DRIVING THE DAY
1. China prepares for Cold War
On Wednesday, the People’s Daily ran an important op-ed by Long Guoqiang – deputy head of the State Council’s in-house think tank, the Development Research Center.
Long voiced what is quickly becoming the consensus view on American motivations for a trade war:
- Long believes it’s all a bid to contain China, just as the US did to the Soviet Union.
Yep, that’s right – Long sees this as the beginning of a new Cold War.
Long also reiterated China’s basic game plan.
- Don’t turn up the heat.
- But continue to match the US action for action.
- Be ready to resume negotiations any time.
Meanwhile, Long suggests these domestic support measures:
- In the short-term, offer government assistance to companies hit by the tariffs – finding new markets for exporters and substitute sources for imports.
- In the long-term, avoid errors made by the Soviet Union – in other words, don’t abandon the domestic agenda.
Get smart: Long’s piece appears to reflect the thinking of top officials, so it should be closely read.
Get smarter: China’s leadership no longer sees this as a trade spat, but rather as an attack on China’s basic political and economic models. That’s not a recipe for de-escalation.
People’s Daily: 理性认识当前的中美贸易摩擦（人民要论）
FINANCE and ECONOMICS
2. Guo Shuqing ups the ante on financial de-risking
China’s banking and insurance regulator (CBIRC) held a big meeting on Wednesday.
The key message: Financial de-risking is not over by a long shot.
The meeting was led by CBIRC Chairman Guo Shuqing, the key architect of the financial “regulatory storm” that kicked off in April 2017.
The meeting established three clear priorities – in order of importance:
- Prevention and control of financial risks
- Supporting the real economy
- Opening the financial sector
Officials then detailed how they propose to achieve those goals.
On the de-risking side, markets can expect:
- Tighter regulation over internet finance
- Faster, better recognition of bad bank assets
- Increased loan writeoffs
- Increased efforts to divert lending out of the property market
- Fines, fines, and more fines for wrongdoers
Other priorities over the next twelve months will, of course, include boosting the Party’s presence in the financial system and executing the CBIRC’s ambitious restructuring plan.
Get smart: Guo is sending a clear signal that he is not backing off of financial de-risking. Officials will attempt to balance those efforts against weaker economic growth – but risk containment is the obvious priority.
FINANCE and ECONOMICS
3. Liquidity set to tighten into September
China’s banks and other financial institutions have had a pretty easy July and August. Cash was abundant and cheap, making it easy to lend.
But September promises to be tenser on the liquidity front, according to a solid article in the China Securities Journal.
There will be four drivers:
- Large local government bond issuance
- Macroprudential Assessments (MPAs) of the banks
- An interest rate hike by the Federal Reserve
- Strong cash demand – due to quarterly tax payments and in anticipation of the week-long holiday in early October
We are already starting to see the effects of the bond issuances. Local governments have sold over RMB 800 billion so far this month – mostly in just the last two weeks.
That was the largest monthly issuance since July 2016, and it has served to push money market rates up since they bottomed out in mid-August.
Traders expect issuance to top RMB 1.2 trillion in September. Add in the regulatory pressure from MPAs, the Fed’s move, and broader cash demand, and rates will continue to drift up.
Get smart: Higher funding costs for banks will keep them from accelerating loan growth – which will further pressure the decelerating economy.
China Securities Journal: 9月面临四大考验 资金面料松紧有度
FINANCE and ECONOMICS
4. Government prepares natural gas for winter
With autumn right around the corner, the Chinese government is making preparations to ensure that there is enough natural gas for heating come winter.
Some context: A forced coal-to-gas switch last winter left many households without heat when natural gas supplies proved insufficient for the increased demand. It left many people freezing, disrupted business operations, and was a major embarrassment for the government.
Despite last year’s failure, the government is pushing ahead with the coal-to-gas switch (MoF):
- The central government recently initiated the switch in 23 cities across five provinces.
The government has learned some lessons:
- This time, local governments can only switch to gas when there is secure supply.
- The central government has been pushing the big three national oil companies to build more gas infrastructure – and make sure that all infrastructure is fully integrated.
China’s gas demand is soaring:
- Natural gas consumption grew 17.5% y/y in H1.
- And natural gas imports grew by a whopping 39.3% y/y.
Get smart: Supplies of natural gas will struggle to keep up with demand without more wide-ranging reforms to the natural gas sector. We don’t see those happening fast enough, meaning that coal demand will not drop precipitously.
POLITICS and POLICY
5. Chinese around the world called to rejuvenate the nation
Xi Jinping and all six of his Politburo Standing Committee colleagues attended the National Congress of Returned Overseas Chinese and their Relatives in Beijing on Wednesday.
Head of the Party’s discipline commission, Zhao Leji, made a speech on behalf of the Party’s top leaders.
- “[Zhao] called on returned overseas Chinese, their relatives and Chinese people living overseas to keep firmly in mind the hopes of the Party and the people [and] uphold the greater national interests.”
Get smart: Xi Jinping has made special efforts to enlist the overseas Chinese community in his project to rejuvenate the Chinese nation – including by making it easier for overseas Chinese to live and work in China.
Get smarter: It’s a pretty aggressive move to ask citizens of other countries to keep in mind the hopes of the Chinese Communist Party. Xi’s exhortations are not appreciated by foreign governments, to put it mildly.
Xinhua: Top leaders attend congress of returned overseas Chinese
POLITICS and POLICY
6. Japan ties on the upswing
Premier Li Keqiang sent a congratulatory messageto a China-Japan youth conference held in Beijing on Wednesday to celebrate 40 years of diplomatic relations.
Japanese Prime Minister Shinzo Abe also sent a congratulatory note.
This is just the latest indication of warming relations between the two countries.
And that’s not all (FT):
- “Taro Aso, Japan’s finance minister, will travel to Beijing for talks with his Chinese counterpart, Liu Kun, as diplomatic contacts between the two largest powers in East Asia pick up pace.”
But wait – there’s even more. Taro Aso more or less confirmed that Abe is planning to visit China this year:
- “Alluding to an unconfirmed top-level trip, he said: ‘I hope it can also contribute to the success of prime minister [Shinzo] Abe’s visit later this year.’”
Get smart: An Abe visit is a big deal. It would be his first official visit since becoming prime minister in 2012.
The big picture: Warming Sino-Japanese ties are in large part because both countries have more contentious relations with the United States under President Trump.