DRIVING THE DAY
1. Merkel comes to China
German Chancellor Angela Merkel arrived in China yesterday.
Merkel is no stranger to the Middle Kingdom: It was her 11th visit since becoming chancellor in 2005.
She met all the important people:
- Xi Jinping
- Premier Li Keqiang
- NPC Chairman Li Zhanshu
The two countries have common cause in trying to preserve global order in the midst of the Trump chaos machine. They both want:
- To uphold the multilateral trading regime
- To uphold the Iran nuclear deal
- The US and DPRK to meet
But there are differences as well:
- Merkel told Li that they need to talk about human rights.
- And she also demanded more market access for German firms.
- Meanwhile, the Chinese complained about growing European skepticism towards Chinese firms.
Our thought: Both sides seemed eager to stress the positives in the relationship. But there are plenty of tensions beneath the surface.
DRIVING THE DAY CONT’D
2. Xi and Li say market openings are coming
“You want market opening? We’ve got market opening!”
That’s what both Xi and Li said to Merkel.
Well, not exactly. Here’s what Xi said (Xinhua):
- “We welcome Germany to grasp opportunities arising from China’s new round of reform and opening up.”
- “The two countries should expand industrial and market cooperation, driven by innovation, and jointly explore the third-party markets.”
Here’s what Li said (AP):
- “I welcome German businessmen to come to invest in China.”
- “China’s door is open and will be open wider.”
Li Keqiang promised more market opening at a meeting with German and Chinese business leaders. He said China will:
- “Expand the business scope of foreign-funded financial institutions in China”
- “Relax foreign equity restrictions in banking, securities and insurance industries”
- “Gradually ease… restrictions on the automobile sector”
- “Significantly cut… import tariffs on foreign vehicles and some drugs”
Get smart: These are not new promises. But the government is finally getting serious about putting the promises into action.
Xinhua: Xi meets Merkel, calls for higher-level China-Germany ties
AP: China’s Li says German companies welcome amid US trade spat
Gov.cn: Premier, German chancellor meet business leaders
Bloomberg: Merkel Tells China It Risks European Backlash Over Investments
DRIVING THE DAY CONT’D
3. Did Xi scupper the Trump-Kim summit?
North Korean Leader Kim Jong-un and US President Donald Trump have scrapped their proposed summit in Singapore next month.
China’s not happy about it, according to Foreign Ministry spokesperson Lu Kang (The Paper):
- “The Chinese government’s position on the Korean peninsula issue is clear and consistent.”
- “We believe… that a meeting between DPRK and US leaders… is critical to making progress on… denuclearization.”
- “We hope that the DPRK and the US can… maintain patience… and continue… dialogue and consolation.”
Donald Trump appears to think that China is insincere. He has insinuated that Xi Jinping’s meeting with Kim in Dalian on May 7 and 8 (see May 9 Tip Sheet) may have had something to do with deteriorating relations.
But one of China’s top scholars of foreign affairs, Shi Yinhong, says Trump’s suspicions are unfounded:
- “’Subverting the summit would bring even bigger uncertainties to China,’ said Shi Yinhong, professor of international relations at Renmin University in Beijing.”
The bigger picture: It’s impossible to know what role, if any, Xi played in the cancelling of the summit. But what we do know is that Chinese officials will now be scrambling to make the most of the situation.
The Paper: 外交部回应“特朗普取消美朝会晤”：希朝美珍惜积极进展
NYT: Canceling of Trump-Kim Meeting Shakes Asia but Could Help China
FINANCE and ECONOMICS
4. Assessing bond market risk
China’s bond market risk is on the rise – that might just be a good thing.
We’ve highlighted in recent Tip Sheets that corporate bond defaults are up in 2018 – totaling 19 so far this year.
That’s not a lot, but it’s up from just 11 by this point in 2017.
Regulators are watching with an increasingly wary eye. In fact, the Shanghai Securities Journal has a telling interview with an anonymous bond market regulator (via The Paper).
The regulator’s key messages:
- There is no systemic risk.
- The default rate of the listed companies on the Shanghai Stock Exchange is about 2.2%.
- But regulatory authorities are strengthening information disclosure requirements and supervision for bond issuers and intermediaries.
- Better information disclosure is meant to provide early detection of risks to guide the bonds toward better risk pricing.
Get smart: Although nascent, increased onshore bond defaults have helped to start establishing a more reliable yield curve and risk pricing. Those defaults need to continue to be managed to keep from sparking contagion.
The Paper: 一线监管部门谈债市违约：个别的风险暴露，不存在系统性风险
FINANCE and ECONOMICS
5. Local government investment falls
Several provincial governments have been struggling to keep up investment in the first four months of 2018.
- Tianjin’s infrastructure investment contracted by a whopping 55.9% y/y.
- Ningxia saw investment fall by 35.7% y/y.
