FINANCE and ECONOMICS
1. CNY back in focus
Scrutiny of the CNY increased after US President Donald Trump accused China of currency manipulation Thursday.
Trump’s verbal intervention weakened the dollar, leading the CNY to open the trading day stronger on Friday.
- The CNY started trading at 6.7593 to the USD, compared to 6.7671 the day before.
That was the first time the central bank (PBoC) strengthened the CNY fixing in eight days.
Some context: The CNY fixing is the central trading rate that the PBoC sets every morning.
More context: For your average observer, the change in the fixing might seem miniscule, but it’s an important indicator of where the currency will trade for the day – and where the central bank wants the currency to trade.
Get smart: Trump’s charge of “currency manipulation” is baseless. China is not purposefully weakening its currency.
In fact, the PBoC is actually trying to mitigate currency weakness. It’s Trump’s trade war that is strengthening the dollar against other currencies – other central banks are simply trying to stem the fallout.
Bloomberg: China’s Luck on Yuan Devaluation Risks Running Out on Trump Ire
FINANCE and ECONOMICS
2. New asset management rules are a big deal
Regulators issued a spate of new rules for the asset management sector Friday. They’re all implementing rules for the regulation announced in April (See May 2 Tip sheet).
In a coordinated release, the banking regulator (CBIRC), securities regulator (CSRC), and central bank (PBoC) each issued new ruleson wealth management products (WMPs), which are the heart of shadow banking in China.
The most important were draft rules from the CBIRC. They require that by 2020 banks must:
- Manage WMPs on a net asset value basis
- Standardize the management of their funding pools
- Not invest their own WMPs in other banks’ WMPs
- Control leverage ratios
- Strengthen information disclosure
- Register all products in a national system
Markets think the rules are soft. That’s because they give financial institutions (FIs) some leeway to decide the pace of compliance over the next 18 months.
Our view: Given then USD 15 trillion size of the WMP market, these rules could represent the most wide-ranging change to China’s financial system in years. Regulators went a bit softer than they had initially indicated, but that doesn’t mean they are giving up on financial de-risking. It simply means they are being more realistic about how quickly they can clean things up.
Get smart: These clear guidelines will make it easier for FIs to formulate investment strategies. That should help to ease liquidity in the market.
Reuters: China Steps ups Regulations on Wealth Management Products, Asset Management Business
POLITICS AND POLICY
3. Xi gets royal treatment in the Emirates
Xi’s three-day visit to the United Arab Emirates concluded Saturday.
The two countries upgraded their relationship to a “comprehensive strategic partnership.”
Get smart: China has comprehensive strategic partnerships with LOTS of countries. We’re not sure it means much in practice.
Xi got the red-carpet treatment:
- “President Xi was conferred with the Order of Zayed, the UAE’s highest civil decoration, by the Crown Prince, who also gave Xi an Arabian horse as present.”
They also made some commemorative stamps (Khaleej Times):
- “To mark the historic visit of Chinese President Xi Jinping to the UAE, Emirates Post Group… issued commemorative stamps celebrating 34 years of diplomatic relations.”
The two countries also made some deals, including (SCMP):
- “[A] strategic cooperation [agreement] between…the Abu Dhabi National Oil Company and China National Petroleum Company.”
- “A deal to allow state-owned financial services firm Industrial Capacity Co-Operation Financial Group to set up a lending platform in Abu Dhabi.”
- “A deal was also reached for the Zhejiang China Commodities City Group to build a “traders market” at the Dubai Jebel Ali free economic zone.”
- “The joint statement…also announced plans for joint military training exercises.”
Our take: Looks like a successful visit.
Xinhua: China, UAE agree to lift ties to comprehensive strategic partnership
Khaleej Times:New stamps issued marking UAE-China Week
SCMP: China’s President Xi Jinping wraps up UAE visit with series of deals to boost presence in Middle East
POLITICS AND POLICY
4. Senegal signs up to Belt and Road
On Saturday, Xi flew to Senegal for a two-day visit.
The big news: Senegal became the first West African country to sign up for the Belt and Road.
Xi also got another medal to add to his collection (Xinhua):
- “After their talks, Xi received Senegal’s top medal of honor from [Senegalese President Macky] Sall.”
