DRIVING THE DAY
1. The US-China trade negotiation roller-coaster
The latest reporting indicates that Vice Premier Liu He, who has been in Washington since Tuesday, has offered a reduction in China’s trade surplus with the us of USD 200 billion (Bloomberg):
- “The offer was made during talks in Washington this week as Vice Premier Liu He visited to try to resolve a trade dispute.”
- “Liu met with Trump Thursday afternoon at the White House.”
But for the record, China is denying such an offer was made:
- “Two posts on state social media disputed the report, and a foreign ministry official said no such offer had been made to his knowledge.”
Some context: The USD 200 billion reduction was one of the items on a list of demands that the US negotiating team brought to China a couple of weeks ago.
Our take: Until we see some details, it’s hard to know exactly how China would achieve such a dramatic reduction in the trade surplus – or over what timeframe.
But at the very least, this offer gives us optimism that a short-term deal can be reached.
Get smart: The devil is in the details, and Chinese negotiators are experts at making the big announcement but slow-walking the detailed implementation.
Bloomberg: China Offered Trump $200 Billion Cut in U.S. Trade Deficit, Official Says
FINANCE and ECONOMICS
2. Inbound and outbound investment data
China’s authorities will be happy with the latest inward (FDI) and outward (ODI) investment numbers.
Through the first four months of the year:
- FDI into China has clocked in at USD 43.6 billion – growing by 2% from the same period in 2017.
- ODI from China has meanwhile clocked in at USD 35.6 billion – growing by 34.9% from the same period in 2017.
Some quick math: That means China took in USD 8 billion more than it sent out.
What’s more: The ODI numbers show that regulators have gotten a better handle on where exactly China’s outbound flows are being spent (China Daily):
- “The structure of outbound investment continued to improve, with investment mainly going to sectors of business service, mining, manufacturing, software and information technology services, among others.”
- “No new projects were reported in sectors such as property development, sports, and entertainment.”
Get smart: Policymakers have made clear that they want “balanced capital flows.” That’s because China needs inbound investment so that it can finance its outbound spending, especially if Xi Jinping’s Belt and Road Initiative is to become a reality.
FINANCE and ECONOMICS
3. Bond defaults on the rise
Bond defaults in China are on the rise. Overall, though, the number is still very small in comparison to other countries.
The 21st Century Business Herald has an interesting look at the weaknesses in China’s capital markets that keep defaults relatively low, and what might be improved going forward.
- “The current [method to deal with] bond defaults is mainly the intervention of the local government.”
- “[But] the foreign approach can not necessarily be copied.”
- “In the end, it is still the problem of the depth and breadth of the development of the capital market.”
The short-term solution:
- “At present, the process of dealing with a breach of contract can be said to have formed a preliminary prototype, including the convening of a creditors’ meeting after default… but it is not specific, and there is further space for further refinement.”
Get smart: The biggest challenge to allowing defaults to move forward in China is the lack of expertise among financial institutions in working through such events. It’s an involved process that takes a lot of knowledge and man power.
China has a long way to go to build up this expertise.
21st Cent Biz: 债券违约善后处理：政府主导为主市场化机制待建
POLITICS and POLICY
4. MEE puts the hammer down on steel companies
As part of the MASSIVE government re-org that was announced in March, China’s environmental regulator got a big upgrade.
They are using their new powers to go after China’s heavy-polluting steelmakers (Reuters):
- “Roughly half of China’s steelmaking capacity would have to comply with tough new emissions targets by 2020, according to a draft plan… reviewed by Reuters.”
- “The plan would require 480 million tonnes of annual capacity… to meet ultra-low emissions standards by 2020, the document issued by the Ministry of Ecology and Environment (MEE) said.”
- “An official at the MEE confirmed the authenticity of the document, which said the emissions target would rise to 900 million tonnes by 2025.”
But…two of China’s biggest steel producing cities will get some extra time:
- “The Hebei cities of Tangshan and Handan, where hundreds of steel plants are located, may apply for an extension until 2022, the document said.”
Get smart: In the old days, we would have said that these plans would never come to fruition. But in Xi’s China, policy implementation is much improved. And given the priority placed on cleaning up air pollution, we wouldn’t bet against this initiative.
Reuters: China draft plan sets tough 2020 emissions targets for steel mills
POLITICS and POLICY
5. State Council makes it easier to do business
Li Keqiang’s efforts to cut red tape took another step forward on Thursday. The State Council General Office issued a new policy to simplify setting up a business.
What the new policy does:
- “The… length of time required to start a business in municipalities, sub-provincial cities and provincial capitals will be lessened from 20 workdays on average to 8.5 by the end of the year.”
- “All regions [should] reach… the goal across the board in the first half of 2019.”
- “Government approval of business names before registration will no longer be needed.”
- “The approving procedure for official seals will be replaced by the record-filing procedure for official seals.”
- “The amount of time required for invoice application and social insurance registration will also be decreased, with a two-day invoice application procedure for newly established enterprises.”
Get smart: Reducing red tape does not show up directly in economic statistics. But it really does improve economic efficiency.
Get smarter: Tip Sheet readers knew this was coming (see May 3 Tip Sheet).