DRIVING THE DAY
1. Up in arms about the Meng Wanzhou arrest
Pretty much everyone in China is up in arms over the arrest of Huawei CFO Meng Wanzhou,in Canada (see yesterday’s Tip Sheet).
Here’s just a few of the folks putting out statements:
- The Ministry of Foreign Affairs (MFA)
- The Chinese Embassy in Canada
- Huawei itself
- The Shenzhen government
And we could go on.
What most folks on the Chinese side are objecting to is the way in which the arrest took place – with little information around the nature of the alleged crimes.
Irony alert: Hopefully we don’t have to explain the irony behind China’s MFA claiming it’s outrageous that this detention took place without a clear accusation of the crime that was committed.
It appears that the US administration may be using Meng as a bargaining chip in the broader trade negotiations. That is a dangerous precedent for the US to set.
One thing is for sure: This episode ups the ante in the whole bilateral competition.
And markets know it. Chinese companies with any links to Huawei are getting hammered.
So much for the supposed year-end equities rally on the back of the chummy G20 meeting.
China News: 深圳市政府就孟晚舟被拘发布声明：强烈要求立即放人
Caixin: Huawei Suppliers’ Stocks Hit Hard After Arrest of Key Executive
DRIVING THE DAY, CONT’D
2. Huawei’s tough year
The arrest of its CFO is really the cherry on top of a terrible year for Huawei.
SupChina has a great rundown of the events of the last twelve months:
- January: Hopes that ATandT would sell Huawei smartphones in the United States were crushed.
- February: U.S. intelligence agencies said that American citizens shouldn’t use Huawei phones.
- March: Best Buy, one of the few places where Americans could find Huawei devices, announced it would stop selling them.
- August: Australia blocked Huawei from providing 5G equipment for the country’s wireless networks.
- November: The Wall Street Journal reported that the U.S. government had “initiated an extraordinary outreach campaign to foreign allies, trying to persuade wireless and internet providers in these countries to avoid telecommunications equipment from China’s Huawei Technologies Co.”
- Last week, New Zealand blocked a top telecom firm from using Huawei equipment for its 5G mobile network.
- On Wednesday, U.K. telecom group BT said it would not buy equipment from Huawei for the core of its next-generation wireless network.
Get smart: Wariness of Huawei goes far beyond the US.
What to watch: The balkanization of global technology starts now. Global businesses better start thinking through what that means.
SupChina: One Huawei Scion Arrested In Canada, Another Waltzes In Paris
DRIVING THE DAY, CONT’D
3. Government begins preparations for big tech plan
With the Huawei drama as the backdrop, the first-ever meeting of the National Science and Technology Leading Small Group met on Thursday.
Some context: The group was established in August to replace the National Science, Technology and Education Leading Small Group.
The group’s main task will be to oversee the drafting of the country’s long-term technology strategy.
More context: The current strategy is set to expire in 2020.
The new plan will be all aboutdeveloping core technologies. Here’s how Li Keqiang, who chairs the group, described what needs to happen:
- “[Our] technological innovation strategy should be better integrated into the overall development of the country,…[and] focus on breakthroughs in key core technologies.”
Get this: English language reports of the meeting do not talk about “core” technologies, only “key” technologies. That’s because most “core” technologies are currently controlled by the US, and China is keen to downplay the fact that it is looking to displace the US from the top of the technology league tables.
Get smart: Controlling core technologies becomes more pressing by the day as the US increases efforts to shut Chinese companies – like Huawei – out from its technological ecosystem (see entries #1 and #2 above).
FINANCE and ECONOMICS
4. All quiet on the liquidity front
China’s central bank (PBoC) has now gone 30 straight trading days without injecting liquidity into the banking system through open market operations.
On Thursday, however, the bank did roll over RMB 188 billion worth of medium-term loans that were set to expire that day.
Here’s a fun nugget: The medium-term lending facility (MLF) is referred to by domestic market folks as “spicy powder” or mala fen (麻辣粉) in Chinese. Get it – Ma La Fen?
But this injection by the central bank didn’t feel very spicy. If anything, the bank is just making sure liquidity doesn’t drain too quickly.
Get smart: That’s not the type of operation you expect from a central bank that is ramping up to a rate cut (see yesterday’s Tip Sheet). And it’s just another reason why we don’t see one on the horizon.
The Paper: 连续30天暂停逆回购同时续做MLF，央行最快或在下月降准
POLITICS and POLICY
5. China’s policy misstep on basic research
Yesterday’s meeting of the National Science and Technology Leading Small Group talked about fostering basic research:
- “The Premier called for long-term and consistent support for basic research.”
- “Enterprises and private entities should be encouraged to increase investment in this field.”
Why that is bad policy: Enterprises don’t do basic research because it doesn’t pay. That’s why it makes more sense for the government to fund basic research.
Oh the irony: The strength of China’s statist system is that they can marshal government resources for public goods like basic research.
Get smart: Li’s desire to get business involved is evidence of an oft overlooked aspect of China’s economic policy. It is often about getting government out of the way – sometimes even when it shouldn’t be.
Gov.cn: Premier Li calls for technological innovation to promote development
POLITICS and POLICY
6. MofCom clarifies next steps in trade negotiations
On Thursday, Ministry of Commerce (MofCom) spokesman Gao Feng gave a press conference to update everybody on trade negotiations with the US.
Gao’s most noteworthy statement:
- “China will immediately implement the consensus that the two sides have already reached, starting with agricultural products, energy and automobiles.”
Why that matters: The US has been saying that China agreed to buy more agricultural products and reduce the 40% tariff on US autos. Gao’s statement seems to confirm that.
Get smart: These moves do not appear to be particularly meaningful concessions. Instead they just get us back to the status quo ante.
POLITICS and POLICY
7. Know your government
Xi Jinping wants to steer China’s economy away from high-speed growth toward high-quality growth.
That’s why he instituted a change to the KPI system for Chinese officials back at the Central Economic Work Conference in 2017 (see our CEWC special edition Tip Sheet on December 22, 2017).
The point of the change is to increase the number of metrics along which officials’ performance is measured. So officials will take broader responsibility over societal development in their areas.
Some local governments are getting to work on it (21st Cent Biz):
- “Hubei, Jiangsu, Zhejiang and other places are studying the indicator system for high-quality development.”
And Hubei province published a list of 22 indicators for officials to be graded on last month, including (Hubei.gov.cn):
- the value-added ratio of the high-tech industry in GDP
- the non-public proportion of fixed asset investment
- the utilized foreign investment proportion in overall investment
- NPL ratios at local banks
- the ratio of outstanding government debt in comparison government fiscal resources
- growth of disposable income per capita
- air and water quality
Get smart: The change is good in principle. But if officials don’t know which of the many goals to prioritize, then none of them will get done.