DRIVING THE DAY
1. Liu and Trump strike a deal
Trade war averted. That was the message from both the Chinese and American negotiators in Washington over the weekend (Caixin):
- “China and the U.S. have agreed to avoid a trade war and refrain from imposing protective tariffs on each other, Chinese Vice Premier Liu He told the media on Saturday in Washington.”
- “Liu made the remarks shortly before the Chinese trade talks delegation he led jointly issued a statement with the U.S. on “substantially” reducing the U.S. trade deficit.”
Last week’s reporting that China had offered to reduce the trade surplus by USD 200 billion was off the mark. In the end, China agreed only to “substantially” reduce the surplus.
Our take 1: That’s pretty woolly language. It allowed both sides to reach an agreement. But it’s likely that the two sides have different ideas of what “substantially” means.
- “China and the U.S. will strengthen cooperation in energy, agriculture, healthcare, technology, finance and other areas.”
Our take 2: This is about as positive an outcome we could have hoped for. It temporarily ratchets down the most immediate tensions, while giving space for negotiation over the longer-term issues.
What to watch:
- “The U.S. will send a team to China to work out more details.”
Caixin: U.S., China Strike Trade Deal, Ending Threat of Protective Tariffs
FINANCE and ECONOMICS
2. China’s broader drive to boost imports
The pressure from the US may be accelerating the process, but China is serious about wanting to increase its imports.
The 21st Century Business Herald lays out the rationale.
The current trading regime is outdated:
- “China’s current import policy, including tariffs, was basically set up more than ten years ago when China entered the WTO. At that time, China’s purchasing power was low, and economic growth was the most important work target.”
- “Therefore, we paid attention to production rather than consumption.”
Goosing certain types of imports also aligns with China’s dominant economic policy framework – Supply-Side Structural Reform. Basically, domestic firms can’t supply the right type of consumer services:
- “There is still a gap between the quality of the local enterprises and the needs of the people in the service industry.”
What’s more, import restrictions have led to a cottage industry of people travelling abroad to buy goods and avoid import tariffs. The thinking is that if import tariffs are lowered, then Chinese citizens will spend less traveling abroad to buy goods.
Get smart: This will take time, but policymakers are serious about updating the trading regime.
Get smarter: There is also an element of propaganda here. By claiming it wants to boost imports anyway, China can say it isn’t simply giving in to US pressure.
21st Cent Biz: 扩大进口是供给侧结构性改革的重要内容
FINANCE and ECONOMICS
3. Monetary policy debate
There is an ongoing debate among the China analyst community as to whether or not monetary policy is set to loosen soon.
The same debate is playing out in China’s domestic banking industry.
Some banks are looking for loosening (21st Cent Biz):
- “The focus of monetary policy has begun to shift to structural adjustment and promoting economic development, the future monetary policy is toward the loosening space, liquidity is more abundant than the first quarter.”
But others are not convinced:
- “But there are also many institutions that do not agree with this, because internally China still needs to fight against major financial risks; on the external side, the pace of the Fed’s hawkish hikes has virtually restricted the ‘space’ of China’s monetary policy loosening.”
Our take: We agree with the latter view – policymakers will hold the line and continue focusing on financial de-risking as growth slows.
Get smart: When the policy outlook is uncertain, banks don’t know what to do – and neither do local officials.
Get smarter: It’s likely that the confusion reflects disagreement among the top political leadership.
Unsolicited advice: Policymakers need to send a clearer signal if they want policy to be properly implemented.
21st Cent Biz: 从去杠杆到稳杠杆：货币政策松紧猜想
FINANCE and ECONOMICS
4. CBIRC vice chairman on financial opening
Financial regulators are more committed to opening the finance sector right now than they have been in years.
CBIRC Vice Chairman Chen Wenhui has driven home the message again – explaining the policy rationale behind recent opening moves over the weekend.
