DRIVING THE DAY
1. Rubber meets road in US-China trade war
US-China trade and technology tensions are having a visible effect on companies.
As we’ve written before, the biggest casualty of the tensions, so far, is ZTE.
Things got real on Wednesday (Quartz):
- “[ZTE] filed a notice to the Hong Kong Stock Exchange stating “major operating activities of the Company have ceased.”
- “The company’s page on Tmall, one of China’s major e-commerce sites, doesn’t link to any product listings.”
- “Instead, it states that the page is ‘undergoing maintenance,’ and shows a photo of rowers alongside text that roughly translates to ‘Youth is a time for fighting.’”
That’s pretty dire.
Meanwhile, rather than outright restricting US imports, China customs is fighting dirty (Reuters):
- “The three people said Ford cars and those of its premium Lincoln brand were facing unusual delays at customs, with officials asking for extra technical checks.”
- “Two of the people said U.S.-made models of some German carmakers, mainly SUVs, being brought into China, were also affected.”
Our take: We’ve said it before. The initial effects of these tensions will be on companies – demand, operations, and earnings will be disrupted.
But it’s not a global macro story just yet.
What to watch: Can the two sides temporarily walk back from the brink when Vice Premier Liu He goes to Washington next week?
QZ: The US-China tech war has forced a Chinese smartphone maker to halt production
NYT: Chinese Tech Giant May Be First Victim of a New U.S. Cold War
Reuters: Red light: Ford facing hold-ups at China ports amid trade friction – sources
FINANCE and ECONOMICS
2. WMP crackdown is real
Tough new rules governing China’s wealth management product (WMP) market were released at long last on April 27 (see May 2 Tip Sheet).
They are already having a significant impact (China Banking News):
- “Chinese banks are already suspending the sale of wealth management products (WMP’s) with guaranteed principals, following the launch of new asset management regulations that put an end to the ‘implicit guarantees’ considered a source of acute risk in the financial system.”
This is just the beginning:
- “The official launch of the new asset management rules is expected to cause a major shake-up of China’s financial sector, by removing the implicit guarantees undergirding financial product[s] such as WMP’s that remain…a vital source of retail funds for China’s small and medium-sized banks.”
We wrote on Tuesday about how some firms are switching to Asset Backed Securities to fill the void (see May 8 Tip Sheet). Everyone is searching for an alternative:
- “’Our bank is making active adjustments to its sale of WMP’s, and principal-guaranteed WMP’s are no longer being sold,’ said bank staff. ‘At present large-denomination CD’s and structure[d] deposits are selling very well.’”
Get smart: Banks are going to try to find alternatives to WMPs. But the regulators will be watching.
China Banking News: Banks Remove Guaranteed Principal WMP’s Due to New Asset Management Rules
FINANCE and ECONOMICS
3. Inflation where PBoC wants it – for now
China’s stats bureau released inflation data for April this morning.
- CPI rose 1.8% y/y – down from 2.1% in March.
- PPI rose 3.4% y/y – up from 3.1% in March.
Quick take 1: The easing in CPI was largely thanks to a huge drop in pork prices. Food prices more broadly actually increased a bit. Overall, consumer price growth is in a comfortable spot for the PBoC.
Quick take 2: On the producer price side, this was the first acceleration of growth in seven months. That will be welcomed by the PBoC, who was getting worried about the steady march toward deflation.
The bottom line: This is what the PBoC wanted to see. But rising CPI inflation is still a worry for 2018 – especially if a trade war with the US starts to drive up food prices.
FINANCE and ECONOMICS
4. Soybean imports falling
China imports as lot of soybeans from the US. So reducing those imports was considered one of China’s most powerful weapons in a trade war with the US.
But that weapon seems to be losing its power.
Per Chinese customs, soybean imports are down in Q1:
- Soybean import volumes dropped by 3.7%.
- Prices declined by 8%.
- Overall, the value of soybean imports dropped by 11.5%.
Some context: One third of China’s soybean imports came from the US in 2017.
What’s more: The Chinese government estimates that soybean imports will fall in both 2018 and 2019, which would be the first time in 15 years.
What’s happening? One reason for declining imports is that China is stepping up subsidies to expand its own soybean industry.
Get smart: China is reducing its dependency on US soybeans in case it needs to impose proposed 25% tariffs on US soybeans.
Get smarter: The Chinese government is preparing for a trade war. So should you!
POLITICS and POLICY
5. Japan ties make more progress
Premier Li Keqiang is in Japan. He’s the first Chinese premier to visit the country in eight years.
The trip is helping to warm once-frigid relations. The two countries already promised a currency swap. Li also promised that China will allow more Japanese portfolio investment into China (see yesterday’s Tip Sheet).
On Wednesday, there were more positive signals (SCMP):
- “[A] hotline for senior military officials to communicate in the case of incidents involving their navies or air forces will be launched within 30 days under an agreement signed after Chinese Premier Li Keqiang met Japanese Prime Minister Shinzo Abe in Tokyo.”
Li was hoping to get an endorsement of the Belt and Road. In the end, he only got a half measure:
- “The two countries also agreed to… launch a public-private sector council to consider cooperation projects related to Beijing’s belt and road trade and infrastructure strategy.”
Get smart: A half measure is better than no measure. Given an erratic United States, Japan is looking for more friendly relations with its neighboring superpower.
What to watch: Abe said he will go to China later this year. That would be his first state visit to China since coming to power in 2012.
POLITICS and POLICY
6. MEE takes action
The Ministry of Ecology and Environment (MEE) is on the prowl.
Some context: The MEE is the beefed up environmental regulator created at this year’s “Two Sessions.”
The ministry is hunting for polluters in central China (gov.cn):
- “From May 9 to the end of June, the MEE will send 150 teams to regions in the Yangtze River economic belt to inspect the illegal discharge of solid waste.”
Here’s what happens if they find you:
- “Companies and public institutions that discharge listed pollutants directly into the environment will pay taxes.”
Get smart: Companies used to ignore environmental regulators. But that’s increasingly not the case as regulators become more empowered.
Our thought: Should you really announce that you are going to do inspections? Doesn’t this just give polluters time to clean up/prepare?
Gov.cn: China starts targeted crackdown on solid waste pollution
POLITICS and POLICY
7. Putting SOEs in their place
Earlier this year, the Party Central Committee told the State Council to report to the legislature (NPC) on the management of state-owned assets (see January 15 Tip Sheet).
They weren’t kidding around.
The NPC and Ministry of Finance (MoF) have been meeting for the past two days to put the order into practice.
Why all the fuss?
- Regulators don’t actually know how many state assets they own.
- Nor do they know the quality of those assets.
What to watch: The State Council will report on state-owned financial institutions (FIs) in October.
What it means: It’s no coincidence they’re looking at the books of state-owned FIs. Don’t forget that 2018 is the year of financial de-risking.
This is just the beginning. By 2020, local governments at and above the county level will be required to report on their state assets.
Why it matters: The legislature will be empowered to hold the government accountable for bad stewardship of state assets. This could be another tool to get the debt problem at SOEs under control.