DRIVING THE DAY
1. Chinese businesses adapt to tariffs
As the US-China trade war deepens, Chinese business are looking for ways to minimize the impact.
So far, early tactics include:
- Exploring new markets to offset sales losses in the US
- Trading with the US via subsidiaries in other countries
- Moving production facilities to new countries
But companies can’t simply walk away from the US market.
Here’s what an employee at a top Chinese chip designer had to say:
- “The high-end market for chip products is the United States.”
- “As a company, you can’t give up…Future opportunities may not be as good as they are now.”
But moving production isn’t easy:
- “The difficulty [with building new production facilities] is the increase in fixed costs.”
- “There is a risk as to whether future [revenues] can recover the cost.”
Get smart: The trade war has yet to enter the stage where a significant number of businesses feel compelled to shift their supply chains. But if companies become convinced that the trade war will last, the calculus will change.
What to watch: The commenting period for the next round of USD 200 billion worth of US tariffs on Chinese goods ended on Thursday. So the Trump administration could implement them any day.
21st Century Biz: A股解压贸易摩擦：规避关税壁垒 筹划境外设厂
FINANCE and ECONOMICS
2. PBoC quietly drains liquidity
China’s central bank (PBoC) took the unusual step of withdrawing bank liquidity on Wednesday – that’s according to widespread reporting in domestic and foreign financial media.
The PBoC denies it. But short-term money market rates jumped on Thursday – with 7-day repo rates up 11 basis points.
Some context: The central bank injected lots of liquidity throughout July and the first half of August – driving down bank funding rates as they tried to boost lending to small businesses. But by mid-August rates were too low, and liquidity was too flush – and none of it was translating into faster credit growth, to boot.
So the central bank has apparently decided it needs to fine-tune things by pulling out some very short-term liquidity – i.e. 7-days or less – and focusing instead on providing longer-term money.
Get smart: The jump in market rates is a pretty good indication that the news is true. But the PBoC won’t admit it because it doesn’t want to send any kind of tightening signal.
Get smarter: Monetary policy has become less effective in supporting the economy. That’s why the PBoC wants leaders to rely more on fiscal policy.
21st Century Biz: 央行重启正回购：资金从银行间向实体传导仍待疏通
Bloomberg: PBOC Is Said to Have Drained Short-Term Liquidity in August
FINANCE and ECONOMICS
3. Are China’s consumers downgrading?
Over the past several weeks, a strain of online economic commentary has zeroed in on the notion of “consumption downgrading.”
Some context: Booming growth in online sales of cheap retail products – like instant noodles and pickles – have led some to believe that consumers are adjusting their lifestyles to a slowing economy.
More context: The argument for why this might be happening includes slow wage growth and continually rising property prices that lead buyers to become more economical elsewhere.
But on Thursdaya spokesman at the Ministry of Commerce said the whole thing is hogwash. Not only is there no consumption downgrade…we are actually in the middle of a consumption upgrade!
- Consumers are increasingly paying more for branded products
- E-commerce means people in small cities and rural areas are buying more.
- Consumers are increasingly going green.
Get smart: This burgeoning debate is important for understanding the health of the Chinese economy. With the trade war and the investment slowdown, a marked downshift in consumption would be a big problem.
It’s not confirmed by the data just yet, but we’ll be watching closely.
POLITICS and POLICY
4. China’s footprint in Africa will grow
Political life in China continued to revolve around relations with Africa on Thursday.
According to the evening news, Xi met with top officials from these nine countries:
- The Central African Republic
- The Gambia
- Cape Verde
- The Democratic Republic of the Congo
Li Keqiang, Wang Yang, Zhao Leji, and Han Zheng also met with African leaders Thursday.
And Africa-related events were not confined to Beijing:
- Senegalese President Macky Sall attended the first China-Africa Private Sector Cooperation Summit in Hangzhou, Zhejiang.
- Meanwhile, in Changsha, Hunan, President of the Republic of the Congo Denis Sassou Nguesso attended the fourth Investing in Africa Forum.
Get smart: Anyone who has spent time in Africa recently will have noticed the presence of Chinese goods, companies, and people. China’s footprint in Africa will only become more prominent as gatherings like those in Changsha and Hangzhou spur further Chinese investment in the continent.
CCTV: 《新闻联播》 20180906 19:00
Xinhua: China-Africa Private Sector Cooperation Summit held in Zhejiang
Xinhua: 4th Investing in Africa Forum held in Hunan
POLITICS and POLICY
5. State Council tells business not to worry
All week, we’ve been highlighting recent moves by tax authorities to step up enforcement of tax laws – including corporate contributions to social security.
Businesses are worried.
Premier Li Keqiang acknowledged these fears at Thursday’s State Council meeting, which focused on implementing the recently amended Individual Income Tax Law (see September 3 Tip Sheet).
This should make businesses feel somewhat better:
- “Every locality must…urgently research appropriate [measures] to reduce social security rates, and ensure that overall burdens on businesses do not increase.”
Li wants to make sure that business sentiment doesn’t plummet:
- “[We must make sure to] stimulate market vitality, and make sure that society has positive expectations [for the economy].”
Get smart: The government is stuck between a fiscal rock and a hard place. They want to improve the fiscal position, but they are terrified of raising taxes in the middle of an economic slowdown.
Get smarter: There is never a good time for fiscal reform. And no one likes it when their taxes go up, so this won’t ever get any easier.
Gov.cn: 李克强主持召开国务院常务会议 确定落实新修订的个人所得税法的配套措施等
POLITICS and POLICY
6. China’s millions-strong censorship machine
Did you know: Chinese companies do the heavy lifting when it comes to online censorship – not the government.
Underscoring that fact, Jiemian has an interesting article that takes a behind-the-scenes look at how one (anonymous) internet company reviews its users’ videos.
It goes like this:
- The company let’s AI do the first pass, deleting videos with vulgar language or images.
- Videos that pass the computer test are then reviewed by a human, who must decide within 20 seconds if the content is kosher.
That’s some snap decision-making.
And get this: The company’s review department expanded from a just few dozen people to over 10,000 in just 18 months. Even with that manpower, every reviewer has to screen 2,500 videos a day.
More art than science: The standards for judging the videos are a mix of legal, ideological, and commercial considerations. And the standards can change frequently.
The company is always trying to strike the right balance:
- “Traffic is money.”
- “If the bar [for compliance] is too high, there will be no traffic.”
Get smart: An increasingly conservative ideological environment is testing China’s commercially driven tech firms.