DRIVING THE DAY
1. China detains former Canadian diplomat
China has upped the ante in the Huawei case – as authorities have detained former Canadian diplomat and well-known China watcher Michael Kovrig on Monday.
The Ministry of Foreign Affairs has said that Kovrig was detained because his current employer – the International Crisis Group – is not registered in China, and thus in violation of the Foreign NGO Law.
But it’s difficult to believe that’s the real reason for Kovrig’s detention. It certainly looks a lot like retaliation for the arrest of Huawei CFO Meng Wanzhou in Canada earlier this month.
What’s more, it appears that Kovrig was detained by the Ministry of State Security, which leads China’s counterintelligence efforts. That’s leading to suspicion that Kovrig might be charged with something more serious than breaking the Foreign NGO Law.
The upshot: The episode is undermining Beijing’s attempts to paint itself as a country that abides by the rule of law, and validating many of its critics in the process.
The bigger picture: This atmosphere is going to get worse (see next entry).
Full disclosure: Michael is a friend of ours and many among our readership. We are highly concerned and pulling for a positive outcome to occur quickly.
The Paper: 外交部：加拿大前外交官供职的组织未备案，违反我国相关法律
Bloomberg: Ex-Canadian Diplomat Held by China Spy Agency as Feud Escalates
DRIVING THE DAY, CONT’D
2. Expect more from DOJ
We are hearing from more and more people who are wired into Washington that the Meng Wanzhou arrest is just the tip of the iceberg.
The US Department of Justice is prepping a slew of legal actions against Chinese individuals who have been involved in breaking sanctions and other crimes.
If tensions continue to escalate along these lines, then the diplomatic and business relations between China and the US – and China and other countries – will go into the freezer.
The situation is already affecting Canadian companies (SCMP):
- “Canadian businesses operating in China are starting to feel the chill and the signing of one major deal has been postponed, a well-placed source said.”
- “’The consequences have already begun,’ said the source, noting that a Canadian firm had been due to ink a major agreement in the next few weeks.”
- “’The local partner, a Chinese private sector actor, has told the Canadian partner that now is not a good time to sign,’ said the source.”
This is worrying: US President Trump and other US officials have already made it clear that they see Meng’s arrest as part of the trade war.
What that means: If Meng’s detention is just the beginning, then so is Michael Kovrig’s.
FINANCE and ECONOMICS
3. Data dump – credit
Stop us if you’ve heard this one before – credit growth in China just hit a new all- time low.
(Pro tip: If you haven’t heard that one before, you aren’t reading the Tip Sheet closely enough).
The details from the November lending data, released by the PBoC on Tuesday:
- Headline credit growth came in at 9.9% y/y – down from 10.2% y/y in October, and the slowest growth on record.
- Growth of RMB bank loans grew by 12.9% y/y – down a bit from the 13% seen in October, but fully in line with the 12.9% average growth over the previous 10 months.
- Most categories of non-bank-loan credit continued to contract on a y/y basis in the month.
- Growth of the money supply (aka M2) matched its all-time low of 8% y/y – the same rate as in October.
Get smart: Most news reports are looking at the flow of new loans, which came in at RMB 1.52 trillion – way up from RMB 729 billion in October. That is simply a seasonal increase and says nothing about the underlying pace of credit growth.
The bottom line: Economic support measures are not leading to credit growth. We have not reached the bottom of the credit cycle.
Reuters: China November loans top forecasts but other credit gauges at record lows
FINANCE and ECONOMICS
4. Where we are in the credit cycle
The November data is effectively the last chance we will have to take stock of China’s credit environment in 2018.
Here’s what we know: Credit growth has been steadily decelerating for the past 16 months. And nothing in November’s data suggest that trend is changing.
Get smart: China’s economy closely follows the credit cycle. Once the slowdown in credit growth bottoms out, it will take two to three quarters for the economy itself to hit a cyclical bottom.
Get smarter: Based on the current trend, we don’t expect credit growth to bottom out until some time in Q1 2019. That means the economy will continue to decelerate until late in 2019 – and that’s not even accounting for potential effects of the trade war, which has yet to have a meaningful impact on the macro data.
So 2019 is going to a much tougher year for China’s economy.
Bottom line for businesses: Don’t expect the same topline performance in 2019 that you got over these past two years.
Bottom line for investors: China will be a significant drag on global growth on 2019 – don’t expect macro stimulus to ride to the rescue. If that was going to happen, it would already be in the works.
POLITICS and POLICY
5. Something big will happen on December 18
Get excited. The Office of the Central Commission on Comprehensively Deepening Reform –i.e. the most important policy making body in China – and the Propaganda Department have produced a political documentary.
The first episode ran on Tuesday night, and it’s called The Only Path (必由之路).
That title comes from Xi Jinping’s 2018 New Year’s address: (Xinhua)
- “Reform and opening-up is the only path to achieve the China dream.”
The documentary reviews the first 40 years of Reform and Opening. The key message:
- The Party always finds the best way forward for the country.
The documentary is signaling something big. The eight-episode series will end on December 18, which marks the 40th anniversary of the Third Plenum of 11th Party Congress. It was that meeting that kicked off Reform and Opening.
What to watch: It looks like there will be some sort of big gathering on the 18th, and Xi will definitely make a major address trumpeting “reform.”
Our question: Will Xi unveil new economic reform measures? Or will he just reiterate current policies?
POLITICS and POLICY
6. China to lower tariffs on American cars
Vice Premier Liu He had a phone call with his American counterparts on Tuesday morning (see yesterday’s Tip Sheet).
It looks like Liu promised to reduce Chinese tariffs on American cars (WSJ):
- “Mr. Liu said Beijing would reduce tariffs on U.S. autos to 15%, down from 40%, said people familiar with the call.”
When this will happen is unclear:
- “It wasn’t clear when the change would take effect, but Washington is pushing Beijing to make concessions as soon as possible.”
It also appears that face-to-face negotiations are still a few weeks away:
- “Mr. Liu plans to travel to Washington after the new year, people familiar with the matter said.”
Get smart: Lowering auto tariffs is positive, but hardly gets us closer to a comprehensive deal. And with tensions rising on both sides of the Pacific, there’s no telling where this thing is going.
WSJ: China Moves to Address U.S. Economic Concerns
POLITICS and POLICY
7. NDRC begins planning for 2025
China is midway through its 13th Five Year Plan, which covers 2016-2020.
That means that it’s time to start preparing for the next Five-Year Plan, which will be finalized in March 2021.
The National Development and Reform Commission (NDRC), which oversees the drafting of the plan, has already started to put the wheels in motion (Jiemian):
- “In recent days, the National Development and Reform Commission held a symposium on drafting the 14th Five-Year Plan in Beijing.”
- “Planning officials from local Development and Reform Commissions attended.”
Get smart: Right now the NDRC is trying to pin down the major themes and overall direction for the next plan. Early next year, they will begin researching specific topics.
Get smarter: Check out Trivium’s free, easy-to-read primer on China’s policymaking process.