According to Chen, financial opening:
- Better utilizes financial resources and expertise to support the real economy
- Gives foreign financial institutions better terms so that Chinese institutions can get better terms in overseas market
To accelerate opening, the CBIRC is accepting applications from foreign institutions that want to increase ownership of their domestic ventures – in some cases even before the final regulations have been fully written.
CBIRC has generously offered to walk those applicants through the process hand-in-hand.
But Chen also had a warning for countries that are tightening their stance toward Chinese investment:
- “Our country’s opening up must adhere to the principle of equality and mutual benefit.”
- “For countries and regions that are afraid of opening and implement protectionism, their long-term competitiveness will definitely suffer as they only look at short-term gains.”
Get smart: Not all foreign applicants are created equal. The approval process for financial institutions to increase ownership in China is still partly political.
China Banking News: Opening of Chinese Financial Sector Requires Reciprocity: CBIRC
POLITICS and POLICY
5. Xi wants a Beautiful China
On Friday and Saturday, Xi Jinping and other top officials held a meeting to discuss environmental protection.
Xi told assembled officials that protecting the environment is of utmost importance:
- “The environment is a major political issue related to the Party’s mission and goals.”
What Xi means: If China doesn’t clean up its environment, it could undermine the Party’s legitimacy, and scupper Xi’s larger goal of making China great again.
Some context: Forty years of growth-at-all-costs development has left China’s environment utterly degraded.
Xi says that China must now pursue “green development”:
- “[We] must take creating an ecological civilization into account when planning for economic and social development.”
Xi promised tougher enforcement of environmental regulations:
- “[We will] employ the most severe system and strictest rule of law in order to protect the… environment.”
Xi is serious about enforcement. That’s why the head of the Party’s discipline commission, Zhao Leji, was at the meeting.
Get smart: We have already seen increased enforcement of environmental regulations in recent years. That trend will only intensify going forward.
POLITICS and POLICY
6. The problem with EVs
As Tip Sheet readers know, China is going all in on promoting electric vehicles (see February 14 Tip Sheet).
But some in China are questioning the benefits (FT):
- “Tsinghua University scientists found that the production of new-energy vehicles — a category in China that includes electric, plug-in petrol-electric hybrid and fuel-cell powered vehicles — creates 50 per cent more greenhouse gas emissions than producing internal combustion engine cars.”
- “Meanwhile… Chinese oil company CNPC… researchers found that, while gasoline cars emitted more carbon dioxide than battery-powered cars, the latter emitted more than twice as many PM2.5 particles, the toxic smog that plagues Chinese cities.”
But, China’s EV push is about more than the environment:
- “EVs will help China limit the growth of oil imports, helping Beijing overcome what many reckon to be a strategic vulnerability.”
And this is even more important:
- “The switch to EVs has been widely seen as beneficial to China’s auto industry, which is weaker than its international competitors at making high-quality internal-combustion engines, but is more competitive in battery production.”
Get smart: China’s not abandoning its push for EVs any time soon.
POLITICS and POLICY
7. The Party takes another stab at motivating cadres
Top leaders see that the Party as plagued by inertia.
That’s why the Party’s Central Committee published yet another policy document on the matter recently.
Once more, with energy! The document is called:
- Opinions on Further Incentivizing Cadres to Take on New Responsibilities and Do Things to Make a New Difference in the New Era
What it proposes to do:
- Improve the performance assessment system to judge how well cadres implement policies issued by the Central Committee
- But also try to prevent officials from setting unrealistic targets
- Make promotions and demotions more accurately tied to performance
- Allow officials to make mistakes, as long as they are trying to push forward reforms and test new policies
Get smart: The fundamental purpose is to get lower-level officials to implement policies without tying their hands behind their backs. But it also tries to keep them from blindly over-implementing policy without regard for unintended consequences – it’s a tough needle to thread.
Get smarter: Operationally, it’s very difficult to design actionable, effective rules here. And the Opinions aren’t clear on the details.