DRIVING THE DAY
1. Xi Promotes the China Model to Kim
Xi Jinping met with Kim Jong-un for a second day in Beijing on Wednesday.
Xi offered to take Kim under his wing (CPC):
- “The Chinese side is willing to…unite in cooperation with North Korea, and jointly create a more beautiful future for the two countries’ socialist projects.”
What Xi means (our paraphrasing):
- “I can show you how to grow your economy – without giving up political control.”
There was an important sign that Kim is willing to take Xi up on his offer (SCMP):
- “Kim was accompanied by his top economic official, Premier Pak Pong-ju, on a visit to the Chinese Academy of Agricultural Sciences [CAAS].”
- “Pak, 79, who is also a member of the supreme Presidium of the Central Committee of the Workers’ Party of Korea (WPK), was making his first visit to China, KCNA reported.”
Get smart: China’s economic reforms started in the agricultural sector. So it makes sense that Chinese officials took Kim and Pak to CAAS.
Get smarter: Kim has been good at playing all sides thus far. Just because he is leaning towards China today, does not mean that he will not lean towards the US tomorrow.
SCMP:Kim Jong-un says Beijing and Pyongyang ‘like family’
FINANCE and ECONOMICS
2. Farmers talk trade war
Ever wonder how the trade war is playing outside of the Beijing-Shanghai corridor?
You might be surprised at some of the nuanced views among Chinese rural citizens.
Most are predictably irked at the US. But others see Trump as doing his best to defend the US, as a good leader should.
Our best source for on-the-ground, in-the-sticks reporting is Matt Chitwood. He has a great piece in the New Republic worth a read:
- “’Your president is not good,’ said a man in a cockeyed Mao cap. ‘Why does he want to hurt us common folk?’”
- “The man had never finished elementary school, but he quoted me the exact figure of America’s trade deficit with China.”
- “Even here in rural Yunnan Province, one of the most remote parts of China, tariffs are on the mind.”
Get tuned in to laobaixing thinking by clicking the link below.
New Republic: Tea and Tariffs in Rural Yunnan
POLITICS and POLICY
3. Liu He’s New Job
Economic czar Liu He has an additional job. He is now chair of the State Council Leading Small Group for Promoting the Development of Small and Medium Enterprises.
Some context: The group was established in 2009. Its main task is formulating policy to promote SMEs.
There are three vice chairs:
- Minister of Industry and Information Technology (MIIT) Miao Wei
- Minister of Finance Liu Kun
- Member of the State Council Party Group Gao Yu
- The LSG’s office will be housed in MIIT
- The director of the office will be MIIT Vice Minister Wang Jiangping
Get smart: Policymakers have a renewed focus on SMEs. They have been unintended collateral damage of the financial de-risking campaign and we have seen a spate of recent policy moves to try to undo the damage.
Get smarter: Despite the renewed focus, SMEs have traditionally thrived in China despite government policy, not because of it.
What to watch: With Liu He at the head of the small group, will the government finally succeed in creating a more favorable environment for SMEs? We are skeptical.
POLITICS and POLICY
4. State Council promises more financing for SMEs
Speaking of small businesses…
The State Council’s weekly meeting focused on improving financing conditions for small and micro enterprises.
Some proposed measures:
- “Re-financing interest rates for small and micro businesses will be lowered.”
- “Evaluation for financial institutions will be improved to make sure that businesses with a credit quota of 10 million yuan and below can enjoy faster year-on-year loan growth than other types of credit recipients.”
- “The state financing guaranty fund will cover no less than 80 percent of the financing guarantee for small and micro businesses.”
That’s not all. They are also dipping into the monetary policy toolkit:
- “Targeted cuts in banks’ reserve requirement ratios (RRR)…will be used to boost credit supply to small and micro businesses.”
- “Loans of businesses with credit quota of under 5 million yuan can be included as qualified collateral for mid-term lending facility.”
Get smart 1: When these targeted RRR cuts come, don’t misinterpret it as monetary stimulus.
