DRIVING THE DAY
1. SCO outshines G-7
Xi was hanging out in Qingdao this weekend, palling around with leaders from the Shanghai Cooperation Organization (SCO) member and observer states.
The member states:
As Xi told assembled delegates, that’s a significant group of countries:
- “SCO… members account for about 20 percent of the global economy and 40 percent of its population.”
But it’s also a rather disparate group. These countries don’t have a lot in common, and many have complicated, even antagonistic relations.
But that did not stop them from agreeing on some areas of cooperation:
- They agreed to a three-year plan to counter terrorism
- And they agreed to a five-year plan to counter drug trafficking
And China agreed to do more. Xi promised:
- “[To] set up an RMB 30 billion equivalent special lending facility within…the SCO Inter-bank Consortium”
- “To train 2,000 law enforcement officers for all parties in the next three years”
- “To provide meteorological services to all parties using its Fengyun-2 weather satellites”
Get smart: None of these initiatives are game changers, but they do show that the organization is having concrete impacts.
The big picture: While Western leaders fought at the G-7, Asian leaders cooperated at the SCO.
DRIVING THE DAY CONT’D
2. India still not into Belt and Road
There was one notable area of non-consensus at the SCO.
The final joint statement said this:
- “Kazakhstan, Kyrgyzstan, Pakistan, Russia, Tajikistan and Uzbekistan reaffirmed their support for the China-proposed Belt and Road Initiative [BRI].”
There is one obvious SCO member not on that list – India.
Get smart: This follows another notable non-affirmation in April (see April 25 Tip Sheet). India has long opposed the BRI because a key portion goes through disputed territory with Pakistan.
Get smarter: Despite the kerfuffle, Sino-India ties continue to improve. Xi is going to India next year for an informal summit similar to the one that the two held in Wuhan in April (see the May 2 Tip Sheet).
DRIVING THE DAY CONT’D
3. China’s going to forge its own path
You’ve probably already caught on to this, but China has no intention of following the path of Western countries when it comes to its political and economic development.
Xi was clear about that in his SCO address:
- “It is the diversity of civilizations that sustains human progress.”
Xi was more explicit later:
- “We should respect each other’s choice of development paths and accommodate each other’s core interests and major concerns.”
What it means: The rise of a non-democratic, statist superpower is causing frictions with Western powers. Those frictions look set to get more pronounced as China’s power and influence grows.
Why it matters: Political frictions have economic consequences. For everybody but the defense sector, this is bad news.
FINANCE and ECONOMICS
4. Financial opening gathers pace
Chinese regulators continue to make good on their promises to open the financial sector.
We know that sounds crazy, but it’s true.
The most recent move came late Friday, when the banking and insurance regulator (CBIRC) announced that foreign ownership limits for banks and asset management companies will be completely scrapped.
That announcement means that all of the promises that regulators laid out back in November, and reiterated in early April, have now officially been made policy.
In addition to Friday’s announcement, regulators have recently:
- Raised foreign equity ownership caps on securities companies to 51%
- Raised foreign equity ownership caps on life insurance companies to 51%
- Allowed foreign insurance brokerages to undertake the same business activities as domestic firms
Get smart: The opening of the financial sector has accelerated in 2018. Several dynamics are driving the process:
- China needs more FDI inflows, so they are opening more sectors
- Pressure from the Trump administration means now is a good time to be seen as opening
- 2018 is the 40th anniversary of China’s reform and opening – regulators want to make concrete progress to commemorate the anniversary
Shanghai Securities Journal: 金融业对外开放新动作！银保监会将取消外资入股中资银行股比限制
FINANCE and ECONOMICS
5. Data dump – inflation
Inflation data for May came in on Monday morning.
- Consumer prices rose by 1.8% y/y – the same as in April.
- Producer prices rose 4.1% y/y – up from 3.4% in April.
Quick take #1: Consumer inflation remains benign. The central bank will hope that price growth continues to bounce along just below 2%, so that it can focus on the financial de-risking campaign.
Quick take #2: The trade war matters here. If China’s leaders decide to impose retaliatory tariffs on the US for political reasons, the increase in consumers prices would be a headache for the PBoC.
Quick take #3: Upstream inflation (i.e. producer price growth) accelerated for the second month in a row. That’s a good sign for industrial profits and overall nominal economic growth in H1 2018.
Reuters: China’s May producer inflation picks up for second time in a row
POLITICS and POLICY
6. State Council document on boosting FDI coming soon
The foreign business community is very familiar with State Council Documents No. 5 and No. 39 from last year (see the August 17 Tip Sheet). Both are dedicated to encouraging foreign investment.
But both fell shortin delivering intended results. Timelines were not clear and implementation was lackluster.
A new document is on the way, according to Vice Minister of Commerce Wang Shouwen, speaking at a press conference Friday.
Wang promised that this time would be different. In a clear bid to ease foreign investors’ concerns, the new document promises the following:
- “A timetable is… set for some measures to ease the foreign investors’ concerns.”
- “The new decisions further deepen… reforms to streamline administrative approvals, delegate power to lower levels and optimize services.”
- “The patent law will be modified, and the cap of statutory damages for infringement of intellectual property right will be greatly increased.”
- Perhaps most importantly, the central government has made it a disciplinary rule that no government departments can restrict FDI access beyond the upcoming new negative list.
Get smart: The government is delivering on its promises to further open the economy.
People.com: China to roll out new policies for easier access of foreign investment
Gov.cn: China’s FDI to remain stable in 2nd half of 2018