- Beijing’s spending was down by 8.6% y/y.
- Hunan saw a 0.5% y/y reduction.
Several other provinces saw a significant slowdown in investment spending, although not an outright contraction like those listed above.
So what’s going on?
- The central government scrapped trillions of RMB worth of public-private partnership projects (see April 9 Tip Sheet).
- The Hunan government also cited its efforts control government debt, as well as banks’ tightening of credit to government agencies.
One other nugget for data nerds: The stats bureau is updating its method for calculating investment spending. They haven’t released the details, but the change likely also had an effect on the numbers.
Get smart: The investment slowdown shows that there is some genuine resolve in controlling local government debt. Despite slowing growth, we still haven’t seen the supposed signs of stimulus that some analysts are expecting.
POLITICS and POLICY
6. China promises more market openings – someday
China’s Ministry of Commerce says it is working to increase market access for foreign companies:
- “The country is working on the revision of two negative lists for foreign investors, namely, a national negative list and a negative list for foreign investors in the Free Trade Zones (FTZs), Tang Wenhong, head of the department of foreign investment of Ministry of Commerce, told a press conference on May 24.”
Some context: A negative list approach to foreign investment allows companies to invest in any industry unless explicitly prohibited. That’s how the US does it, for example. But China, has always required foreign companies to get explicit approval before investing.
Get smart: China has already been using a negative list approach in the FTZs for years. But the negative list has been so long that it undercuts the purpose.
What to watch: The government should be releasing an updated, shortened negative list within the next month.
Gov.cn: China in process of revising negative lists for foreign investors
POLITICS and POLICY
7. SOEs told to innovate
The Ministry of Science and Technology (MoST), along with the SOE administrator (SASAC) have told China’s large SOEs that they need to innovate:
- “SOEs have been asked to increase spending on research and development (RandD), make greater efforts on basic research and application of major technologies.”
They will be measuring RandD spending:
- “Companies should put the RandD spending share of their sales revenue into business performance evaluations.”
Get smart: This is further proof that SOEs are not really companies, but really just extensions of the government.
Get smarter: Just like government spending on basic research, spending on RandD by SOEs may not have immediate economic returns. But it’s not necessarily a total waste of resources.
Such spending can produce positive externalities by creating technologies or products that can be commercialized by other market actors.
The big problem: This is classic China – instead of measuring the effectiveness of RandD spending, the government simply measures the total amount of spending. They track the inputs instead of the outputs, which leads to a lot of waste.
The rub: Many SOEs simply use “RandD spending” as an inhouse venture capital fund.
Gov.cn: China’s central SOEs asked to enhance innovation capabilities
POLITICS and POLICY
8. The Party does some soul searching on the ZTE case
China is working hard to strike a deal with the US to ease the Commerce Department’s recent penalty on ZTE. President Trump seems amenable, but Congress doesn’t.
Those ongoing negotiations haven’t stopped the Party from doing a post-mortem of what went wrong.
The Central Party School’s newspaper, The Study Times, has published an article entitled “Warnings of the ZTE case for Chinese tech companies.”
- Lesson No. 1: Be patient, invest in RandD, and develop your own core technologies.
- Lesson No. 2: Build a domestic supply chain.
- Lesson No. 3: The Chinese market should serve Chinese companies. The government and Chinese companies should be encouraged to use Chinese products.
- Lesson No. 4: Make sure to focus on compliance in overseas markets.
- Lesson No. 5: Put RandD resources toward areas where China is lacking technologically so the country can get stronger and the government can negotiate better terms.
- Lesson No. 6: Incentivize your employees to innovate.
Get smart: The argument has a lot of flaws, and it’s not official policy, but it gives a good sense of where the Party’s thinking is on the issue of core technology.
It’s all about making China stronger.
Study Times: 中兴事件对中国科技企业有哪些警示
POLITICS and POLICY
9. Taiwan has one less friend
Burkina Faso has switched its official recognition from Taiwan to the PRC.
Ministry of Foreign Affairs spokesman Lu Kang was happy:
- “We welcome Burkina Faso to join in China-Africa friendly cooperation as soon as possible on the basis of the one-China principle.”
Some context: Burkina Faso is the second country to switch recognition in less than a month. The Dominican Republic did the same earlier this month. That brings the number of countries that recognize Taiwan down to 18.
Taiwan’s foreign minister Joseph Wu offered to resign (Reuters):
- “I along with our country’s people feel sad, angry and regretful.”
Taiwanese president Tsai Ing-wen was defiant:
- “I want to emphasise again that China’s pressure will only lead to Taiwan’s ties with its partners in the international community getting closer.”
- “We will not cower at all.”
The rub for Beijing: The reunification issue is not about who recognizes who. It’s about whether or not Taiwanese citizens want to rejoin the Mainland.