DRIVING THE DAY
1. Trade talks redux (redux)
Vice Minister of Commerce Wang Shouwen will arrive in Washingtonon Wednesday to re-start talks on the trade war.
Bob Davis and Lingling Wei from the WSJ say, this time, the US Treasury has a more reasonable list of demands:
- “reduction of subsidies”
- “elimination of overcapacity in steel, aluminum and other industries”
- “cessation of pressure on U.S. companies to transfer technology”
- additional purchases of U.S. goods and services”
- “strengthening of the yuan”
Those look doable for China.
But there’s a problem. It’s not clear that Treasury is in charge:
- “The Treasury and Mr. Kudlow’s National Economic Council have put together [the]…pared-down list of requests to China that they think could be a basis for a deal.”
- “But the U.S. trade representative’s office, which is in charge of tariffs, wants to hold off on negotiations, arguing that additional levies would give the U.S. more bargaining power by October, said people briefed on the discussions.”
Get smart: China is ready cut a deal. But the US side remains divided. Ultimately, this will come down to Trump.
What to watch: Even a glimmer of hope continues to buoy markets. But a disappointing outcome on Wednesday will do just the opposite.
FINANCE and ECONOMICS
2. Bankruptcy cases continue to grow rapidly
The National Development and Reform Commission (NDRC) released the latest bankruptcy data last week.
Bankruptcy filings through the first six months of 2018 came in at 6,392 cases – on course to reach 12,784 cases by year end.
That number has risen dramatically over the past several years. Bankruptcy filings came in at:
- 3,568 in 2015
- 4,081 in 2016
- 10,195 in 2017
Some context: Bankruptcies continue to be most concentrated in the coastal provinces of Zhejiang, Jiangsu, and Guangdong – all of which have a high proportion of private enterprises.
Why it matters: China desperately needs a more robust bankruptcy system in order to unwind underperforming companies in a controlled, predictable, and transparent way. There is a big push to improve the system, but it will take time.
Get smart: Growth of filed bankruptcy cases is far outstripping growth of concluded bankruptcy cases. The courts are trying to expand capacity to address the backlog, but they just don’t have the resources.
21st Century Biz:僵尸企业”出清致破产案件猛增 专家建言设立破产法院
FINANCE and ECONOMICS
3. Regulators ask banks to lend more, yet again
China’s banking regulator (CBIRC) is trying to get banks to lend more…again.
Over the weekend, the CBIRC put out new guidelines, exhorting banks to better serve the real economy.
Some context: This is the third time in the past month regulators have asked banks to juice lending.
After last week’s economic data showed investment in China contracting for the first time ever, regulators are even more concerned about the pace of growth.
But so far, the guidance for more bank lending has not translated into faster credit creation – let alone improved economic growth.
There are three reasons:
- Banks are still being cautious – regulators want them to lend more but are still holding them more accountable for bad lending.
- Shadow credit continues to be squeezed – offsetting any improvement in bank lending.
- There aren’t a lot of shovel-ready projects out there – so banks are having a tough time finding worthy borrowers.
Get smart: Regulators are trying to have their cake and eat it, too – telling banks to lend more while also controlling their risk profiles.
What to watch: We remain skeptical that overall credit growth will accelerate much, if at all, in the coming months.
21st Century Biz:银保监周末表态！从基建到居民消费，匡定这些信贷重点！1月内三次发文，宽货币正加速传导宽信用
POLITICS and POLICY
4. Anxieties abound in Beijing
Bloomberg’s Peter Martin has been running around the capital, surveying the mood among Beijing’s elites. Here’s what he found from more than two dozen interviews, including with current and former officials:
- “The trade war is leading to some soul searching in Beijing.”
- “Discussions quickly turn to the sustainability of China’s state-centered economy and the leadership of Xi.”
- “The hushed debate centers over the wisdom of Xi’s goals for rapid growth and his decision to announce China’s ambitions to the world.”
This soul searching could be good for foreign companies:
- “Across the political spectrum in China, from reformers to nationalists, there’s a growing consensus that the nation needs to open up more to foreign business, better protect intellectual property and create a more level playing field.”
Get smart: We have seen a concerted push this year to open more sectors to foreign investment.
But that’s not all. The slowing economy and tensions with the US are spurring efforts to create a better business environment for domestic companies, too.
Get smarter: China’s strategy for dealing with the US is in flux. There are more voices calling for compromise in the trade war – but in a way that does not look like capitulation.
Bloomberg: China, Unsure of How to Handle Trump, Braces for ‘New Cold War’
POLITICS and POLICY
5. Legislators debate income tax law
China’s legislature, the National People’s Congress Standing Committee, has announced that it will hold its next session from August 27-31.
There will be at least seven draft laws up for deliberation. As always, the excellent NPC Observer has the skinny:
- “The draft E-Commerce Law (电子商务法) returns for a fourth—and most certainly final—round of deliberation.”
- “The draft Soil Pollution Prevention and Control Law (土壤污染防治法) returns for a third—also most likely final—reading.”
- “Draft amendments to both the Individual Income Tax Law (个人所得税法) and the Criminal Procedure Law (刑事诉讼法) return for a second—and again, most likely final—round of deliberation.”
- “The Council of Chairmen submitted for deliberation draft Separate Parts of the Civil Code (民法典各分编).”
- “The State Council submitted two draft tax laws for deliberation: Vehicle Acquisition Tax Law (车辆购置税法) and Farmland Occupancy Tax Law (耕地占用税法). “
What to watch: The revision to the income tax law is being rushed through because the government wants to cut taxes to spur consumption. But the first round of discussions were extremely contentious, and it’s unclear that all debates have been resolved.
NPC Observer: NPCSC Session Watch: Separate Parts of Civil Code, Tax Bills, Criminal Procedure, and More
POLITICS and POLICY
6. The Party’s plan to lift 30 million people out of poverty
The Central Committee and the State Council have at long last released guidelines on winning the battle against poverty over the next three years.
Some context: This document is clearly important to the Party – the 25-person Politburo approved it in May (see June 1 Tip Sheet).
The goal is ambitious:
- “Lift a further 30 million people out of poverty in the next three years.”
Here’s what the Party means by “lifting people out of poverty”…:
- “Guaranteed food and clothing”
- “Guaranteed nine-year compulsory education for kids”
- “Guaranteed basic medical needs and living conditions”
…and here’s how the Party plans to achieve it:
- “Fostering distinctive industries, supporting employment, advancing relocation, ecological restoration. and strengthening education.”
- “Extending the infrastructure network: all counties should have electricity; all villages should have buses, and 90% of poor villages should have internet.”
Get smart: This is one of Xi Jinping’s signature policies, so expect all cadres to put significant effort into it.
One bonus: Lifting 30 million people out of poverty would also create a significant boost for consumption.
Gov.cn: China releases guideline on winning battle against poverty
Gov.cn: 中共中央 国务院关于打赢脱贫攻坚战三年行动的指导意见