DRIVING THE DAY
1. Another round of US-China trade talks
After a disappointing round of trade talks between the US and China last week in Beijing, the two sides are back at it – this time on the other side of the Pacific.
The White House has announced that Vice Premier Liu He will head to Washington next week (FT):
- “The visit from Mr Liu, who led China’s side in trade talks last week in Beijing, is a signal that both sides want to move quickly.”
- “But it also comes after both sides took a hard line going into the first round of talks, which are aimed at averting a trade war.”
- “The US has demanded a $200bn reduction in two years of the US’s $337bn trade deficit with China. It also wants Beijing to abandon key elements of its domestic economic policy.”
- “In return, China has called for the US to drop its opposition to it being treated as a market economy in the World Trade Organization, something Beijing has long insisted it became entitled to on the 15th anniversary of its entry into the WTO in 2016.”
Get smart: We are only weeks away from the end of the public commenting on the USTR’s 301 case against China. That May 22 deadline adds urgency to find at least a temporary agreement.
READ MORE
Financial Times: China’s vice premier Washington-bound for further trade talks
Caixin: White House Says China Trade Talks to Resume in Washington Next Week
FINANCE and ECONOMICS
2. The market turns to ABS in lieu of WMPs
Financial authorities officially released the new regulations that will tighten oversight of China’s huge asset management industry late last month (See May 2 Tip Sheet).
The industry folks that we’ve talked to all agree – the new rules will curb the growth of wealth management products (WMPs) significantly.
But some market participants see a silver lining: asset backed securities (ABS).
Why is that? The new regulations exempted most ABS from being lumped into the WMP universe. So the stricter asset management rules will drive more business in the ABS direction.
Some context:
- The ABS market grew to RMB 1.5 trillion in 2017, way up from RMB 30 billion just five years ago.
- That’s less than 2% of the size of the overall WMP market, so it’s still a relatively small safety valve.
Still, financial institutions will be searching for all kinds of new ways to invest assets, and ABS will be a part of that move.
Get smart: Industry players are still in the process of developing their coping strategies to deal with the new asset management rules. It’s going to cause a big shake up.
READ MORE
21st Cent Biz: 资管新规“豁免”下的ABS变局：“非标转标”利器秒变新蓝海？
Xinhua: 去通道压力犹存 券商资管料发力ABS
CS: 资管新规厘清界限 “非非标”前景堪忧
21st Cent Biz: 类ABS狂飙：“没有3万亿也有2万亿” 中小银行“转标”突围
FINANCE and ECONOMICS
3. Data dump – FX reserves and trade
China’s FX reserve data come out on Monday (Reuters):
- “Reserves fell $17.97 billion in April to $3.125 trillion, compared with a rise of $8.34 billion in March.”
Quick take: The fall in reserves was mostly due to a strong dollar last month. Overall, regulators feel like capital flows are pretty balanced:
- “In recent weeks, authorities have announced a series of moves which suggest they are less worried about capital outflows, including allowing Chinese investors to put more money into global financial markets.”
- “At the same time, China has moved to give foreign investors more access to its equity, bond and commodity futures markets, which will help support the yuan.”
China’s trade data came out on Tuesday morning (CNBC):
- “China’s April imports jumped 21.5 percent and its exports grew 12.9 percent against the prior year-ago period.”
- “Overall, China’s April trade balance was a positive $28.78 billion.”
- “Of note, the country’s trade surplus with the U.S. expanded to $22.19 billion in April — compared with a surplus of $15.43 billion in March.”
Quick take: Chinese trade is holding up despite tensions with the US. The Chinese want to keep it that way – hence Liu He’s trip to Washington (see entry #1).
READ MORE
Reuters: China April FX reserves fall to $3.125 trillion
CNBC: China says last month’s trade surplus with the US was nearly $7 billion more than March’s surplus
POLITICS and POLICY
4. The CCP puts socialist core values into legislative work
Get excited.
Xinhua has graciously published a readout of the CCP Central Committee’s plan to integrate socialist core values into the country’s legislative work.
It’s a real page turner.
