DRIVING THE DAY
1. Party makes concessions on ZTE
The US-China trade and investment relationship is still in flux.
On Saturday, US Commerce Secretary Wilbur Ross will join a team of over 50 American officials in Beijing, looking to negotiate the details of a trade agreement between the US and China.
Meanwhile, Beijing and Washington continue to haggle over the fate of ZTE.
China desperately wants the sanctions against ZTE to be lifted. The company is taking the remarkable step of changing top leadership in a bid to placate the Americans (Bloomberg):
- “Tian Dongfang, a ZTE non-executive director who’s also chief of a think-tank under the China Aerospace Science and Technology Corp., has already assumed the role of party secretary.”
- “He replaces Fan Qingfeng in a position that’s considered the ultimate responsibility in an era when Chinese President Xi Jinping has called for the Communist Party to lead in all things.”
Get smart: It’s striking that the first move was to replace the Party secretary. Recall that ZTE is a nominally private company. This move makes it clear who ultimately calls the shots.
This saga is far from over. Several US Congressmen are trying to stop any backdown from the sanctions:
- “Several U.S. politicians have agitated to keep the ban in place.”
Bloomberg: ZTE to Replace Top Exec as China Seeks to Lift U.S. Ban
FINANCE and ECONOMICS
2. Government cuts tariffs on 1449 items
The State Council decided to cut tariffs on a spate of consumer goods on Wednesday.
We wrote that those cuts would be implemented quickly (see yesterday’s tip sheet), but we didn’t think we’d get the details this fast.
On Thursday, the Ministry of Finance released the official notice for the tariff reductions to start on July 1, along with a detailed list of the import items that are included.
It’s a long list, covering 1449 items. Check the link below to see whether your industry got lucky!
The official rationale:
- To meet the public’s demand for a better life
- To increase competition and force improvement of domestic producers
- To make good on promises to further open the economy
Get smart: Trump’s tactic going into this week’s negotiations was to use a stick – signaling the imposition of more tariffs. The Chinese side seem to be using a carrot – preemptively and unilaterally lowering tariffs.
What to watch: As we wrote yesterday, these moves are much more about the domestic agenda than the bilateral trade tensions. But it will be interesting to see how they play into the trade negotiation process.
FINANCE and ECONOMICS
3. Updating the negative list
On Wednesday, the State Council announced that it will issue an updated negative list for foreign investment by June 30 (see yesterday’s Tip Sheet).
The Shanghai Securities Journal takes a look at what might be new:
- “In addition to the announced financial and automotive opening initiatives, the new negative list will also cancel or relax restrictions on foreign investment in the fields of energy, resources, infrastructure, transportation, trade and logistic, and professional services.”
- “The new negative list will also reveal opening measures for the next few years by giving relevant industries a certain period of transition.”
The piece (link below) also outlines a new push to boost trade in services. This will be an explicit regulatory focus from July 2018 to June 2020. The main goal will be to boost service exports.
A friendly reminder: Any opening measures that China pushes through are ultimately aimed at improving the domestic economy and strengthening domestic companies.
Get smart: There is a lot of well-deserved skepticism from the foreign business community when it comes to the opening agenda, but we sense increased urgency on the part of Chinese regulators.
The details of the updated negative list will be a good barometer of their seriousness.
Shanghai Securities Journal:
FINANCE and ECONOMICS
4. Chinese tech IPO blitz
Another day, another Chinese tech IPO announcement.
This time, it’s Tencent’s music unit (FT):
- “Tencent Music and Entertainment has appointed Goldman Sachs, Morgan Stanley and Bank of America Merrill Lynch to lead a highly anticipated initial public offering [in New York] that bankers expect will value the Chinese streaming group in excess of $30bn.”
This trend is just getting started:
- “The investment banks leading the deal also appear on another mega listing from China, Meituan-Dianping.”
- “Tencent-backed Meituan began life offering food-delivery services, but has since broadened into everything from ordering a facial to ride hailing to booking trips.”
- “The two deals head a clutch of large Chinese IPOs, with another three — including ride-hailing app Didi and Alibaba’s financial payments affiliate Ant Financial — expected next year.”
Our question: Is Tencent being tone deaf here? (Excuse the pun). This New York listing seems out of step with the push to bring China’s tech companies back home. Or was this already in the works, so they are getting a pass?
Get smart: This spate of listings means that foreigners are helping to fund China’s technological revolution.
That’s something to ponder, given recent tech-related frictions in China’s foreign relations.
FT: Tencent hires banks to list music unit in New York
POLITICS and POLICY
5. Dongbei gets creative to cut capacity
Dongbei’s large cement companies are undertaking an interesting experiment.
They are voluntarily integrating to speed up the sector’s consolidation.
The short version: Major industry players in Jilin, Liaoning, Heilongjiang, and Inner Mongolia are banding together to create an “integration platform.”
The idea is basically to create a local monopoly by combining the top three or so companies in each province, and then incentivizing smaller players to sell their assets to the new behemoth.
We heard about this scheme a few months ago, but this is the first we’ve seen it reported in the financial media (see link below).
Why it matters: Industrial consolidation and capacity cuts still have a long way to go. So, don’t expect the Supply-Side Structural Reform agenda to disappear any time soon.
Get smart: The scheme is an interesting example of local policy experimentation. Regulators have helped to facilitate the process, but it has largely been the big industry players who’ve negotiated the finer details.
The point: Policymaking may be driven by a top-down process, but there is still room for local creativity.
Shanghai Securities Journal: 东北三省纷纷成立水泥集团 加快推进化解过剩产能
POLITICS and POLICY
6. Politburo focuses on China’s poor
The Politburo held its monthly meeting on Thursday.
The topic of discussion: How to bring two groups of China’s “left-behind people” up to speed.
The two groups:
- Rural residents
- The poor
The meeting deliberated a rural revitalization strategy for the next five years. The goals:
- “Make agriculture a leading industry.”
- “Make farming an attractive occupation.”
- “Make rural areas beautiful places to live and work.”
Get smart: Xi Jinping loves to develop grand strategies – and stick to them. So get to know this strategy if you want to know where agricultural and rural policy is headed.
The Politburo also deliberated a guideline for a three-year campaign to win the battle against poverty.
The idea is to be more targeted:
- “We must strengthen the precision of assistance measures from villages to households.”
Get smart: Poverty alleviation is Xi’s baby. Officials at all levels, along with state-owned and private enterprises are all being asked to contribute.
POLITICS and POLICY
7. Li Keqiang says what scientists want to hear
Earlier this week, Xi Jinping gave a major address to the country’s top scientists (see Tuesday’s Tip Sheet).
On Wednesday, Li Keqiang took his turn.
Li, like Xi, said that he wants scientists to have more freedom to pursue research.
One way to do that is to improve science funding:
- “The process for applying for scientific research funding is too complicated, and the administration [of those funds] is too rigid.”
Most importantly, Li wants the government to stop telling scientists what to think:
- “[We] must give scientists sufficient time and space for thinking and imagining, in order to set free their greater innovative and creative abilities.”
- “Think for a moment about Newton sitting under the apple tree, and suddenly, through thinking and imagining, he discovered gravity.”
- “Can you plan this type of thing?”
- “Even Newton himself could not have planned that.”
Li demanded action:
- “Today we have all the responsible parties gathered together.”
- “What I have said today, must be guaranteed to show tangible effects this year.”
Get smart: Xi and Li have both talked this week about giving scientists more room to think freely. But at the same time, Xi is demanding ever more political orthodoxy. How will those two demands interact?