DRIVING THE DAY
1. Vicious cycle of trade retaliation begins
In case you’ve been living under a rock since Friday: The trade war is on.
Friday, the US administration announced 25% tariffs on USD 34 billion worth of Chinese exports, to come into effect on July 6. The US also promised to impose 25% tariffs on an additional USD 16 billion of Chinese goods.
Within hours, China’s Ministry of Commerce (MofCom) announced a tit-for-tat move:
- 25% tariffs on USD 34 billion worth of US exports to China – including soybeans and autos – effective July 6.
- 25% tariffs on another USD 16 billion exports – including chemicals, medical devices, and energy – that will go into effect if and when the US makes good on the rest of its promised tariffs.
China’s move triggered yet another threat from US President Trump of a further 10% tariff on USD 200 billion worth of Chinese exports.
That was met by another statement from MofCom:
- China will continue to match like for like.
Get smart: China doesn’t import USD 200 billion with of American goods. So MofCom says China will have to rely on “quantitative and qualitative” measures of retaliation once the next round of tariffs are drawn up (see next entry).
The outlook isn’t good here: China won’t back down, and Trump doesn’t seem inclined to either.
DRIVING THE DAY
2. The trade war – what to watch
China’s potential “qualitative” measures in the trade war are pretty straightforward:
- Slow American imports via lengthy customs inspections
- Disrupt production for American companies in China
- Increase the scale and frequency of penalties for American companies
- Slowing licensing and other approvals for American businesses
- Restrict tourism to the US
Get smart: China has laid out its playbook for the trade war in previous spats with countries like South Korea and Japan. All the tactics above were used in concert and to great effect. So China still has plenty of weapons to use once it runs out of quantitative measures.
Get smarter: Most of China’s moves will be targeted to inflict maximum pain on Trump himself – targeting agricultural exports, for example, is meant to influence Trump voters in agricultural states.
Our take: While this is the biggest macroeconomic theme of the year, it will hurt individual companies the most. Expect stock prices to tank on both sides of the Pacific, but overall economic growth won’t be slashed in either country…yet.
FINANCE and ECONOMICS
3. PBoC signals intention to stand firm on policy
Move along, there’s nothing to see here.
That was the central bank’s (PBoC) message in an interview it released on Monday, as it sought to tamp down market concern over potential liquidity and credit tightness.
Some detail: The interviewee was an anonymous “relevant authority” and the comments were published in the PBoC’s official newspaper The Financial News.
Some context: The release of the interview came in the wake of last week’s poor monthly credit and economic data. The credit numbers saw every form of credit creation contract, except traditional bank loans. And economic data saw infrastructure investment and consumer spending slump significantly (See June 13 and 14 Tip Sheets).
More context: Those numbers have sparked a debate about what steps regulators may take to stem a slowdown.
The PBoC’s answer: We will not loosen our policy stance.
While the central bank acknowledged that it may tweak policy here or there, the overall “neutral and prudent” stance won’t change.
The PBoC says overall economic performance still looks okay and its primary goals are:
- financial de-risking
- getting more credit to small companies
Get smart: The PBoC is not about to open the credit taps.
21st Century Economic Report: 央行：当前金融市场流动性合理稳定 经济金融运行平稳
FINANCE and ECONOMICS
4. The central bank wants to let governments go bankrupt
We know one reason that the PBoC won’t pump more credit to support economic growth this time around – the space for monetary policy to maneuver is constrained.
That’s according to Xu Zhong– head of the PBoC’s research bureau. Over the weekend we dove into an important speech that Xu delivered at the Lujiazui Financial Forum in Shanghai last week.
Xu’s comments were wide-ranging. But his fundamental point was:
- Monetary policy is ineffective in boosting long-term growth right now.
What China needs, says Xu, is to focus on boosting Total Factor Productivity (TFP) – or the economy’s efficiency.
We’ve pointed out before that Chinese policy makers are increasingly focused on TFP (See June 8 Tip Sheet), so Xu’s comments are in line with the trend of official thinking.
The fundamental challenge to China’s productivity, according to Xu: the broken fiscal system.
He says that local government spending:
- wastes resources
- leads to overcapacity
- pushes up costs for businesses
- crowds out private investment
- keeps banks from properly pricing risk
Xu’s solution: Let local governments go bankrupt.
Get smart: Xu’s diagnosis is spot on – boosting productivity is the only way to fundamentally improve Chinese growth.
The Paper: 深度｜徐忠：财税改革滞后是各项生产要素成本上升的主要原因
FINANCE and ECONOMICS
5. The Party gets written into business
China’s securities regulator (CSRC) updated the rules for the management of listed companies on Friday.
Specifically, the regulator is seeking to improve corporate governance of publicly traded companies.
Seems sensible enough.
But among the several key goals of the new updates, one stands out:
- Strengthen Party-building in listed companies.
- Promote the social responsibility to participate in the construction of ecological civilization and fulfill the social responsibility of poverty alleviation.
- Improve investor protection.
- Learn from international experience to improve relevant regulations on institutional investors participating in corporate governance.
