DRIVING THE DAY
1. China is getting serious about foreign investment
Xi Jinping has promised to further open China’s market to foreign investment.
On Wednesday, the State Council signaled progress on that front.
- “Commitments already made to cancel or ease restrictions on foreign investment in such manufacturing sectors as automobiles, shipping vessels and aircraft will be promptly implemented.”
- “The mechanism regarding qualified overseas investors will be expanded to encourage them to participate in the futures trading of crude oil and iron ore.”
- “More support [will be given] to foreign-invested financial institutions in underwriting local government bonds.”
- “The negative list for market access of foreign investors will be revised and released before July 1.”
- “Provincial governments will be given authority over the setting up or business alterations of foreign-invested enterprises with total investment of up to $1 billion.”
- “Permit procedures for foreign talent to work in China will be simplified.”
- “Eligible foreign employees hired by enterprises registered in China will be able to get their visas to work in China within two workdays.”
What to watch: Expect concrete policies for all of the above initiatives in the coming weeks. Seriously – many of them are already in the works.
Get smart: China is serious about further opening. But after years of delay, they are a long way from having the trust of the foreign business community.
Gov.cn: China will open wider to attract foreign investment
DRIVING THE DAY CONT’D
2. Tariffs lowered on consumer goods
China’s not just opening the door wider to foreign investment. It’s also reducing import tariffs.
Wednesday’s State Council resolved to lower the following tariffs:
IMPORT CATEGORYNEW AVERAGE TARIFF RATEPREVIOUS AVERAGE TARIFF RATEClothing, shoes, kitchen equipment, sports equipment7.1%15.9%Washing machines, refrigerators, household appliances8%20.5%Mineral water, processed foods6.9%15.2%Cosmetics, beauty products, selected healthcare products2.9%8.2%
Our outstanding questions: How do they calculate average tariffs? Which products, specifically, will be included?
The timeline: The tariff reductions will take effect on July 1.
Get smart: That’s a lot of products. And some serious reductions.
Get smarter: It’s pretty strange that the State Council chose yesterday to make this announcement. They could have waited and rolled the measures into the broader trade negotiations with the US.
What it means: These moves have little to do with US pressure. And everything to do with wanting to increase consumption at home.
Gov.cn: 李克强主持召开国务院常务会议 确定进一步积极有效利用外资的措施等
FINANCE and ECONOMICS
3. Life insurance sector gets pried open
Speaking of market opening, on Wednesday the banking and insurance regulator (CBIRC) released a draft regulation that will lift foreign ownership caps in the life insurance sector to 51%.
Some context: This move was one of several opening measures that central bank governor Yi Gang recently promised would happen by the end of June.
The draft regulations add some new wrinkles to insurance ownership, including a stipulation that at least one of the joint venture’s major shareholders be a “normally operating insurance company.” Some thoughts:
- We’re not 100% sure what that means, but it appears aimed at keeping non-insurance financial institutions from jumping into the market.
- Regulators have cracked down on such cross-sector ownership after the insurance sector ran amok over the past several years.
Get smart: After years of slow playing it, China is finally taking significant and consistent steps to open its financial sector – and it is sticking to the promised timeline.
Get smarter: This document was clearly rushed out. The CBIRC had to release the draft yesterday in order to get a full 30-day commenting period in before the June 30 deadline that it set for opening the sector.
What to watch: The result of rushing the regulation is that some previous provisions were simply axed rather than being fully updated. But more details should be fleshed out in the coming weeks.
FINANCE and ECONOMICS
4. A-share inclusion in the MSCI starts tomorrow
Just a gentle reminder that Chinese A-shares will officially be included in the MSCI index starting tomorrow, June 1.
That means a lot of Tip Sheet readers are about to be de facto owners of Chinese listed stocks, if their mutual fund, pension fund, or whatever else fund tracks the MSCI emerging market index.
So…congrats, everybody! Welcome to the wonderful and wild world of Chinese equities.
To mark the occasion, Bloomberg has a nice write up of some the quirks of the A-share market.
First the bad news:
- “A gauge tracking Shanghai shares has taken quite a beating in the past six days, closing Wednesday at its lowest level since October 2016.”
But then the good news:
- “Foreigners are getting in at the cheapest valuations in more than two years.”
One final piece of trivia that many people will already know, but is always fun to point out for newbies:
- “Unlike in other exchanges around the world, red means a share price is rising in Shanghai and Shenzhen, while green means it’s falling. That’s because it’s seen as a lucky hue in Chinese culture, while green has negative connotations.”
So here’s to everyone being in the red in 2018!
Bloomberg: The Oddest Things About China’s $7.4 Trillion Stock Market
POLITICS and POLICY
5. China cracks down on fake science
Xi Jinping wants China to be a technological superpower (see Monday’s Tip Sheet).
But that’s going to be tough if China can’t trust its own scientific research.
The ugly truth: China’s scientific research is rife with fraud. An October 2017 NYT article lays out the problem:
- “Since 2012, the country has retracted more scientific papers because of faked peer reviews than all other countries and territories put together, according to Retraction Watch, a blog that tracks and seeks to publicize retractions of research papers.”
- “This summer, a Chinese gene scientist who had won celebrity status for breakthroughs once trumpeted as Nobel Prize-worthy was forced to retract his research when other scientists failed to replicate his results.”
- “At the same time, a government investigation highlighted the existence of a thriving online black market that sells everything from positive peer reviews to entire research articles.”
That’s why new regulations, released on Wednesday, attempt to address the problems (Gov.cn).
The quick-and-dirty explanation of how the regulations will work: They create a social credit system for each researcher that will track performance and log any funny business…for life.
Get smart: China’s got a long way to go to clean up its culture of scientific fraud. Admitting there’s a problem is the necessary first step.
NYT: Fraud Scandals Sap China’s Dream of Becoming a Science Superpower