DRIVING THE DAY
1. China-US-EU commercial dynamics
Xi Jinping won’t back down in a trade war with US.
He personally delivered that message to CEOs from foreign companies last Thursday (WSJ):
- “’In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek,’ the Chinese leader said, according to the people [at the meeting].”
- “In our culture we punch back.”
Xi also hinted that, thanks to trade tensions, China would increasingly take nationality into account when dealing with foreign companies:
- “At his meeting with the global CEOs on Thursday, Mr. Xi suggested that preferential treatment awaits companies whose countries aren’t embroiled in a trade fight, according to the people briefed on the event.”
In fact, China is actively trying to forge better economic ties with the EU as part of its strategy against the US. Recent meetings with the Europeans showed progress towards an investment treaty (European Commission):
- “Both sides agreed to exchange market access offers at the upcoming Summit to give political impetus to an ambitious EU-China Comprehensive Agreement on Investment.”
Get smart: The Europeans may be the big winner from this trade war.
This just in: China just announced that it is lowering duties on imports from Bangladesh, India, Laos, South Korea and Sri Lanka (MoF). Its lowering duties on goods, like soybeans, that it currently imports from the US.
WSJ: China’s Xi Tells CEOs He’ll Strike Back at U.S.
European Commission: EU and China discuss economic and trade relations at the 7th High-level Economic and Trade Dialogue
China Daily: Talks with EU speed up amid headwinds
FINANCE and ECONOMICS
2. The art of inflicting pain
In a trade war, the goal for each side is to inflict maximum pain to the other side while reducing their own exposure.
That’s one reason why both the US and China altered their final tariffs,when compared to the initial versions (Caijing):
- The US side zeroed in on high-tech imports, related to China’s Made in China 2025 program, while getting rid of the lower tech stuff.
- Meanwhile, the Chinese deleted components for high-end manufacturing, agricultural products, and some natural resources.
By and large, the deleted items would have only worked to push up prices in the importing country without hurting the exporter all that much.
But Chinese officials are also trying to figure out other measures to offset some of the pain.
Wang Yiming, deputy director of State Council’s inhouse think tank, says that the government should:
- Create a mechanism to compensate Chinese companies negatively impacted by tariffs
- Establish programs to put back to work those that are laid off because of the trade war
Get smart: We don’t see the US taking the same sort of measures to salve their self-induced pain. That’s one reason that Chinese officials are confident they can outlast the US.
FINANCE and ECONOMICS
3. More support for SMEs
Small companies have been collateral damage of the financial de-risking campaign that China regulators have pursued over the past 18 months.
Officials are trying to address this unintended consequence of de-risking.
On Sunday, the PBoC cut reserve requirements at banks to encourage them to lend to smaller companies. And last month the central bank expanded the collateral pool for its medium-term lending facility in another effort to alleviate the pain (see June 4 Tip Sheet).
On Monday afternoon, the PBoC and four other financial regulators pledged to do more to support these companies. One important measure is the approval of RMB 150 billion worth of relending facilities (see link).
Some context: The relending program allows a bank to take an existing loan and pledge it as collateral to the central bank. Then it can obtain new, cheap funds to lend again – earmarked specially for small companies.
Get smart: Regulators might be stepping up their efforts, but we aren’t sure any of them will work. The financial de-risking campaign may have exacerbated the funding issue for SMEs, but this is a structural feature of China’s financial system – cash tends to flow primarily through large banks to large borrowers.
Caixin: 五部委支持小微企业 再贷款和再贴现增1500亿
FINANCE and ECONOMICS
4. Data dump–bank assets
Get excited. China’s bank asset data for May was released on Monday.
- Total assets grew by 7.2% y/y in the month – the same pace as in April.
- The pace of growth has come down from the recent high of 14.6%, seen back in February 2017.
Why it matters: The bank asset data is our favorite data point for keeping tabs on debt growth and financial de-risking. It’s a simple measure, but it captures a broad swathe of what is going on in the banks, shadow banks, and even some off-balance-sheet activity.
The considerable slowdown in asset growth has mostly been thanks to a reduction in interbank lending since March 2017. Now that lending among the banks has been curtailed to a large degree, regulators will look to stabilize asset growth.
Now that the de-risking program is starting to slow economic growth, regulators don’t want to slow credit growth any further. But neither do they want to accelerate it, as that would undo the progress made over the past 18 months.
It will be a tough needle to thread.
FINANCE and ECONOMICS
5. Uncertainty around China’s PSL support to shanty town redevelopment
Markets are concerned about one thing today.
China Development Bank (CDB), a policy bank, is allegedly:
- Taking approvals of all loans to local government for shanty town redevelopment back to headquarters
- Suspending all approvals for new loans
Some context: CDB has loaned RMB 437 billion to local governments this year as of May. The number was RMB 880 billion in 2017.
How this works in a nutshell:
- The central bank injects money into CDB through its pledged supplementary lending (PSL) facility.
- CDB then lends the money to local government finance vehicles, mainly in third- and fourth-tier cities.
- Local governments then pay for people to move out of their crappy apartments.
- These people then purchase new apartments with the money and may also take on mortgage.
- Local governments pay CDB back mainly with revenues from land sales.
This leads to two problems:
- More local government debts
- Increases in property prices in lower tier cities
According to CDB sources, the sudden change could be a reflection of concerns about local government debts.
- “It can not be excluded that relevant departments, after research, view funds for shanty town redevelopment programs as off-balance sheet debts that need to be controlled.”
Get smart: Shanty town redevelopment may continue. But the Ministry of Finance is pushing local governments to finance it via municipal bonds. Going forward, those moved out of shanty towns will not be given money to buy an apartment, but rather be given an apartment.
21st Century Biz: 国开行棚改项目审批权限上收总行 截至5月末已放棚改贷款4369亿元
POLITICS and POLICY
6. Legislature is unhappy with new Individual Income Tax Law
The E-commerce Law is not the only law that got bogged down at last week’s meeting of the National People’s Congress Standing Committee (see yesterday’s Tip Sheet).
The legislature also failed to put the updated Individual Income Tax Law to a vote.
According to Zhu Mingchun, deputy director of the legislature’s budget committee:
- “[They] failed to provide sufficient information for the NPC to review.”
In fact, lots of the legislators aren’t convinced that the current version would actually cut people’s taxes:
- “According to the budget committee’s internal calculations, some people’s tax burden will actually increase.”
So the legislature is now requiring the following changes:
- Increase the tax exemption threshold beyond the proposed level of RMB 5,000/month
- Lower the top tax rate from its current 45%
- Allow tax deductions for expenditures on elderly care
- Increase oversight of income and tax payments of wealth individuals
- Limit the discretion of local governments to formulate detailed rules for implementation
Get smart: This happened in part because the legislature tried to rush this through ahead of schedule.
What to watch: One reason the legislature is trying to speed passing of the amendment is in order to provide support to Chinese consumers. Can they work out these disagreements in the two months before the legislature’s next session?