Get smart 2: Small businesses (which are usually privately owned) don’t get funding because China’s banking system prioritizes lending to state-owned enterprises. These measures don’t attack that problem head on.
Gov.cn : 李克强主持召开国务院常务会议 部署进一步缓解小微企业融资难融资贵等
Gov.cn : Fiscal measures on the way to help small businesses
POLITICS and POLICY
5. Legislature pitches in to address data falsification
The legislature has sent out teams across the country to inspect implementation of the new statistics law (see May 28 Tip Sheet).
Yesterday, the inspection teams reported their findings to the legislature’s standing committee.
They didn’t like what they found.
- “Statistical falsification is still happening after repeatedly being banned.”
- “The supervision and enforcement of the statistics law is subject to various constraints, and the punishments are too soft.”
Some proposals from the legislature:
- Stop ranking localites by economic growth, which is the primary driver of local officials cooking the books
- Don’t promote officials that falsify data
- When evaluating cadres, use more comprehensive and balanced formulas that cover social development, new growth drivers, the quality of growth, and economic efficiency
- Build a measurable index for Supply-Side Structural Reform and the Three Critical Battles
- Aggregate operational data from businesses to get a more granular picture
Get smart: Some of these efforts are likely to be pursued, but until local officials are convinced that their promotion matrix has truly changed, we are skeptical that they will get much traction.
Why it matters: Good data makes for good policy…and vice versa.
POLITICS and POLICY
6. The NAO’s coming out party
We recently highlighted the empowerment of the National Audit Office (see June 7 Tip Sheet).
Xi Jinping is using the body as an important tool for measuring policy implementation. (see yesterday’s Tip Sheet)
Yesterday, the body had a bit of a coming out party. It published a spate of reports covering:
- Execution of the central government’s 2017 budget
- Implementation of the affordable housing program in 2017
- Local government’s implementation of major policies in Q1
- An audit of three state-owned financial institutions
- Audits of 35 central SOEs
- Audit of poverty alleviation efforts in 145 counties
The NAO isn’t trying to be anyone’s friend. Some of their findings include:
- “Five localities illegally borrowed RMB 3.2 billion. Three local governments illegally guaranteed RMB 978 million since August 2017.”
- “Nine large state-owned banks illegally provided RMB 360.87 billion in financing to the real estate industry.”
- “Some individual consumer loans actually flowed into the stock market and property market.”
- “[35 Central SOEs] In 2016, inflated profit by RMB 2.865 billion, accounting for 0.77% of total profit.”
- “556 irregular business management issues resulted in RMB 20.367 billion worth of asset loss or waste.”
Get smart: The NAO is keeping tabs on nearly every government agency. Their ability to track implementation with hard data should improve implementation and accountability.
POLITICS and POLICY
7. Party center warns officials about “hostile forces”
The latest issue of the Party’s most prestigious ideological publication, Qiushi (a.k.a. Seeking Truth), has an editorial asking cadres to stand firm in their Communist beliefs:
- “[Hostile forces] spare no effort to engage in ‘peaceful evolution,’ to advocate erroneous ideological trends such as historical nihilism, ‘constitutional democracy,’ and ‘universal values,’ and then to sell neo-liberalism, questioning reform and opening up.”
- “Hostile forces never stop for a moment to westernize and separate our country.”
Whew. That’s some heavy stuff. There’s more:
- “Some [cadres] have lost faith in the destiny of socialism and longed for Western social systems and values.”
- “They always feel that China is not good, and that foreign countries are fine.”
- “[But] they have not even noticed that Western countries have fallen into a quagmire in recent years and have been plagued by sluggishness: the economic downturn, the failure of democracy, and the intensification of social conflicts.”
Get smart: When foreign relations are especially intense, officials are asked to look at every issue through an ideological lens.
Get smarter: You don’t have to be a Communist to see a glimmer of truth in that last quote. That’s one reason China is increasingly confident in its political system.