DRIVING THE DAY: US-CHINA EDITION
1. Trump reignites trade war
That was fast.
After last week’s agreement between the US and China to put the trade war on hold, we had expected calm to prevail through June, at least.
It turns out we were wrong.
Last night, the White House issued a statement indicating it will move forward with tariffs on selected Chinese goods and tighten scrutiny over Chinese investment into the US (White House).
- “[The US will] implement specific investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology.”
- “[The US will] impose a 25 percent tariff on $50 billion of goods imported from China containing industrially significant technology.”
Needless to say, the Chinese government was caught off guard.
The Commerce Ministry scrambled to respond. Their message:
- Well…this was unexpected. We thought we reached a consensus a week ago.
- But we’re also not terribly surprised.
Get smart: The Chinese side thinks this is a negotiating tactic. US Commerce Secretary Wilbur Ross will be in Beijing soon to start hammering out details of last week’s agreement. So Trump thinks this increases his bargaining power.
We wish we could be so certain.
White House: President Donald J. Trump is Confronting China’s Unfair Trade Policies
White House: Statement on Steps to Protect Domestic Technology and Intellectual Property from China’s Discriminatory and Burdensome Trade Practices
SCMP: US to shorten length of some visas issued to Chinese citizens amid trade row
DRIVING THE DAY: CHINA EDITION
2. Government to increase oversight of poverty funds
Xi Jinping has promised to eradicate extreme poverty by 2020.
To achieve this, the central government is allocating ever more money to poverty alleviation – over RMB 100 billion this year:
But there is a problem. Not all of that money is getting to its intended destination. There have been hundreds of cases of misappropriated poverty funds in recent years.
To address the problem, on Monday the State Council released new measures to improve the efficacy of the funds:
- “Any investment of the funds should be target-oriented, with more focus on helping achieve good results in poverty-relief tasks.”
Those who misuse the funds are in trouble:
- “Any unit or personnel found engaging in illegal and irregular acts in fund management will be punished, the circular stated.”
Get smart: For all of Xi’s efforts to create a more disciplined government apparatus, there are still plenty of officials who put their own personal interests ahead of the public.
Go deeper: Poverty alleviation is one of the “Three Critical Battles” for 2018. Get the skinny on the Trivium website (link below).
Gov.cn: China to improve poverty-relief fund management
Trivium: The Agenda: the “Three Critical Battles” that will define 2018
FINANCE and ECONOMICS
3. Central bank promises cautious approach to financial opening
China’s new central bank governor Yi Gang is focused on opening the financial sector.
He’s only been on the job for two months, but most of his public statements have revolved around the issue.
On Tuesday he was at it again. Speaking at a financial forum in Beijing, Yi said (PBoC):
- “Finance is a competitive sector…competition must require opening up, both to domestic and foreign [players].”
There is still a lot of skepticism among foreign observers around these openings. But regulators are serious, and they are moving forward.
It’s all an effort to strengthen the domestic financial system.
Greater opening puts more pressure on regulators (Gov.cn):
- “In the process of opening up, China should also pay close attention to risk control, and make sure that the country’s financial oversight and regulatory capabilities are in line with the level of opening up.”
Get smart: Regulators have already made concrete steps to open the securities and insurance sectors. They plan to do more this year.
Get smarter: But “controlling risk” remains paramount, meaning that any opening will be conditional and gradual.
Gov.cn: China’s financial sector has much room for opening-up
FINANCE and ECONOMICS
4. Ant Financial closes major funding round
China’s big tech companies are on the global march.
The latest news is that Ant Financial, an affiliate of China’s Alibaba Group, has just closed a major round of funding (CNBC):
- “Ant Financial Services Group, operator of China’s biggest online payment platform by market share, Alipay, has closed its latest funding round having raised $10 billion from a clutch of global and local investors, five people with direct knowledge of the matter told Reuters.”
- “Ant’s first fundraising targeting global money values the firm at $150 billion, the people said, compared with about $60 billion after its previous fundraising in April 2016.”
The funding round is widely expected to be a precursor to an IPO – as early as 2019.
Why it matters: If you think the US-China trade wars are unnerving, the looming US-China tech wars will make them look like child’s play. Both countries want to dominate future technologies, and make money doing it.
The rub: Ant Financial is in an interesting position. Like other parts of the financial system, internet finance has been in regulators’ crosshairs since early 2016. So, while Ant Financial is in a dominant position, it is playing in an increasingly tighter space.
