DRIVING THE DAY
1. China is radio silent on the latest tariffs – for now
Western media outlets are reporting that the Trump administration will issue a final, updated tariffs list on Friday in the US.
It’s not surprising. US Trade Representative Robert Lighthizer has long been expected to issue his final recommendations tomorrow. According to the reporting, Trump is ready and willing to put those recommendations into action quickly.
What is surprising is the total silence on the issue from Chinese media today. In past rounds of the back-and-forth on trade, official media has quickly come out with scathing commentary based on English language reporting of what is to come.
The all-quiet signal has certainly come from the top.
But if all goes as expected, the tariffs will be finalized on Friday in the US, and steps to actually impose them will have begun. So the stakes are higher now than with previous announcements from the US administration – where the Chinese still had a window to affect the outcome.
Our assessment: China’s leaders want to see the exact details of the finalized tariff list. Then they will come out with a strong, coordinated message and retaliatory tariffs.
DRIVING THE DAY, CONT’D
2. Xi doesn’t have any last-minute magic on trade
With the tariff deadline looming, Xi Jinping met with US Secretary of State, Mike Pompeo, in Beijing on Thursday.
It was originally supposed to be a briefing on the Trump–Kim summit.
On that front, Xi indicated China’s support for complete denuclearization (Xinhua):
- “China firmly adheres to denuclearization of the peninsula and its peace and stability, and insists on solving problems through dialogue.”
- “China will continue to play an active and constructive role, and work with relevant parties, including the United States, to promote the political solution of the issue. “
But Xi and Pompeo also had other urgent issues to discuss – the looming US-China trade war and the broader US-China relationship.
- “Xi expressed his hope that the United States will handle sensitive issues, including the Taiwan issue and economic and trade frictions, in a prudent way to avoid serious obstruction to bilateral ties.”
At least on the trade front, the message fell on deaf ears. On Taiwan, things are TBD.
FINANCE and ECONOMICS
3. Is Chinese consumption really that weak?
China’s economy had a bad month in May – we pointed that out in yesterday’s Tip Sheet.
There were two key weaknesses:
- Subpar local government investment
- Tight credit conditions
But there was another surprising area of weakness last month – consumption.
Retail sales of consumer goods grew by just 6.8% y/y on a real basis – down from 7.9% growth in April and posting the slowest pace of growth since 2003.
That’s especially surprising because consumption held up well through recent economic downturns.
But we are not so concerned on this front.
The May consumer slowdown was largely thanks to a drop off in vehicle purchases – which saw a rare contraction of 1% y/y.
Get smart: Auto purchases are over-represented in the data. In fact, they make up almost 30% of the retail sales data series. While auto purchases are important, they aren’t THAT important to consumption – the overall population doesn’t spend 1/3 of its money on vehicles every month.
Plus, weak auto sales have a pretty easy fix – consumer subsidies. Policymakers have easily boosted auto sales before with such subsidies, and they can do so again.
Outside of autos, consumer spending actually looked okay.
Asahi Shimbun: China holds fire on rates, posts ‘shockingly weak’ activity growth
FINANCE and ECONOMICS
4. Local governments don’t believe the center will watch them go bankrupt
The central government has been trying to tell local governments to get their fiscal houses in order – hence the local investment slump (see previous entry and yesterday’s Tip Sheet).
Here’s what then-Finance Minister Xiao Jie said in December (NAO):
- “[We must] absolutely dispel the fantasy that the central government will ‘pay the bill’ for local governments.”
Get smart: It’s rare for a senior official to use such blunt language.
But local governments aren’t listening. That’s according to Liu Shijin, a former deputy head of the State Council’s in-house think tank (Caixin):
- “Lower level governments still think that if a problem occurs, especially if it’s big, then the…[central] government will come to the rescue.”
Liu says that the central government needs to…not…put its money where its mouth is:
- “[We] must have the resolve to make a few [example] cases which break the guaranteed bailouts, and make responsible those who are supposed to be responsible.”
