DRIVING THE DAY
1. Wang Qishan calls out Trump in Russia
Wang Qishan was in Russia over the weekend, where he attended the St. Petersburg International Economic Forum.
Wang was accorded supreme respect at the gathering, sharing the stage with Russian President Vladimir Putin, Japanese Prime Minister Shinzo Abe, and French President Emmanuel Macron.
Wang’s speech, entitled “Enhance Trust, Work Together Hand in Hand, and Develop Together,” reprised the pro-trade talking points that have become de rigeur for Chinese officials in recent years.
It also included some not-so-subtle digs at the US (Xinhua):
- “No country should blame its own problems on others…Wang said.”
- “He also called for global unity in resisting trade protectionism and safeguarding the stable international economic order, particularly the authority of the multilateral trading regime.”
- “Economic and trade disputes should be handled properly through communication and consultation, and different parties need to take care of each others’ major concerns, Wang added.”
Get smart: As tensions with the US rise, Chinese officials are seeking to rally other countries to oppose Trump.
Get smarter: Most European countries share similar concerns to the US. But many of China’s Asian neighbors – including US allies Japan and Korea – are more tolerant of China’s industrial policies.
FINANCE and ECONOMICS
2. The PBoC bumps up rates again
The People’s Bank of China (PBoC) has raised the interest rate on one of its key liquidity tools – the 28-day reverse repo.
Some context: Reverse repos are short-term lending contracts that the PBoC uses to inject money into the banking system. The primary maturities that the central bank uses are 7-day, 14-day, and 28-day contracts.
The rate “hike” wasn’t exactly massive – it was only 5 basis points, so rates went up to 2.85% from 2.8% previously.
Given the growing debate around where monetary policy is headed (see May 21 Tip Sheet), it’s tempting to read these small adjustments as signals of what’s to come.
But the PBoC was quick to tamp down speculation, indicating that this was actually a backward-looking change.
- After the Federal Reserve hiked interest rates in March, the PBoC adjusted all of its reverse repo rates.
- It’s just that the PBoC had not used 28-day contracts since March 15, which was before the Federal Reserve decision.
The bottom line: This isn’t a new adjustment. It’s something that was done months ago, but only now has become apparent.
What to watch: The Fed is likely to hike rates again in June. Will the PBoC “follow the Fed” once again?
FINANCE and ECONOMICS
3. Bank liquidity rules get an update
The banking and insurance regulator (CBIRC) has released the latest round of liquidity-strengthening measures for banks.
The main goal of the regulation remains unchanged from the draft rules – to improve the Net Stable Funding Ratio (NSFR) of China’s commercial banks (see December 7 Tip Sheet).
Some context, from the Bank for International Settlements:
- “The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding.”
The main change in the latest draft was to draw a clear line as to which banks would face the most stringent requirements for the NSFR. Banks above RMB 200 billion in assets must fully comply – that is roughly the top 75 banks in China.
The new regs also tweaked some rules about the specific indicators that should be used for liquidity monitoring and risk management.
What to watch: The liquidity management rules will be phased in. They officially start on July 1. Banks should be 80% compliant by the end of 2018 and 100% compliant by mid-2019.
Our take: Messing with bank liquidity is a delicate operation. If things go badly, regulators could cause a financial crisis. Not good. So a slow, phased approach to implementation makes sense.
FINANCE and ECONOMICS
4. The Chinese view on the US view of China
The US view on China has fundamentally changed.
That’s according to Li Ruogu, a former chairman of the Export and Import Bank of China (see link).
What’s the change Li senses? A broad range of individuals in the US – from both major political parties and from various socioeconomic strata – have an increasingly negative view on China. That includes the US business community, which has traditionally been in the “panda hugger” camp.
The change has occurred along several dimensions:
- Ideological: The days when the US could overlook ideological differences and focus on the economic relationship are gone.
- Economic: The US has had it with what it sees as unfair competition between a market economy and a statist economy.
- Military: The US thinks China is trying to rival its global military presence.
Li thinks that the worst-case scenario for China involves:
- The US effectively pulling out from WTO and instead building regional partnerships, like the Trans-Pacific Partnership.
Get smart: Li is right. American attitudes toward China are changing for the worse.
Get smarter: It’s easy to think that it’s just the Trump administration. But these feelings are widespread in Washington. And it’s not clear that China’s political leadership have fully grasped that reality.
POLITICS and POLICY
5. Li Keqiang tells the government to leave markets alone
On Friday, Premier Li Keqiang chaired a State Council plenary session.
Li’s message was straightforward: The government needs to stop intervening in the economy.
Li knows this goes against the inclination of most regulators (gov.cn):
- “This is a reform that [requires turning] the knife blade on oneself.”
Li’s list of proposed reforms was familiar:
- “He said the reforms of streamlining administration, delegating power and improving service should be continued to stimulate the market, in addition to easing market access and cutting taxes and administrative fees.”
- “The market should play a decisive role in resource allocation while the government should play a better role, he said.”
- “Efforts should be made to strengthen market supervision to create an environment for fair competition, while cutting repetitive supervision and red tape and reducing the discretionary powers of the government, he noted.”
Get smart: This is a difficult battle. Li’s already been pushing this agenda for over five years. He’s made progress, but it’s been slow going.
Get smarter: While the government is shrinking, the Party is growing.
Gov.cn: Premier Li urges economic upgrade for high-quality development
POLITICS and POLICY
6. The legislature inspects implementation of the stats law
China’s top lawmakers are fanning out across the country to make sure that laws are being enforced:
- “China’s top legislature inspected the implementation of the Statistics Law in northeast China’s Heilongjiang Province and southwest China’s Guizhou Province from Monday to Saturday.”
- “The tour was part of a round of inspections on Statistics Law implementation in 13 provincial-level regions, which will run until the end of May.”
- “The inspection teams examined the major measures governments at all levels and their departments have taken to carry out reform in the management of statistics, implement the law, and ensure the authenticity and accuracy of statistical data.”
- “The law was enacted in 1983 and revised in 2009. This has been the first nationwide inspection on the Statistics Law implementation since the revision.”
Get smart: When the legislature chooses to evaluate the enforcement of certain laws, it is indicating its priorities.
Get smarter: This updated stats law, and its proper enforcement is one thing that Xi Jinping is getting right – in terms of improving the accuracy of data collection across the country, as well as its dissemination and sharing. Having good data is fundamental to good policymaking and accountability.
Big picture: The legislature is taking an increasingly active role in the application and implementation of its laws across the country.
POLITICS and POLICY
7. The Government wants to change incentives in SOEs
Compensation for SOE executives and employees has always been a controversial subject.
People working in SOEs think they’re underpaid. Those working outside the state system think SOE employees are overpaid. No real surprise on either front.
That’s one reason that the State Council is trying to link pay more clearly to performance.
The State Council recently issued a guideline on reforming the mechanism for setting salaries in SOEs. The aim is to incentivize SOE employees to improve efficiency and performance (Xinhua):
- “Authorities should establish a salary-setting and growth mechanism that is suited to the labor market and linked to the SOE’s economic performance and labor productivity.”
The government will relinquish some salary setting powers to SOE boards, particularly in competitive sectors.
Employees in SOEs with strategic goals will be paid according to how well they achieve those goals.
Why it matters: Many pundits claim that SOEs don’t care about profits. That’s not exactly true. They respond to the targets, whether economic or strategic, set by government.
Get smart: The changes should make SOEs more effective tools of state strategy.