Talking trade in Beijing – China Tip Sheet March 28

Driving the Day

1.Latest chapter in the US-China trade saga

The latest round of in-persontrade talks with the USbegin this eveningin Beijing.

Reuters reports thatsome US officials seeprogress:

“China put proposals on the table in the talks that went further than in the past, including on technology transfer, said one of four senior U.S. administration officials who spoke to Reuters.”
“’If you looked at the texts a month ago compared to today, we have moved forward in all areas. We aren’t yet where we want to be,’the official said, speaking on condition of anonymity.”

Of course, this may be more than a little spin:

“’They’re talking about forced technology transfer in a way that they’ve never wanted to talk about before – both in terms of scope and specifics,’he said.”

It’s notable that other media outlets are gloomier on prospects.

Everyone agrees thatan enforcement mechanismis the final sticking point – and it’s a big sticking point.

Tomorrow, we’ll send out our take onthe past month of the trade war.

Our bottom line: We are more pessimistic about a deal today than we were amonth ago.

Finance Economics

2.China, the perpetual bond machine

CITIC Bank is getting in on the perpetual bondgame:

“One of the 12 joint-stock lenders that operate across the country, [CITIC]is planning to sell as much as 40 billion yuan ($5.9 billion) of perpetual bonds.”

That makes CITIC the latest bank to take advantage of ongoing efforts by regulators to help lenders replenish capital:

“Chinese lenders are stepping up to issue perpetual bonds to supplement capital since regulators flashed a green light for such long-term borrowing to alleviate mounting capital pressures on the banking sector amid slowing economic growth.”

CITIC will be the first joint-stock bank to issue such instruments, though not the first bank:

“In January, Bank of China became the first lender to win approval to raise $40 billion by selling perpetual bonds.”

Get smart: The bank bailout is just beginning…at least for some banks.

What to watch: We are curious to see how perpetual bond issuance fits into the framework of Financial Supply-Side Structural Reform. Policymakers have been floating the idea of letting financial institutions go bankrupt under the plan – are we on the cusp of some industry consolidation?

Politics Policy

3.Li Keqiang goes on the road with his pro-business agenda

Premier Li Keqiang is down in Hainan for the Boao Forum.

While there, he decided to go an inspection tour around the provincial capital Haikou.

Li made four stops:

First, he headed over to the local tax authorities, where he told them to implement the State Council’s tax cuts.
Then, he went to Jinpan Smart Technology Company, where he touted the government’s tax cuts for business.
After that, he went to a daycare center, where he promised better elderly care and daycare services.
Finally, he headed over to Hainan College of Economics and Business where he promised to improve vocational education.

Get smart: These visits weren’t chosen at random. The Premier is signaling policy priorities for the coming year.

Politics Policy

4.Li Keqiang promises more market opening

As you probably know, China passed a new Foreign Investment Law on March 15.

As you also probably know, the impact of the law is difficult to forecast because the language is so vague.

According to Li Keqiang, we may get some more clarity soon (Xinhua):

“China has started to formulate matching regulations and rules to support the implementation of the newly-adopted foreign investment law, Premier Li Keqiang said Thursday.”
“The supporting rules will go into effect together with the foreign investment law on Jan. 1, 2020, he said.”

Li also promised that more sectors will be open to foreign investment within three months:

“By the end of June, China will make another revision on the negative list for foreign investment and issue the updated list, Li said.”

Some context: The negative list specifies the sectors in which foreign investment isrestrictedor prohibited.

Li said these sectors would see openings (Gov.cn):

Telecommunications
Healthcare
Education
Transport
Infrastructure
Energy

Get smart: 2018 was a big year for market openings. 2019 looks like it might be even bigger.

Politics Policy

5.Working level officials getting some love

Regular Tip Sheet readers will know that morale among Chinese officials isn’t exactly solid – and it’s been bad for a while (see September 18 Tip Sheet).

But one recent development may help things out a bit.

On Wednesday, the Party’sCentral Committee General Office releasednew rules governing professional ranks.

Some context: A “professional rank” designates an official’s level of seniority.

How it works: As an official gains increasing amounts of required government experience, he or she is promoted through the ranks via a performance review process.

The problem is that the current system often requires a very long timeframe to achieve a meaningful promotion.

But the new rules are looking to speed things up.

What that means: Civil servants will havemore opportunitiesto move up the ranks, and to do so more quickly. That will entitle them to higher pay and better benefits.

Get smart: The Partyis trying to create more incentivesto work hard.

Politics Policy

6.Chemical safety month

The fallout from last week’smassive chemical explosionin Jiangsucontinues (see March 22 Tip Sheet).

On Wednesday, the government ordered a 30-day inspection into a range of related safety issues:

“China will launch a month-long, nationwide inspection programme into hazardous chemicals, mines and fire safety, the country’s safety watchdog said, following a deadly pesticide plant blast that killed 78 people last week.”
“The Ministry of Emergency Management said in a notice late on Wednesday authorities needed to “deeply absorb” the lessons of the explosion at the chemical park in the city of Yancheng in eastern China’s Jiangsu province.”

The focus will be on smaller plants that tend have weaker safety procedures:

“Safety departments were told to investigate ‘poor, chaotic and small’ enterprises and to ensure that unqualified companies are shut down.”
“They are also under pressure to crack down on a range of other activities, including the illegal or excess storage of dangerous chemical materials.”

Get smart: A month-long inspection is all well and good, but these measures are totally reactive.

Fundamentally improving safety will require sustained investment to buildout inspection and supervision capabilities among regulators.

Talking trade in Beijing – China Tip Sheet March 28

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