouldn’t expect the sale to come at a bargain.
The upshot: Financial market opening is accelerating, but there are still plenty of ways for regulators to slow down the process if needed.
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Bloomberg: UBS Becomes First Global Bank to Take Advantage of China Opening
FINANCE AND ECONOMICS
5. China’s latest debt crisis
Yet another high-profile credit event is grabbing headlines in Chinese financial news.
Instead of the struggling northeast, the latest woes are emanating from the well-to-do province of Zhejiang (Caixin):
- “Zhejiang-based DunAn Group faces a debt crisis after a publicly listed subsidiary failed to raise capital through a bond sale. The precision manufacturing and equipment maker then turned to the local government for help.”
- “On Wednesday, the Zhejiang government called on DunAn’s main creditors to discuss ways to solve the company’s crisis and help the company get temporary liquidity support.”
The company’s explanation was especially concerning:
- “In its report to the government, DunAn said it had trouble selling the bonds because the banking sector’s deleveraging efforts and the rising cost of financing have caused a severe liquidity crunch for the company.”
Get smart: The financial de-risking drive has so far had little impact on banks’ relationships with actual companies. But that situation was always bound to change.
What to watch: Is DunAn the canary in the coal mine? If so, will regulators be forced to back off the de-risking drive?
READ MORE
Caixin Global: Equipment Maker DunAn Hit by $7 Bln Debt Crisis
POLITICS AND POLICY
6. Xi’s Marxism
We told you yesterday that the propaganda machine is in overdrive promoting Marx ahead of his 200th birthday on Saturday.
Marx’s number one cheerleader: Xi Jinping.
Xi visited Peking University’s (PKU) school of Marxism, where he had this to say (Xinhua):
- “Xi said Marxism should be consolidated as the guiding ideology and promoted in campuses, classrooms, and among students.”
Xi also had some advice for foreigners trying to figure out China:
- “He also told the foreign students that to understand China… they must understand Marxism in contemporary China.”
What is Marxism in contemporary China, you may ask? Xi’s got an answer for that one too:
- “’[Xi Jinping] thought on socialism with Chinese characteristics for a new era…embodies Marxism in contemporary China,’ Xi said.”
What that means: The same old Xi Jinping program you’ve come to love – a more assertive China on the world stage, a more conservative political environment, and a more efficient state-led economy.
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POLITICS AND POLICY
7. MEE lays down the law
After the MASSIVE government re-organization, China has a beefed-up environmental regulator, the Ministry of Ecology and Environment (MEE).
They are going after air polluters (Xinhua):
- “China’s Ministry of Ecology and Environment (MEE) held talks on Thursday with leading government officials in three cities in north China that failed to meet air improvement targets.”
The offending cities:
- Jincheng, Shanxi
- Yangquan, Shanxi
- Handan, Hebei
Crazy China stat: You’ve probably never heard of those cities. But they have a combined population of more than 13 million people – that’s more than in Greece or Sweden.
The punishment: The MEE will not approve any more projects in these three cities.
A sign of the times (SCMP):
- “The mayor of Jincheng, Liu Feng, said the major coal and gas city would ‘rather sacrifice GDP growth’ to curb air pollution, noting that Jincheng’s gross domestic product fell 9 per cent as a result of production curbs in the first quarter.”
Get smart: Combating air pollution is one of three top policy priorities this year – and officials know it.
READ MORE
Xinhua: China’s environment watchdog talks with local officials on air pollution
SCMP: Chinese cities ordered to axe new projects after failing to hit winter pollution targets
POLITICS AND POLICY
8. Handan’s not all bad
The State Council is rewarding local governments who did a good job in implementing key policies in 2017.
25 provinces, 82 cities, and 116 counties are in the central government’s good books for making obvious progress on improving the business environment, cutting steel and coal capacity, spurring innovation, and practicing sound fiscal management, among others.
It’s more than just a pat on the back. Localities that have done well can receive tens of millions of yuan in rewards.
But there are some ironies. Handan, Hebei was singled out for its superb efforts in creating a better business environment. That’s the same Handan that was just censured by central authorities for not making enough progress on improving air pollution (see entry #7).
Get smart: This is a great example of how policy priorities can run counter to each other. Handan decided to take a more hands-off approach to regulating industry – did that have anything to do with its failure to hit pollution reduction targets?
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Gov.cn: 国办印发通报对2017年落实重大政策措施真抓实干成效明显地方予以督查激励