DRIVING THE DAY
1. Xi in the middle again
Xi Jinping and Kim Jong-un were chillin’ in Dalian on Monday and Tuesday.
The big news:
- Kim said he would be willing to denuclearize through “staged, synchronous measures” with the US.
That’s not in line with what Trump wants (NYT):
- “[Kim’s proposal represents] a far more drawn-out process… than the demands of the Trump administration, which has talked about dismantling the North’s arsenal in six months to a year.”
While Trump and Kim may be on different pages, Xi and Kim are doing all they can to look tight (Xinhua):
- “After the first meeting between me and Comrade Chairman [Kim], both China-DPRK relations and the Korean Peninsula situation have made positive progress.”
- “‘I feel happy about it,’ Xi said.”
Xi said he wants even better relations:
- “The China-DPRK traditional friendship has been a treasure of both countries.”
- “High-level exchanges between the two parties play an irreplaceably significant role in guiding bilateral relations”
The optics: The aggressive use of “comrade” signals solidarity between the two leaders.
And solidarity with Xi should give Kim more leverage when (if) he meets with US President Trump.
Our thought: We know what Xi wants – a reliable anti-American little brother. It’s much less certain what Kim wants.
DRIVING THE DAY, CONT’D
2. Xi keeps trump in the loop
Xi knows Donald Trump likes attention.
So as soon as Kim was on his way back to Pyongyang, Xi picked up the phone to call The Donald.
The two men spoke about two things:
- North Korea
Xi basically said the same thing about both topics
- Let’s talk this out.
The rub: Trump’s not exactly patient.
Get smart: A key deadline is looming for the US to potentially enact tariffs. And Xi won’t be in the room when (if) Trump and Kim meet.
There is only so much Xi can do over the phone.
FINANCE and ECONOMICS
3. Financial conglomerates in the crosshairs
China’s central bank is on a regulatory tear lately.
The latest efforts are all about improving risk management of non-bank financial institutions, especially ones that were previously unregulated.
The Wall Street Journal details new rules that the PBoC is currently developing:
- “Officials at the central bank are preparing to roll out rules to bring risk-management and capital-reserves requirements for these companies in line with those for commercial lenders, according to people familiar with the situation.”
- “The draft rules will require financial conglomerates to obtain a new, broad license from the central bank to engage in different financial services, said the people.”
- “They will likely impose firewalls between a conglomerate’s units to discourage trading between related parties.”
Who’s in the crosshairs? The internet giants:
- “The rules would apply to firms that have waded into two or more financial sectors… meaning they would apply to the likes of [Alibaba’s] Ant Financial Services Group and the financial arms of Tencent Holdings Ltd. and JD.com.”
But that’s not all:
- Conglomerates such as Ping An Insurance Group Co., Citic Group and China Everbright Group would also be subject to the new rules.
The bottom line: The financial regulatory storm continues.
FINANCE and ECONOMICS
4. Local bonds in focus
The Ministry of Finance (MoF) came out on Tuesday with a few new policies for local bond issuance in 2018.
The idea is to encourage the use of the municipal bond market for provinces to raise finances on the books instead of through shady, illegal means. And to do so by making the instruments more market-based (Shanghai Securities):
- “The opinions point out that [the government] should enhance the marketization pricing for local government bond issuance, improve credit rating and information disclosure mechanisms, and promote the diversification of investment entities.”
- “In early April, the head of the Ministry of Finance said that a yield curve for China’s local debt will be compiled in 2018 to provide a benchmark for local debt issuance and transaction pricing.”
But MoF doesn’t want a free-for-all, either:
- “To this end, the opinion limits the scale of long-term bonds [that provinces can issue].”
China Securities: 财政部：加强地方政府债券发行计划管理
FINANCE and ECONOMICS
5. The National Team’s favorite stocks in Q1
Jiemian has an interesting piece this week. It updates readers on the positions that the “National Team” has in the A-share market as of the end of Q1 2018.
Some context: During the 2015 stock market meltdown, several state-owned institutions stepped in to purchase stocks and stabilize the A-share market – they were dubbed the “National Team.”
The top line stat:
- “[National team investments have] a total market value of about RMB 4.52 trillion.”
That’s up from RMB 4.3 trillion at the end of 2017 (See April 27 Tip Sheet).
- “[They] account… for 10.21% of the market value of A shares in circulation.”
That’s up from 9.84% at the end of 2017.
The National Team’s favorite sector is still finance, which accounts for 82.8% of the team’s portfolio. 76% of the portfolio is invested in banks.
Go deeper: Want to know exactly where The National Team is investing? Click on the piece below.
FINANCE and ECONOMICS
6. Nomura follows UBS into Chinese securities
China’s opening of its financial sector has seen a marked acceleration since the beginning of this year.
That opening is in part due to pressure from the Trump administration. But it’s also because regulators think the time is right to move forward.
Most foreign banks are taking a cautious approach to the opening. But some are rushing in.
We pointed out before that UBS applied to take a controlling stake of its securities JV just days after ownership caps were lifted in late April (see May 4 Tip Sheet).
A second bank has now bounded through that door:
- “Nomura is the second foreign financial company to apply for a controlling stake in a securities business in China, following the country’s revised rules allowing foreigners to own majority stakes in domestic securities firms.”
- “The rule revision, effective in late April, raised the ceiling on foreign ownership of Chinese securities companies from 49% to 51%.”
Get smart: We’re seeing a legitimate acceleration of market opening. BUT Chinese regulators still retain a lot of leeway to deny foreign ownership on a case-by-case basis.
POLITICS and POLICY
7. Li Keqiang is in Japan
That’s a big deal.
Some context: It’s the first ever visit by Li, and it’s the first visit by a Chinese premier in eight years.
Li wants to reset what has been a rocky relationship (Asahi Shimbun):
- “Through my visit, I want to promote a sound and stable development of our bilateral relationship for the long term.”
One step of goodwill:
- “China planned to announce during his visit that Japanese financial institutions and other entities would be granted the status of renminbi qualified foreign institutional investor (RQFII), enabling them to directly invest in Chinese securities.”
And another (SCMP):
- “Li said also that a bilateral currency swap agreement between Beijing and Tokyo would be signed during his visit.”
Get smart: Those are concrete steps to turn warm rhetoric into better ties.
What to watch: Li meets today with Japanese Prime Minister Shinzo Abe and South Korean President Moon Jae-in. Look for indications that the countries want to accelerate movement towards a long-mooted free-trade area.
What to watch 2: Li would love to secure Japanese endorsement of and/or involvement in the AIIB and Belt and Road.
Asahi Shimbun: Chinese premier seeks to reset bilateral ties in 1st visit to Japan
SCMP: China set to strengthen economic ties with Japan, South Korea amid trade row with United States