DRIVING THE DAY
1.What will happen over the weekend?
As we pointed out earlier this month, something strange is going on with China’s political calendar (January 8 Tip Sheet):
- “All provinces seem to be blocking off the January 18-22 timeframe for some reason.”
That’s led many – including us – to speculate that a major meeting is set to happen:
- “Whatever is being planned must be a big deal – potentially even the 4th Plenum that we were all waiting for in November-December.”
To date, there has still been no announcement of anything big.
But just because we haven’t heard anything doesn’t mean there’s nothing going on. Last year’s Third Plenum came out of nowhere, and was only announced days before it started.
Why we think something similar might be happening now: The Party has been stepping up propaganda reviewing the 2013 3rd Plenum (Theory People). That’s usually a sign that something is coming.
Xi Jinping, meanwhile, is back in Beijing after heading to Tianjin yesterday. The official reporting around his trip has been minimal, but he did say this (CPC People):
- “For the country to develop, the economy is the primary important task.”
Why that matters: If there is going to be a plenum, it may very well focus on the economy, like the 3rd Plenum in 2013.
What to watch: It’s very likely that there will be a Politburo meeting over the weekend to announce a plenum for early next week.
DRIVING THE DAY
2. Huawei founder slams indigenous innovation
Huawei founder Ren Zhengfei sat down with Chinese media on Thursday, his second media appearance of the week (see Wednesday’s Tip Sheet).
Ren’s unprecedented media blitz comes amidst a global backlash, which only got worse on Thursday:
- The US is opening an investigation into the company (WSJ).
- US lawmakers are looking to ban chip sales to the company (SCMP).
- Germany is considering a ban on Huawei 5G equipment (Reuters).
- Oxford University is banning donations from the company (Guardian).
On Thursday, Ren took aim at China’s “indigenous innovation” policy.
Some context: The policy was introduced in the mid-2000s and has been widely condemned by foreign businesses and government for unfairly advantaging domestic firms.
Ren’s view (21st Century Biz):
- “I think it’s okay to emphasize more indigenous innovation in cutting edge and unknown [areas].”
- But we can’t emphasize indigenous innovation at a low level – must screws be indigenous?”
Ren was scathing:
- “That everything must be done by oneself is peasant mentality.”
He also took aim at those who see everything as a Western conspiracy:
- “Protecting intellectual property rights benefits the country’s long-term development.”
- “It’s not some excuse by the West to choke us [by the neck].”
Get smart: Ren thinks Huawei is collateral damage of bad government policy.
21st Century Biz: 关于华为，你想知道的，任正非都回答了（附问答全文）
WSJ: Federalprosecutors pursuing criminal case against Huawei for alleged theft of trade secrets
SCMP: US lawmakers seek to ban chip sales to China’s Huawei and ZTE for ‘violating American sanctions’
Reuters: Germany considering ways to exclude Huawei from 5G auction: report
The Guardian: Oxford places ban on donations and research grants from Huawei
3. PBoC and MoF fight again
The central bank (PBoC) and Ministry of Finance (MoF) are in a spat again.
This time it’s about monetary policy.
It all started when earlier this week an MoF official said that the ministry is studying the direct purchase of treasury bonds by the central bank.
Specifically, the MoFwants to (Caixin):
- “Promote the implementation of treasury bonds as the main tool of open market operations”
Some context: Central banks manage liquidity in various ways. Some purchase government bonds directly; others use various forms of central bank paper that banks borrow, using government bonds as collateral. China is in the second camp.
More context: MoF is arguing that changing monetary operations would help to better link government bond yields to the monetary policy stance. (FWIW: we think they are right).
But given the context of the economic slowdown, it sounds like MoF is advocating for quantitative easing.
The PBoC is pushing back:
- “Liquidity currently is reasonably ample…and there is no need to provide large-scale liquidity through QE, [a] person close to the central bank said.”
Get smart: In order to avoid traditional stimulus, officials continue to try and come up with creative new policy responses to the economic slowdown.
4. Pan Gongsheng talks bonds
On Thursday, central bank vice governor Pan Gongsheng spoke at a forum on China’s bond market in Beijing.