FINANCE and ECONOMICS
5. Internet finance – Wild West meets regulation
Tuesday was a perfect example of the needle that Alipay is trying to thread – continuing to innovate, but staying on the right side of regulators.
On the same day that international media outlets reported on the company’s latest fundraising round (see previous entry), domestic Chinese media pointed out that coming regulations will restrict withdrawals from the entity’s marquee investment fund, Yu’ebao.
- So-called “T+0” withdrawals – a.k.a immediate, same day withdrawals – from the fund will soon be restricted to just RMB 10,000 per day, according to new rules that regulators are drawing up.
- The current limit is RMB 50,000.
The new regs will also strengthen licensing rules and disclosure requirements for the sale of online money market funds.
Why it matters: This is all about systemic risk. The sheer size of Ant Financial’s Yu’ebao fund makes Ant the fifth-largest financial institution in China. Any liquidity problems would quickly metastasize.
The bright side: While the new regulations will make life harder for Ant Financial, it is one of the few companies large enough to profitably comply with the spate of new rules in the space.
Xinhua: 货基T+0赎回额度或降至1万元 T+1赎回不受任何限制
POLITICS and POLICY
6. Fiscal reform in focus
Fiscal reform is a priority in 2018 – we’ve been harping on that since the “Two Sessions” in March.
Now, the 21st Century Business Herald reports that authorities are zeroing in on individual tax reform – and prioritizing an update to the income tax law.
Nothing exemplifies China’s labrynthine government bureaucracy better than the tax bureau.
Regulators aim to fix that by:
- lowering tax rates for individuals,
- broadening the individual tax base,
- and streamlining the tax process.
Some important context: The April Politburo meeting pointed out the need to “expand domestic demand.” At the time, markets took that as sign of coming credit and investment stimulus, but we said that wasn’t the case (See April 24 Tip Sheet).
Indeed, regulators and domestic market actors realize that the phrase has taken on new meaning recently:
- “’’Expanding domestic demand’ will be different from the idea of relying on infrastructure and real estate,’ [said] Li Xunlei, chief economist of Zhongthai securities…[It] is expected to show structural features.”
- “The emphasis may be on expanding investment in manufacturing, boosting consumption, reducing corporate burdens and increasing residents’ income.”
Get smart: Tax reform is hugely difficult, but there will be progress this year.
21st Cent Biz: 个税法修订有望今年进入立法程序
POLITICS and POLICY
7. Tax cuts for hi-tech services companies
Speaking of tax cuts…
Chinese policymakers want to promote hi-tech services.
So they are cutting taxes for hi-tech service companies:
- “The rate of enterprise income tax will be cut to 15 percent for businesses in the service trade sector which are qualified as technologically advanced, according to a statement released by the Ministry of Finance.”
- “The tax cut has been in place in 15 regions including Tianjin, Shanghai and Shenzhen since 2016 on a pilot program.”
- “Seventeen other regions, including Beijing, will join the program between July 1 this year and June 30, 2020 to further promote innovative service trade.”
The context: It’s all part of the broader push to become a technological superpower (see yesterday’s Tip Sheet).
Get smart: Tax policy is a more efficient way to promote sectors than subsidies. On balance, it’s a smart move.
Gov.cn: China cuts tax on technologically advanced service trade firms
POLITICS and POLICY
8. Businesses get no respite on environmental protection
Another “Critical Battle” for 2018 (see entry #2) is to control pollution.
So it is no wonder that top leaders are devoting time and effort towards pollution control.
To do his part, National People’s Congress chairman Li Zhanshu went to Henan for five days to inspect factories and make sure that the Air Pollution Control Law is being implemented.
- “The weapon of law should be used to safeguard the blue sky.”
- “[We] must…shut down non-compliant enterprises.”
Li Zhanshu isn’t the only one pushing the environmental agenda.
Minister of Ecology and Environment Li Ganjie is also doing his part. He is waging a PR campaign against those who try to undermine environmental protection (The Paper):
- “Some lawbreakers…disseminate the erroneous view that ‘environmental protection damages the economy’”.
Some context: There have been problems with overzealous implementation of environmental regulations, with whole industries being shut down at points. The MEE is putting in place a more targeted supervisory approach that attempts to ensure that regulators shut down only businesses that do not meet environmental standards (Xinhua).
Get smart: Efforts to tackle pollution are here to stay. Regulators won’t stop until they get it right.
Go deeper: Read more about Li Ganjie on the Trivium website.