DRIVING THE DAY
1. ZTE gets a reprieve
China and the US have reached a temporary détente on trade and economic issues.
The latest development is a climb down on the US Commerce Department’s penalty against ZTE (MarketWatch):
- “The U.S. and China have agreed on the broad outline of a deal to settle the controversy over Chinese telecom giant ZTE Corp., according to people with knowledge of the matter in both countries, as the two sides work toward an agreement to ease trade tensions.”
But the US isn’t coming away empty handed, requiring a major reshuffling of ZTE’s senior leadership in order to relax the penalty:
- “The details are still being hammered out. If completed, the Trump administration would remove the ban on U.S. companies selling components and software to ZTE.”
- “Instead, ZTE would be forced to make big changes in management, board seats and possibly pay significant fines.”
Get smart: Unlike the fairly nebulous trade deal, this agreement is a genuine compromise. It’s really the best outcome for both sides.
Get smarter: There are still lots of people in the US defense and intelligence communities that are concerned about ZTE. The company will need to tread lightly now that it has crossed US regulators twice.
Market Watch: U.S., China near deal that would ease off ZTE ban
FINANCE and ECONOMICS
2. China to publish a five-year plan for the financial system
It’s two years overdue. But it’s coming. The 13th Five Year Plan (FYP) for a Modern Financial System has circulated within China’s policy system and should be made public soon.
Some context: This is the key policy document overseeing the financial space through 2020.
Why the delay? For this kind of medium-term plan to be effective, officials needed to wait for the dust of the recent regulatory reshuffle to settle.
A sneak peak of the FYP:
- The main thrust is to reiterate the de-risking campaign started last year.
- The plan officially confirms the Financial Stability and Development Committee’s (FSDC) role in overseeing financial regulators and local governments.
- The FSDC will also oversee the purchase of financial licenses.
What to watch: This is the first time the FSDC will officially be given specific oversight responsibilities. It could be a sign that the body will eventually become a financial super-regulator.
There are two other key goals in the plan, to be accomplished by 2020:
- Development of direct finance: The ratio of bonds outstanding to GDP should reach 100%.
- RMB internalization: one third of China’s cross-border payment should be denominated in RMB.
Get smart: Regulators are not backing down on financial de-risking.
FINANCE and ECONOMICS
3. Increased scrutiny over Chinese bonds
Chinese regulators are getting increasingly concerned about the recent string of defaults in the corporate bond market.
After tightening oversight of the onshore market, regulators are now tightening their grip on offshore issuance (Caixin):
- “The National Development and Reform Commission (NDRC)… recently hauled in eight companies and intermediaries for failing to register offshore sales by their overseas subsidiaries and branches.”
- “The commission warned it will take a harsher stance against companies that continue to fail to register their offshore bond issuances.”
- “Depending on the severity of the noncompliance, issuers may find themselves added to an industry blacklist and have the offense recorded in the national credit information system.”
And it’s not just the NDRC. The securities regulator is also getting involved:
- “Meanwhile, the China Securities Regulatory Commission (CSRC) has reminded departments and exchanges that deal with bond sales to pay close attention to risk, making sure they conduct inspections, issue early warnings, and monitor and evaluate potential risks.”
Get smart: China needs more defaults in the bond market if regulators ever want to break the pervasive moral hazard.
Get smarter: But that doesn’t mean they should do so blindly – managed, well-regulated defaults should help to improve risk pricing without causing widespread contagion.
Caixin: Regulators Step Up Supervision as Bond Default Risks Rise
FINANCE and ECONOMICS
4. Hu Chunhua takes charge of poverty alleviation
The State Council Leading Group on Poverty Alleviation and Development has undergone a reshuffle.
Vice premier Hu Chunhua has taken over as head of the group.
Get smart: This comes as no surprise, as Hu is the vice premier in charge of agriculture and rural affairs (see March 26 Tip Sheet).
Hu will depend a lot on Liu Yongfu, who retained his post as head of the leading group’s office. Liu has headed the office for the past five years.
The big goal: Xi has promised to eradicate poverty by 2020. That means that Hu and Liu will have to make sure that more than 10 million people are taken out of poverty over the next three years.
SOEs are on board:
- “According to Hao Peng, an official with SASAC, all central SOEs have established arms specifically devoted to poverty reduction.”
- “A poverty relief fund backed by the SASAC and central SOEs has attracted 15.4 billion yuan in capital. As of April, 9.2 billion yuan had been invested in 45 projects in poor areas.”
Get smart, again: Poverty alleviation is one of Xi Jinping’s key policy goals. So, expect actors across the system to try and demonstrate their contributions.
POLITICS and POLICY
5. Moving towards an Infinite Child Policy
China replaced its infamous One Child Policy with a Two Child Policy three years ago.
Now they might be on the verge of scrapping family planning altogether (Bloomberg):
- “The State Council… has commissioned research on the repercussions of ending the country’s roughly four-decade-old policy and intends to enact the change nationwide, said the people, who asked not named while discussing government deliberations.
- “The leadership wants to reduce the pace of ageing in China’s population and remove a source of international criticism, one of the people said.”
- “Proposals under discussion would replace the population-control policy with one called ‘independent fertility,’ allowing people to decide how many children to have, the person said.”
- “The decision could be made as soon as the fourth quarter, the second person said, adding that the announcement might also be pushed into 2019.”
Get smart: In the medium term, more births will help create more workers. But for the first 15-20 years, more births will actually increase the dependency ratio, further exacerbating China’s demographic challenges.
Get smarter: Boosting birth rates is an incredibly difficult task to achieve through policy. Many other countries have tried and failed.
Bloomberg: China Considers Ending Birth Limits as Soon as This Year