DRIVING THE DAY
1. China tries to stay relevant on the Korean peninsula
All eyes were on Singapore today for the historic summit between DPRK leader Kim Jong-un and US President Donald Trump.
China’s foreign minister Wang Yi only had positive things to say (The Paper):
- “The two leaders sitting down with each other today… has created history.
- “The Chinese side expresses its welcome and support.”
- “This is what the Chinese side has always wanted and worked for.”
He was also at pains to stress China’s importance:
- “I think no one would doubt that China has played a singular and important role throughout.”
- “We will continue to play this role.”
Get smart: China is doing all it can to stay involved in the DPRK-US talks. It even let Kim use Li Keqiang’s plane to fly down to Singapore (Straits Times).
Get smarter: China’s biggest fear is a DPRK-US rapprochement that leaves China out in the cold. They know it can happen – they did something similar with the US in 1972…
The Paper: 王毅：朝美领导人对话创造新的历史，中方欢迎和支持
The Straits Times: Trump-Kim summit: Kim Jong Un’s Air China ride is Chinese Premier Li Keqiang’s private jet, says Apple Daily
FINANCE and ECONOMICS
2. CDRs already getting controlled
Not a single Chinese Depositary Receipt (CDR) has been issued on a mainland exchange, but regulators are already trying to tamp down the enthusiasm for the products.
Recall: CDRs are shares of foreign-listed Chinese companies that are tradeable on Chinese exchanges. They are a mechanism to let domestic investors tap into the wealth that China’s tech companies have created for foreign investors by listing them in New York and Hong Kong.
The first CDRs are expected to be issued in early July as a part of the huge Xiaomi IPO.
Investors are already lining up. That’s making regulators uncomfortable:
- “China’s securities regulator is limiting the amount of money individual investors can contribute to six new equity funds authorized to buy Chinese depositary receipts (CDRs) and unicorn stocks to a total of 20 billion yuan ($3.12 billion) per fund.”
- “[The funds] were instructed to impose a ceiling on total subscriptions from individuals and ‘do their best to control the scale of funds raised.’”
Get smart: CDRs are going to be hugely popular in China. Some analysts are worried that they will eventually divert liquidity away from other listed companies.
What to watch: CDR valuations look likely to go through the moon.
Caixin Global: China Tells CDR Funds: Curb Your Enthusiasm
FINANCE and ECONOMICS
3. Property restrictions ramp up again
China’s property markets just won’t quit.
Regulators have been steadily increasing purchasing and sales restrictions since late 2015, but builders have kept building and buyers have kept buying.
That has led to an affordability problem in a lot of China’s biggest cities, as prices have continued to rise, and some of those cities have begun to take extreme measures.
Shenzhen, for example, has issued a plan calling for 60% of new housing to be public housing (as opposed to private, commercial sales) over the next two decades (see June 6 Tip Sheet).
Even smaller cities are having to resort to similar measures – pushing for more public housing and instituting two-year lock-up periods before home purchasers can resell units (Yicai).
Why it matters: Property is the biggest engine for the Chinese economy. Where it goes, so goes economic growth.
Get smart: Greater government intervention in the property market is a step backward for the liberalization of the economy. But it also makes a disruptive property crash less likely.
Yicai: 今年各地楼市调控达159次 重点已向三四线城市转移
FINANCE and ECONOMICS
4. Local governments holding their breath
Hunan is an important province to watch these days.
That’s because for the past six months, it has taken the most action when it comes to dealing with its debt challenge (see Feb 14 and June 6 Tip Sheet).
Efforts are becoming ever more targeted. Hunan’s Laiyang county is the latest case.
Get this: The county government delayed payment of officials’ May salary. That’s pretty extreme.
The county’s finance bureau explains the situation (Yicai):
- 2017 revenue was about RMB 2.2 billion – down by 18.4% from 2016.
- Revenue in the first five months of 2018 was down a further 15.4% from 2017.
- Meanwhile, expenditures for salaries have continued to grow.
- The county’s outstanding debt stood at RMB 13 billion by the end of 2017.
- It has at least RMB 1 billion in repayment obligations this year.
Some context: The county used to be a big coal producer. But coal isn’t exactly en vogue these days.
Get smart: The central government’s focus on controlling local government debt has some places taking extreme measures.
What to watch: This isn’t sustainable. Local government defaults are likely to happen soon. Will the central government bail them out?
FINANCE and ECONOMICS
5. Controlled opening of auto industry
If you thought tariff reductions were the end of changes to the auto sector… you ain’t seen nothing yet.
The government is close to announcing a major overhaul to investment policies toward the industry.
The biggest change: Foreign equity caps in automotive joint-ventures will phased out by 2022 (See April 18 Tip Sheet).
But the shakeup goes far beyond that (Caixin):
- “The new investment policies will ban the addition of new traditional combustion engine vehicle manufacturers.”
What it means: Foreign manufacturers won’t be able to set up brand new operations for traditional autos – instead they’ll have to negotiate with existing JV partners for more control.
But the government will welcome foreign competition where domestic players are more advanced:
- New Energy Vehicle production will open completely to foreign automakers.
Get smart: This is the biggest shakeup of the Chinese automotive industry in decades.
POLITICS and POLICY
6. Legislature seeks to keep up with e-commerce
China’s legislature will hold its bi-monthly session starting a week from today.
There’s only one law likely to be passed. As always, the excellent NPC Observer has the low-down (link below):
- “The draft E-Commerce Law (电子商务法) returns for a third—and likely final—round of deliberation.”
This should have been done by now:
- “The draft was last reviewed in October 2017, when the NPCSC seemed poised to pass the law.”
- “But then several Chinese bike-sharing companies (including then-third largest, Bluegogo) went bankrupt towards the end of 2017.”
- “The draft presumably needed further revision to address this and other problems exposed by the burst of the bike-sharing bubble.”
But while e-commerce will finally get done, there is one law notably absent from the docket:
- “A draft revision to the Patent Law (专利法) was originally planned for this session but has apparently been dropped.”
- “The latest U.S.-China trade consultations might have made further changes to the draft necessary as the joint statement specifically states that ‘China will advance relevant amendments to . . . the Patent Law.’”
Get smart: More than other major economies, China’s regulatory regime is in constant flux.
Go deeper: The NPC Observer has a full preview of the session. Check out the link below.
NPC Observer: NPCSC Session Watch: E-Commerce Law, Judicial Reform and Militarized China Coast Guard
CPC People: 栗战书主持召开第五次委员长会议
POLITICS and POLICY
7. Putting the PLA out of business
“Make war, not money.”
That’s what new regulations released yesterday essentially tell the PLA (Xinhua):
- “Profit-making contract work conducted by the military is being phased-out.”
It’s all a part of Xi’s broader overhaul of the military:
- “A circular issued by the general offices of the Communist Party of China Central Committee, the State Council and the Central Military Commission said the move was a key part of military reform.”
The PLA has six months to get out of business:
- It said all such contract work should end by the end of 2018, and that programs should be closed down if they sought profit, deviated from the military’s core responsibility or provided solely civilian services.
The basic logic (Gov.cn):
- “[The policy] is to preserve our army’s…basic character, and create favorable conditions for improving the fighting capabilities of our armed forces.”
Get smart: Military reform is perhaps Xi’s greatest achievement. He is systematically making the PLA a more effective institution.
The bigger picture: Improved PLA capabilities make China more confident, assertive, and influential on the world stage.