DRIVING THE DAY
1. Who can outlast who in the trade war?
The trade war is on. Everyone knows that.
As tensions continue to rise, analysts are looking for potential off-ramps.
For now, neither Trump nor Xi can back down, due to domestic political calculations. But as the pain deepens, the economic
become increasingly important.
Both sides think they have the upper hand.
Trump’s reasoning, per the Wall Street Journal:
- “A sharp slump in exports in the coming months, economists say, could threaten growth just as investments in Chinese factories and other fixed assets are slowing to multiyear lows, while Chinese household consumption is starting to weaken.
- A full-blown trade war will tick China’s GDP growth down, from 6.8% to around 6%.
- China can live with that.
Those calculations come from Yang Weimin and Ha Jiming. Yang is a former deputy office director of Central Leading Small Group on Economic and Financial Affairs, and Ha is a senior researcher with the China Finance 40 Forum.
Get smart: Trump and Xi can’t both be right. But it’s going to be months before we see who can really outlast the other.
In the meantime, markets are not going to be happy.
WSJ: White House Is Confident It Has an Edge Over China in Trade Dispute
Caijing: 杨伟民谈贸易争端：不必怕 外需占比已不到10%了
CF 40 Forum: 中美贸易冲突对两国的影响
DRIVING THE DAY
2. Yi Gang tries to calm markets
Investors are getting too emotional. That’s what central bank governor Yi Gang said to local media yesterday.
Yi was discussing the nosedive in the Chinese stock market on Tuesday, which was part of a global sell off as investors digested the news that the US-China trade war is finally kicking off.
Yi certainly tried to portray a since of calm (PBoC):
- “Since it is a market, there will be ups and downs.”
- “Investors should remain calm and rational.”
He then went on to discuss the economy’s strong fundamentals and the outperformance of the currency so far in 2018.
But despite the upbeat message Yi did make clear that the PBoC:
- “attaches great importance to the impact of external shocks.”
For now, the central bank is in monitoring mode. Their goal remains to make sure liquidity and credit don’t get disrupted by a trade war – or anything else for that matter.
So they will be vigilant, but for now don’t expect any proactive loosening.
FINANCE and ECONOMICS
3. QE with Chinese characteristics?
Speaking of proactive loosening from the central bank (see previous entry), the domestic market debate about the trajectory of monetary policy is heating up.
On Tuesday, the PBoC injected RMB 200 billion into the banking system via the medium-term lending facility (MLF). That brought total MLF injections for the month of June to RMB 463 billion.
These large, relatively long-term injections have some folks asking whether the PBoC is embarking on Chinese-style quantitative easing.
Guess what – it’s not. But that hasn’t stopped the discussion.
The PBoC also posted a research paper on its website on Tuesday, which argued for more reserve requirement cuts for the banking system – further boosting some traders’ expectations of looser policy in H2 (see Reuters link).
Get smart: Those looking for stimulus via policy loosening are missing the point of the PBoC’s recent moves. China’s banks have a structural liquidity problem, and the central bank is trying to address it.
One big driver of banks’ liquidity challenges – very high reserve requirement ratios (RRRs).
What to watch: RRRs are set to come down in H2 to keep liquidity adequate. But those moves should not be misinterpreted as stimulus.
How do we know? Because credit growth will not accelerate.
Reuters: China central bank says bank reserve ratios should be cut, fuels easing talk
FINANCE and ECONOMICS
4. Xiaomi butts heads with the CSRC
Xiaomi is running into some issues with its pending IPO.
The company has had to slash its potential valuation and has also shelved plans to become the first company to raise funds on the Mainland by issuing Chinese Depositary Receipts (see June 12 Tip Sheet).
One big reason for the changes – a dust up with Chinese regulators (Reuters):
- “The delay was triggered by a dispute between the company and regulators over the valuation of its China depositary receipts (CDRs).”