Xi used the visit to speak about China-Africa ties more broadly:
- “Noting that he attaches great importance to China-Africa ties, Xi said he feels strongly about the long-term friendship between China and Africa.”
- “The two sides are sincere partners on their path of development and natural allies in international affairs.”
Some context: Xi has invested a fair amount of time and energy in building Sino-African relations. This is his fourth trip to the continent since becoming president in 2013.
More context: Xi’s comment about “natural allies” echoes his recent speech at the Foreign Affairs Work Conference, which said that China should focus more efforts on strengthening ties with developing countries (see June 25 Tip Sheet) .
Our take: Some in Africa (and the West) resent growing Chinese influence in Africa. But our experience is that Chinese trade and investment on the continent is, on balance, welcome – and constructive.
Xinhua : Chinese, Senegalese presidents pledge to create better future for ties
POLITICS and POLICY
5. Guangzhou gets new Party secretary
Guangzhou has a new Party secretary – Zhang Shuofu
The job is a big deal. Guangzhou’s economy is larger than the size of most countries, including the likes of Chile and Vietnam.
A little about Zhang:
- A hydraulic engineer by training, he spent the first 20 years of his career working on hydropower and water resources in his native Hunan.
- He eventually worked his way up to become vice governor of Hunan.
- In April 2015, he took over as discipline chief for Yunnan, in the wake of several major corruption scandals there.
- At the end of 2016, he was appointed head of the Beijing discipline commission; in that role he headed one of three pilots for the new supervisory commissions, which would later be introduced nationwide.
There are more personnel moves on the horizon (SCMP):
- “Zhang’s move to Guangzhou was part of a wider political reshuffle now under way in provincial circles, separate sources said.”
What to watch:
- “One of the sources said there was now “a good chance” that [Zhang’s predecessor] Ren [Xuefeng] would be given a promotion to a northern province, as the central government had been encouraging such moves.”
POLITICS and POLICY
6. Vaccine scandal panics country – AGAIN
Parents across the country are worried that their children may have been given substandard vaccines (Sixth Tone):
- “253,338 doses of baibaipo, a vaccine for preventing against acute respiratory disease and tetanus, were found to be substandard.”
- “What’s worse, the majority of these bad vaccines are currently on the Chinese drug market.”
That’s not all: The same company that produced the bad vaccine was also found to have falsified production data for its rabies vaccine.
The public is demanding a thorough investigation of the company and possible government corruption.
There is good reason to suspect collusion:
- In more than half of recent legal cases involving vaccines, money was exchanged between the company and government (Net Ease).
- Changsheng, the company responsible for the latest scandal, has been caught bribing officials a dozen times before. (The Paper)
Get smart: Nothing makes people angrier than endangering their children.
Premier Li Keqiang is in damage control mode. On Sunday night, he issued instructions and sent out a team to investigate (Gov.cn):
- “The vaccine case has crossed a moral line, and the people deserve a clear explanation.”
The big picture: Scandals like this undermine people’s trust in the government.
Sixth Tone: China Panics Over Substandard Vaccine Scandal
Net ease: 中国的孩子为什么逃不过问题疫苗
The Paper: 长春长生卷入十余起行贿案：每支72元的狂犬疫苗回扣20元
Gov.cn :Premier Li: A thorough investigation must be conducted on vaccine incident
POLITICS and POLICY
7. Discipline inspectors promote new growth model
The Party’s discipline commission (CCDI) has finished its first round of inspection since the 19th Party Congress. They visited:
- 14 provinces
- Seven ministries
- Eight centrally-administered state-owned enterprises
Some context: These tours are conducted regularly to discover problems and enforce the Party line.
The latest round of inspection tours were more extensive than in the past:
- They inspected key cities as well as provinces.
- The tours lasted three months, instead of the previous two which lasted only….
What was different: This round of inspections focused less on corruption, and more on policing poor policy implementation.
There are implications for economic policy. The report complained:
- “Some cadres still use the old thinking of extensive development and pumping investment to guide their work.”
What that means: The central leadership wants to change the growth model to one of high-quality growth and inclusive development.
What to watch: Expect shake-ups in the organizations inspected in the coming months.