Driving the Day
1.Huawei sues US Government
Last year, the US Congress passed a law barring the US government (USG) and its contractors from buying equipment from Chinese telecoms companies Huawei and ZTE.
Now Huawei is taking the USG to court (FT):
- “[Rotating Huawei Chairman] Guo Ping confirmed to reporters in Shenzhen on Thursday that the company had filed a lawsuit against the US government in the District Court for the Eastern District of Texas against the ‘unconstitutional’ restrictions, which were enacted last year as part of the annual US National Defense Authorisation Act (NDAA).”
Some context: The NDAA is just one part of a larger anti-Huawei push by the USG. They have also been trying to get other countries to ban Huawei equipment from their telecommunications infrastructure.
The immediate goal of the suit:
- “Huawei is seeking a judgment that states restrictions targeting its products are unconstitutional and a permanent injunction against the measures.”
But the bigger issue is restoring Huawei’s reputation:
- “By filing the lawsuit, Huawei said it hoped to alleviate the damage done globally by US concerns about the company.”
Get smart: It looks very likely that we will end up with distinct US and Chinese technological ecosystems. The big question is will there be any overlap, andif so, how big will it be?
2.FX reserves rise for fourth straight month
China’s foreign exchange reserves rose by USD 2.26 billion in February, the central bank announced on Thursday.
- February marked the fourth consecutive monthly rise in FX reserves.
- Reserves rose to USD 3.09 trillion – the highest level in six months.
- The increase came in conjunction with a strengthening CNY, which was up 0.9% against the dollar in February.
Some context: A weak dollar and solid risk sentiment, as investors piled back into emerging market assets in February, were key drivers of capital inflows last month.
Those inflows helped add fuel to China’s stock market rally (Reuters):
- “Net flows into the Shanghai and Shenzhen stock markets via the Stock Connect scheme as of end February topped 120 billion yuan ($17.9 billion), nearly four times that in the first two months of 2018.”
Get smart: Sentiment among global investors remains fragile, as there is still a high degree of uncertainty about the underlying pace of global economic growth. China is vulnerable to a reversal of fortunes, in terms of capital flows, if global growth disappoints and sentiment starts to sour.
The rub: One thing boosting sentiment at present is the expectation of solid economic stimulus out of China.
That makes us nervous.
Reuters: China February forex reserves rise to six-month high, eases outflow worry
3.MoF leans on SOEs to fill fiscal shortfall
Minister of FinanceLiu Kunheld a press conference this morning on the sidelines of the Two Sessions.
As we told you Tuesday, the government will lean hard on fiscal policy to support growth this year. That willcreate a big fiscal shortfall.
But Liu Kun says the central government hasit covered (Xinhua):
- “The central government has also increased the profit remittances of state-owned financial institutions and centrally-administered enterprises.
But getting money out of SOEs ain’t easy.
Lou Jiwei, head of the government’s social security fund (and Liu Kun’s predecessor as Finance Minister), complained that SOEs are not making their contributions (Caixin 2):
- “Transfers of state assets to social security funds are progressing very slowly.”
Get smart: SOEs are going to be under pressure to make more money – and pay more to the state.
The big question: Will that drive SOEs to be more efficient?
It’s certainly a big gamble by Liu and the Ministry of Finance.
Caixin: State Firm Profits Will Pay for China’s Tax Cuts, Sinochem Chief Says
4.MoF’s tighter control of state financial institutions
Following the MASSIVE government re-structuring announced in March 2018, MoF is now the sole representative for central government capital in state-owned financial institutions (see yesterday’s Tip Sheet).
Some context: This initiative was part of the Central Committee and State Council’s July 2018 document to improve the administration of state-owned financial capital (Gov.cn).
What it means: As a controlling shareholder, MoF has final say over personnel and big strategic decisions.
According to Finance Minister Liu Kun, the new system is already having positive effects on local government debt (Xinhua):
- “[We have] required[financial institutions] to not introduce new government implicit debt.”
Get smart: China has long used its state-owned banks as quasi-fiscal tools. This should make that process more efficient. But it’s also a step backwards for financial sector liberalization.
What to watch: MoF will release a list of the specific powers that it holds with regards to financial institutions soon.
5.China’s bad diplomacy
China’s diplomacy has become noticeably sharp-edged in recent years, a reflection of Xi Jinping’s more assertive approach to foreign policy.
China’s top diplomats have been quick to parrot Xi’s new line (Bloomberg):
- “In a 2017 essay in the party’s theoretical magazine Qiushi, top diplomat Yang Jiechi pledged to study and implement Xi’s thought on diplomacy in a ‘deep-going way.’”
- And Foreign Minister Wang Yi recently praised Xi for ‘taking the front line of history’ and ‘braving 10,000 crags and torrents.’”
And the Ministry of Foreign Affairs has become more politicized:
- “In line with national ‘party-building’ campaigns, Chinese diplomats regularly engage in ‘self-criticism’ sessions at the Ministry of Foreign Affairs, according to people familiar with the meetings.”
- “Last month, the former deputy head of the party’s powerful Organization Department, Qi Yu, was appointed as the foreign ministry’s Party Secretary despite a lack of diplomatic experience.”
That means that softer approaches are being drowned out:
- “One Chinese trade diplomat said that while it’s never been easy to be a dove in China, all but the most senior officials now refrain from publicly voicing moderate positions toward the U.S.”
Get smart: China’s new diplomatic approach is not making it any friends. Trust us.
Bloomberg: Diplomatic Outbursts Mar Xi’s Plan to Raise China on the World Stage
6.Chinese investment in the EU is slowing
The good folks at MERICS and Rhodium Group have a new report out looking at China’s investment in Europe.
The big headline: Chinese investment into Europe is slowing. A LOT:
- “Chinese foreign direct investment (FDI) in the European Union (EU) continued to decline in 2018.”
- “Chinese firms completed FDI transactions worth EUR 17.3 billion, which represents a decline of 40 percent from 2017 levels and over 50 percent from the 2016 peak of EUR 37 billion.”
This is part of a larger trend…
- “This decline is very much in line with a further drop in China’s global outbound FDI, a trend that can be attributed to continued capital controls and tightening of liquidity in China as well as growing regulatory scrutiny in host economies.”
..but EU regulations are also playing a part:
- EU member states are modernizing FDI screening regimes.
- This strengthening of review mechanisms has already impacted Chinese investment patterns in 2018, including the first ever instance of a blocked Chinese acquisition in Europe and several delayed transactions.
And new EU regulations will further negatively impact Chinese investment:
- The new EU investment screening framework…[would have impacted] 82 percent of Chinese MA transactions in Europe in 2018.
Go deeper: Click the link below for the full report.
MERICS: Chinese FDI in Europe: 2018 trends and impact of new screening policies