- “Xiaomi Corp is using a range of USD 55 billion to USD 70 billion in its discussions with potential cornerstone investors ahead of the planned launch of its Hong Kong initial public offering (IPO) later this week.”
- “The new valuation is far below the $100 billion touted by sources earlier this year and below the more recent floor price of $70 billion that the company and its advisers had informally used as guidance for investors.”
Get smart: This isn’t a total black eye – Xiaomi is still set for a super successful IPO. But it doesn’t exactly look good for Xiaomi or China’s securities regulator.
Get smarter: China’s efforts to bring home its big tech companies won’t necessarily be a smooth process.
POLITICS and POLICY
5. Kim in Beijing
Kim Jong-un is back in China – his third visit to the country in almost as many months.
The reason: to brief Xi on his summit last week with Donald Trump.
Once again, Kim got the royal treatment:
- Xi and his wife Peng Liyuan treated Kim to a lavish welcome banquet.
- Including Xi, seven Politburo members were involved in activities with Kim yesterday, as were Vice President Wang Qishan and State Councilor Wang Yi.
The message: China is investing a lot in the bilateral relationship.
Xi praised Kim for his summit with Trump.
But this was the more important message:
- “We are happy to see that North Korea…has decided to make economic construction its main task.”
- “We support North Korea’s economic development and improvements in the people’s wellbeing.”
What that means: Looks like a pretty clear sign that China is ready to loosen sanctions.
Why that matters: Chinese support gives Kim more leverage in negotiations with the US over “denuclearization.”
The big picture: China wants to keep Kim close because it’s terrified of the DPRK floating into the US’s orbit.
Our thought: Is Kim Jong-un running circles around the world’s two most powerful men – Xi Jinping and Donald Trump?
POLITICS and POLICY
6. Tax cuts are coming
China’s legislature began its bimonthly session on Tuesday.
It looks likely to amend the Individual Income Tax Law (Xinhua):
- “The minimum threshold for personal income tax [will be raised] from 3,500 yuan (about 544 U.S. dollars) to 5,000 yuan per month.”
- “Special expense deductions [will be added] for items like children’s education, continuing education, treatment for serious diseases, as well as housing loan interest and rent.
Some context (SCMP):
- The last significant change to China’s individual income tax system came in 2011, when the personal allowance was raised to 3,500 yuan from 2,000 yuan, and the number of tax brackets was cut to seven from nine.
The reason for the change: To boost consumption, according to Minister of Finance Liu Kun.
This is weird: When the NPC announced this meeting last week, they did not mention that the income tax law would be on the agenda (see June 12 Tip Sheet).
One explanation: Perhaps China’s leaders are bracing for an economic slowdown. The economy is starting to look weak. And a trade war isn’t going to help. So they decided to speed up the amendment to the income tax law in order to give the economy a little boost.
POLITICS and POLICY
7. Xi’s landmark green development program
Xi wants the Yangtze River Economic Belt to be a showcase for green development.
That’s according to a speech that Xi gave in April, which was only officially released last week.
Xi was at pains to stress that environmental protection does not have to run counter to economic development:
- “When we say there should be no large-scale development, it does not mean we cannot develop at all.
- “But we should stay away from development that destroys the river, and we should follow a green development path that puts ecology first.”
Sounds nice. But what does that mean in practice?
- More stringent enforcement of environmental regulations. Xi praised one local environment regulator who issued RMB 27 million worth of fines to its biggest local tax payer, a chemical producer. That forced the company to spend RMB 100 million to upgrade its facility.
- Tacklinglocal protectionism. Xi wants to weed out “inefficient and disorderly competition” that sees redundant industries in the same areas.
The National Audit Office (NAO) is ready to help Xi out. Yesterday, it released a report exposing the failures of local governments with respect to environmental protection – and demanding improvements.
What to watch: Despite what Xi says, a shift to greener development will have adverse short-term effects on headline growth. With the economy slowing, will Xi’s commitment waver?