DRIVING THE DAY
1. MoF hits back at the central bank
As we noted yesterday, PBoC research director Xu Zhong is arguing that government spending – not monetary policy – should be employed to support growth in the second half of this year (see yesterday’s Tip Sheet).
The Ministry of Finance (MoF) isn’t happy. An anonymous editorial by “a person working within the fiscal system” pushes back on Xu’s arguments (Caixin):
- The MoF has already increased fiscal expenditures through using the budget stabilization fund and other means that do not show up as increased deficit spending.
The MoF official then takes aim at the PBoC’s de-risking campaign:
- “What really needs to be guarded against is…using [the campaign to] prevent financial risk as an excuse to rescue bad debt.”
Get smart: Downward pressure on growth is causing a rethink of economic policy. Different actors are trying to promote their prerogatives in advance of the upcoming Politburo meeting, which will set economic policy for H2.
The big picture: Policy debates are good. But this unusually public quarrel shows that Liu He and his Financial Stability and Development Committee have a long way to go in fulfilling their mandate to coordinate monetary, fiscal, and industrial policies.
FINANCE and ECONOMICS
2. Why mainlanders still can’t invest in China’s big tech companies
China’s plan to let domestic investors buy into its big tech companies is hitting some roadblocks. That’s in large part thanks to the stock market meltdown over the past month.
Some context: Earlier this year, the securities regulator (CSRC) opened a new avenue for Chinese investors to effectively buy shares of the country’s foreign-listed tech giants via China Depositary Receipts, or CDRs (see June 7 Tip Sheet).
But no CDRs have yet been issued.
What’s more, regulators have temporarily barred mainlanders from investing in certain stocks in Hong Kong (Bloomberg):
- “China’s stock exchanges said they won’t allow mainland investors to buy shares with weighted-voting rights in Hong Kong.”
- “[This] type of structure [is] favored by founder-led tech companies, which enable leaders to keep control even after going public.”
That means domestic investors can’t get a piece of companies like newly-listed Xiaomi.
Get smart: The CSRC says it is restricting purchase of these shares because it wants to protect small investors. But the real reason is that it doesn’t want liquidity flowing out of the domestic A-share market and into Hong Kong.
Get smarter: China is opening some sectors to boost inbound investment, but regulators are keeping a tight grip on outbound capital.
Bloomberg: China Traders Barred From Buying Xiaomi Through Stock Link
FINANCE and ECONOMICS
3. Millennials and China’s cashless revolution
For those living outside China, it is difficult to appreciate the speed and breadth of the cashless revolution that has overtaken the country in recent years.
Everyone from cab drivers to street-side vendors uses mobile payments. Some of China’s newest startups, like Luckin Coffee, don’t even take cash at all.
In a worthy long read, the FT’s Yuan Yang argues that millennials are driving the change. And that China’s unique mix of online platforms is making the shift seem natural:
- “It was the unique formula offered by China’s tech giants that generated the explosion: by blending social, e-commerce and payment functions into single apps, customers could manage their finances at the same time as managing their social lives.”
- “’When users use this kind of fintech, they don’t think of it as doing their finances, they think of it as part of the daily necessities of life,’ says Li Chao…[at] iResearch.”
When it comes to day-to-day activity, the cashless revolution has arguably been the biggest change in China over the past five years.
And that is one key reason behind China’s drive to improve cybersecurity and data protection.
Go deeper: The link below is worth the click.
FT: Why millennials are driving cashless revolution in China
POLITICS and POLICY
4. China is worried about investment restrictions
It’s not just the US that is fed up with Chinese investment restrictions. European countries are increasingly vocal about what they see as an unfair environment for foreign firms.
Premier Li Keqiang sought to allay these fears at the EU-China Summit Monday (Gov.cn):
- “The Premier stated that China is willing to engage in a further balanced trade relation with the EU, with tariffs on imports reduced, including automobiles, commodities, and medicine, the negative list for foreign investment shrunk, and market entry threshold lowered.”
- That will usher in a benign business environment for both Chinese and European enterprises on the same footing.”
Some context: The Chinese are increasingly worried that Western countries will start restricting Chinese investment. Li was rather explicit about this fear:
- “China hopes that European enterprises will make the most of the opportunity, with their market staying open to Chinese ones as well, Premier Li said.”
Get smart: There is growing recognition that more market opening is needed at home to ensure market access abroad.
Get smarter: It might be too little too late. After years of complaining about investment restrictions to no avail, the opinions of many foreign companies and governments have already hardened against China.
Gov.cn: Premier Li, President Tusk, President Juncker engage media
POLITICS and POLICY
5. China and EU look to preserve WTO
Although there remain disagreements over trade and investment policies, both China and EU agree on one thing: They do not want the World Trade Organization (WTO) to fall apart.
At the conclusion of the EU-China summit on Monday, Premier Li Keqiang and European Council President Donald Tusk made a joint plea to preserve the trade body.
Some context: US President Donald Trump has openly discussed leaving the institution.
Li was at pains to say that this is not about the US (FT):
- “As I said in the beginning of my meeting with Mr Tusk and Mr Juncker: our negotiations are not targeted at any third party.”
- “Leaving behind any other county — let’s not even talk about leaving behind the US or a country located between Europe and China — is unfeasible.”
- “Because this is a multilateral trade agreement.”
Get smart: The WTO is not perfect, but it’s a lot better than nothing.
What to watch: The two sides agreed to set up a working group aimed at reforming the WTO.
- “China on Monday filed an additional complaint with the World Trade Organization against the U.S. plan to impose tariffs on 200 billion U.S. dollars worth of Chinese goods.”
POLITICS and POLICY
6. Government looks to stabilize employment
With the economy slowing, the central government is rolling out measures to stabilize employment.
The National Development and Reform Commission (NDRC) and 16 other ministries jointly released a policy to:
- Improve workforce training
- Promote entrepreneurship
- Promote the services sector and open it up to foreign investment
- Cut labor costs for business, including by slashing their required contributions to social security
The doc promises fair treatment for foreign companies:
- “[We will] protect the legitimate rights and interests of foreign investment, and give full play to the positive role of foreign-funded enterprises in stimulating employment.”
Some context: Foreign companies are responsible for around one-tenth of all jobs.
The government will also give a hand to businesses affected by the trade war:
- “[We will] make full use of employment subsidy funds, and incorporate people affected by industrial restructuring and international trade friction into relevant employment support policies and public employment services in a timely manner.”
Get smart: In the end, Chinese officials aren’t that worried about slower growth. What they are worried about is increasing unemployment.
POLITICS and POLICY
7. Xi’s war on religion
Xi Jinping’s tenure as Party general secretary has been marked by his efforts to enforce an increasingly rigid political orthodoxy.
This has led authorities across the country to take a tougher stance toward religion.
The SCMP has a great article on how this has played out in Gansu province:
- “[The] Party has banned children under 16 from religious activity or study in Linxia, a deeply Islamic region in western China’s Gansu province that had offered a haven of comparative religious freedom for the ethnic Hui Muslims there.”
- “Local authorities have severely curtailed the number of people over 16 officially allowed to study in each mosque and limited certification processes for new imams.”
- “They have also instructed mosques to display national flags and stop sounding the call to prayer to reduce ‘noise pollution’ – with loudspeakers removed entirely from all 355 mosques in a neighboring county.”
One local imam sums up the situation:
- “It feels like we are slowly moving back towards the repression of the Cultural Revolution.”
The big question: Will these increasingly repressive policies eventually lead to a public backlash?
SCMP: Is China’s atheist Communist Party trying to eradicate Islam?