- Strengthen the role of the board of directors’ audit committee.
- Improve the disclosure requirements of listed companies and enhance the transparency of listed companies.
Overall, it’s a solid list that would improve the functioning of China’s listed companies.
Of course, there is one glaring exception: The move to make Party-building an explicit element of Chinese corporate governance.
Get smart: This is all part of the effort to expand the reach of the Party into all elements of Chinese society.
A note to foreigners: In case you haven’t gotten it by now, investing or doing business in China means investing in or doing business with the Party.
POLITICS and POLICY
6. National property database is up and running
We have pointed out numerous times that China’s property market desperately needs a structural fix (see the June 15Tip Sheet).
Well, now one key building block for that fix has officially been rolledout (CGTN):
- “China’s long-expected national property database has started to connect information stations across the country, according to [the] Ministry of Natural Resources.”
- “The unified real estate database not only helps simplify the whole registration procedure, but also facilitates the real-time disclosure of property owners’ holdings, which has been regarded as vital for property market management and a major step to fight against corruption.”
- “With the national database, individual ownership of houses and house mortgage records in China will be traceable so speculation will be effectively restrained under the country’s property-purchasing limits.”
Why it matters: The government can’t roll out a property tax without this database. And a property tax is key to improving Chinese real estate markets in the long term.
Get smart: The database is a big step. But there are still plenty of political challenges to pushing through the property tax. So stay tuned.
CGTN: China’s nationwide property database comes into effect
POLITICS and POLICY
7. 58 detained for violation of environmental regulations
We know we keep saying it, but China is getting serious in its efforts to tackle pollution.
On Monday, the Ministry of Ecology and Environment (MEE) announced the findings of its latest round of inspections:
- “Inspectors have accepted more than 10,000 reports from the public about inefficiency in local government work of rectifying environmental problems since the end of May.”
- “Of these, around one-third had been dealt with by Thursday.”
- “Authorities have issued fines of 58.07 million yuan (about 9 million U.S. dollars), detained 58 people [our emphasis], and held 630 local officials responsible in 10 provincial-level regions.”
Get smart: This isn’t just a slap on the wrist. Officials who aren’t towing the environmental line are facing serious punishments.
The MEE is not alone in trying to fight pollution. The National People’s Congress is also doing its part:
- “Four teams of lawmakers were sent to inspect enforcement of the air pollution control law in eight provincial-level regions in early May.”
Get smart again: Central authorities have sent a clear message that they are serious about environmental protection.
What to watch: Will regulators remain committed if growth slows appreciably in H2?
Xinhua: Local officials held accountable over environmental problems
CPC People:栗战书：执法检查要直面问题不搞评功摆好 让法律制度成为不可触碰的高压线
Xinhua: Lawmakers encouraged to expose loopholes in enforcement of air pollution control law
POLITICS and POLICY
8. Google invests in JD.com
China and the US are on the brink of a trade war.
But that’s not stopping two of the countries’ biggest tech firms from cooperating:
- “Google is paying $550m for a stake in JD.com, the Chinese ecommerce group, in a move that will see the two collaborate on retail and other initiatives.”
Google’s not the only American firm with a stake in JD:
- “Walmart has a stake of about 11 per cent in the ecommerce group.”
- “The partnership… aims to marry the internet company’s user base with JD.com’s logistics expertise and infrastructure to develop retail opportunities in south-east Asia, the US and Europe.”
It’s just one of many recent moves by Google to establish a bigger presence in China:
- “This year Google inked a long-term pact to cross-license patents with Tencent…on a wide range of products and technologies.”
- “It…opened a third office…in the…city of Shenzhen.”
- “That office supplemented a recently opened artificial intelligence lab in Beijing.”
Get smart: Google would do a lot more in China if the authorities would let it.
What to watch: China’s tech giants are increasingly focused on growing global market share. Will there be any geopolitical backlash?
The Financial Times: Google pays $550m for stake in China’s JD.com
POLITICS and POLICY
9. State Council releases new document on attracting FDI
The central government has released yet another document aimed at boosting FDI.
This most recent effort was published on Friday and comes as a follow-up from the State Council’s May 30 meeting (See May 31 Tip Sheet).
There are no big surprises.
Sector-wise, restrictions are meant to be eased in
- Trade and logistics
- Professional services
- Coal and non-metallic mining
- Manufacturing of autos, ships and aircrafts
As for the overall business environment:
- Foreign talents’ work in China, and their exit and entry, will be easier than before.
- “[We will] protect intellectual property right (IPR) and other rights, including lifting the upper limit of IPR infringement compensation, strictly cracking down on illegal activities such invasion of business secrets and trademark squatting.”
- “[We will]prohibit government officials at all levels to force compulsory technology transfer by administrative measures”.
All good stuff.
Disappointingly, though, the document lacked a timetable for several of the measures, despite a recent promise to lay one out (see the June 11 Tip Sheet). That could be due to the whole trade war thing.
Get smart: Maybe you still don’t believe us, but top leaders are now convinced that outside competition is key to improving domestic industries.
Gov.cn: China to promote utilization of foreign investment