Pan touted increasing foreign participation (21st Cent Biz):
- “In terms of attracting foreign investors, statistics show that the net inflow of foreign capital in China’s bond market in 2018 was about 100 billion US dollars, accounting for 80% of the inflow of foreign capital in emerging markets.”
And he promised more opening to come.
Get smart: Foreign investors became much more active in China’s bond market throughout 2018. We expect more of the same in 2019.
Pan did point out one thing that vexes regulators when it comes to China’s Panda Bond market (i.e. RMB-denominated bonds raised in China by foreign institutions and companies).
It seems that some issuers have been raising RMB capital, only to immediately exchange it into USD:
- “I haven’t understood this idea.”
- “When you raise Renminbi, you use Renminbi.”
- “Why do you want to convert the Renminbi raised in the Chinese market into US dollars immediately after issuing bonds?”
Our take: We agree with Pan on this one – it’s not clear what motivates companies to do this.
Our question: Will authorities start to discourage or even ban such conversions?
21st Cent Biz:潘功胜“推销”中国债：收益高风险低，出现违约不一定是坏事
5. Premier Li takes more suggestions on Government Work Report
On Thursday, Li Keqiang solicited feedback on the draft Government Work Report from members of other political parties, as well as the All-China Federation of Industry and Commerce and the president of Nanjing University.
Some context: We often call China a one-party state, but technically there are eight other official political parties in addition to the CCP. However, these parties all recognize the leadership of the CCP.
Some more context: This is the third meeting to discuss the draft report held by Li this week (see Tuesday and Thursday’s Tip Sheets).
Li used the meeting to repeat histalking points on the economy (Gov.cn):
- “The government has accumulated experience in refraining from resorting to a deluge of strong stimulus policies and ensured the economy performs within a reasonable range.”
- “More efforts should be made in further deepening reform and opening-up, improving the business environment, energizing market entities, and lightening the burden on businesses.”
Get smart: Li (and every other economic official) has been repeating the “no stimulus, better business environment” mantraad nauseam of late.
If you haven’t heard it, you’re not paying attention (or reading the Tip Sheet!).
6. New drug procurement system puts pressure ondrugmakers
On Thursday, the State Council General Office formally released its pilot plan for drug procurement in 11 cities – including the Tier 1 cities of Beijing, Shanghai, Guangzhou, and Shenzhen.
Here’s how it works:
- The government announces what drugs it wants to buy for its public hospitals.
- Drug companies then tender bids to fulfill the order.
That’s nothing new. But this is:
- Winners of the tendering process will have sole rights to sell a given drug to public hospitals in a given city.
- And the government will guarantee that the winner will have 60-70% of the city’s total estimated demand from public hospitals.
The logic behind the plan: The fundamental idea is to give the government greater bargaining power with pharmaceutical companies, while compensating those companies by guaranteeing them larger volumes.
Get smart: Although the plan was only released yesterday, these pilots have been going on since December.
What it means: There’s going to be a bloodbath asthe pharmaceutical industry consolidates.
7. SAMR bans government agencies from promoting commercialbrands
China’s new market regulator (SAMR) continues to throw its weight around (see January 7 and 16 Tip Sheets).
In the latest development, the head of SAMR, Zhang Mao, is directing government agencies to stop promoting commercial brands (CCTV via China Economic Daily):
- “We have requested the cancellation of all contests [to confer the status of] ‘famous trademark’ and ‘well-known brand’ [by government agencies].”
Zhang thinks consumers, not officials, can decide which brands are good.
SAMR is also investigatingChina Media Group, a ministerial-level organization that reports directly to the Propaganda Department and runs state broadcaster CCTV (SAMR 1 and 2):
- “SAMR has instructed the Beijing Municipal SAMR to open an investigation….in response to the ‘CCTV National Brand Plan’…[which is suspected] of violating the Advertising Law.”
- “The Advertising Law expressly prohibits using the name of the state organs…in advertisements.”
- “It is easy for consumers to think that the government is endorsing [a given] enterprise, which misleads [consumers about]…product quality…and results in unfair competition.”
Get smart:SAMRwants toconstrain the government’s ability to pick winners.
The big picture: SAMR’s most important mandate is to enable fairer competition.