Get smart: Liu is right. Sometimes you need to “kill the chicken to scare the monkey” if you want things to change. That’s what regulators did in the financial sector by taking down a few high-profile tycoons.
What to watch: We expect some county-level governments will be the first “chickens.”
FINANCE and ECONOMICS
5. China’s financial regulators talk opening
We’ve got some more interesting nuggets from the Lujiazui financial forum in Shanghai – following on the comments by the banking regulator, Guo Shuqing, that we highlighted in yesterday’s Tip Sheet.
The Foreign Exchange Administrator Pan Gongsheng talked capital account convertibility. His main points:
- We still have a ways to go
- But we’ll continue to gradually open some currently non-convertible areas
- Chinese companies need to become better at managing currency risk before we fully open
Get smart: Now that capital in- and out-flows are somewhat balanced, regulators want to get back to steadily opening the capital account – but they will stay cautious.
Next up was the vice chairman of the securities regulator, Fang Xinghai.
Fang is keen to get more foreign participation in China’s stock markets. His aim is to:
- Increase the inclusion factor for A shares in MSCI indices from 5% to 15% as soon as possible.
To do it, China’s exchanges will have to update rules for everything from closing-price formation mechanisms, to trading suspensions and resumptions, to futures pricing.
Get smart again: Financial regulators genuinely hope that further opening can force them to improve their capital markets.
FINANCE and ECONOMICS
6. The government still can’t tame the property market
The stats bureau released the latest data on property prices Friday morning.
The key number: Prices in 31 out of 70 large cities increased in May, even as local governments continued to ratchet up purchasing restrictions (NBS).
That data provides some context for a speech delivered by Yang Weimin – former deputy office director of the Central Leading Small Group on Finance and Economics.
Yesterday, Yang underscored that real estate is still a speculative market (Caixin):
- “[Previous research from the leading small group’s office showed that] vacancy rates in both urban and rural areas are very high.”
- “The vacancy rate is higher than Japan’s 13%.”
- “That’s very abnormal and reflects [the fact that] many properties are for speculation.”
Yang also had a warning for regulators:
- “The property market has become the most easily ignited time bomb.”
- “Administrative measures are not a radical cure.”
What did he propose to do?
- Add more land supply for residential property
- De-stock vacated properties by developing the rental market
- Launch a property tax
- Make the employee housing fund more flexible
Get smart: Many of Yang’s suggestions make sense. But so far we don’t see much progress. China’s property markets desperately need a structural fix.
POLITICS and POLICY
7. What Xi got up to in Shandong
Xi Jinping appears to have come to his Thursday meeting with US Secretary of State Mike Pompeo straight from Shandong province, where he had been for nearly a week.
Here’s what Xi got up to post-SCO (see June 11 Tip Sheet):
- He visited a national laboratory on marine science and technology in Qingdao on Tuesday.
- He visited a residential community in Licang District, Qingdao.
- In Weihai, he visited the museum of the Sino-Japanese war of 1894-1895.
- In Weihai, he also visited an ecological restoration project.
- On Wednesday, he visited Penglai, once a starting point of the ancient Maritime Silk Road.
- He visited the Wanhua Chemical industrial park in Yantai.
- Xi visited shipbuilder CIMC Raffles in Yantai and inspected a submerged oil drilling platform and other marine engineering equipment manufactured by the firm.
- On Thursday morning, he made a trip to IT company Inspur Group in the high-tech zone of Jinan.
- Xi visited Sanjianxi Village, Zhangqiu District in Jinan, where he stressed the importance of talent to realize rural vitalization.
- On Thursday afternoon, he heard reports by provincial Party leadership.
Get smart: These inspection tours are meticulously planned – and every visit listed above sends a message about Xi’s areas of focus.
The most persistent message: We must become strong, and technology is key.