As a reminder, the values are as follows:
- For the nation: prosperity, democracy, civility, and harmony
- For society: freedom, equality, justice, and the rule of law
- For individuals: patriotism, dedication, integrity, and friendship
What does all of that mean for the legislature? (Links below)
- “Economic laws should uphold the protection of property rights and fair competition.”
- “Judicial procedure laws should let ordinary people see in every case that justice is served.”
- “[We should] establish a strict and comprehensive ecological civilization law framework.”
- “[We should] better regulate internet and promote a positive and healthy internet culture.”
Get smart: Fundamentally, socialist core values are the CCP’s alternative to Western universal values.
Get smarter: But that doesn’t have to mean they’re bad for foreigners (or foreign companies).
READ MORE
People.com: 中共中央印发《社会主义核心价值观融入法治建设立法修法规划》
People.com: 进一步彰显法律法规的社会主义核心价值观导向
Xinhua: CPC pledges to fully incorporate core socialist values in legislation
POLITICS and POLICY
5. Inspecting local enforcement of the air pollution law
Watch out. The legislature (NPC) is on the loose:
- “China’s top legislature will send four teams of lawmakers to inspect enforcement of the air pollution control law in eight provincial-level regions across the country.”
The purpose:
- “The inspection is aimed at pushing the whole Party and nation to…effectively implement major environmental policies made by the Communist Party of China (CPC) Central Committee.”
That’s not all:
- “The NPC Standing Committee will also entrust standing committees of the remaining 23 provincial-level people’s congresses to inspect the enforcement of the law within their jurisdictions.”
Get smart: Fighting pollution, air pollution in particular, is top of the agenda this year.
Get smarter: This is part of a broader push for the legislature to put increasing pressure on local governments to actually carry out laws.
READ MORE
CPC: 栗战书：以法律的武器治理污染用法治的力量保卫蓝天
Xinhua: China’s top legislature to inspect enforcement of air pollution control law
POLITICS and POLICY
6. The government re-org moves into phase two
Almost all ministries have finished phase one of the government reorganization that was announced back in March.
What was phase one you ask? Basically, moving furniture and putting out a new shingle.
Executive Vice Premier Han Zheng just chaired a meeting to kick off phase two.
The next phase is all about something called the “three determinations.”
That’s Chinese government speak for having each ministry define:
- Their new responsibilities
- Internal departmental organization
- Staffing needs
The immediate focus is to determine responsibilities of each ministry. The goal is for them to:
- Make sure that each ministry defines its responsibilities in a clear and detailed way
- Becomes more efficient by consolidating redundant responsibilities
Get smart: In China’s government, more responsibility means more power. And ambiguously defined responsibility means widely-defined power.
That’s why it’s so difficult to streamline the government, but that’s also why it’s so necessary.
The timeline: The “three determinations” should be approved and begin implementation by the end of June.
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CPC: 韩正：构建起职责明确依法行政的政府治理体系
POLITICS and POLICY
7. The Chinese public is not fond of the US government’s tough stance
In case you missed it, the US government has been taking a hard line toward China recently.
The US trade delegation outlined an intense list of demands last Friday.
On Monday, the US Embassy accused China of “Orwellian nonsense” in Chinese on Weibo. The embassy was relaying a recent White House statement in reaction to China’s demand that global airlines remove references to Taiwan, Macau, and Hong Kong as non-Chinese destinations on their websites (see NYT link).
So far, the Chinese government’s response has been relatively restrained. But public opinion in China appears to be increasingly less tempered.
Two popular ideas on the Chinese web these days:
- America’s trade demands are like the “unequal treaties” imposed on China by imperialist Western powers in the 19th century
- The Chinese government should punish US companies that don’t abide by Chinese laws just as harshly as the US treated ZTE
Don’t kill the messenger: You might not agree with those notions, but they seem to be increasingly accepted on the mainland.
Get smart: If tensions remain elevated, there is a growing risk that the Chinese public aims its nationalist fervor at US companies.
With these feelings simmering, all it would take is a catalyzing event.
READ MORE
Washington Post: U.S. and China swap hard-line lists of demands at trade talks in Beijing
The White House: Statement from the Press Secretary on China’s Political Correctness
NYT: ‘Orwellian Nonsense’? China Says That’s the Price of Doing Business