Driving the Day
1.Xi still not happy with the Party
On Friday, Xi Jinping chaired a meeting of the Politburo.
The meeting deliberated two internal Party guidelines:
- Regulations governing the work of Party groups
- Regulations on the education and management of Party members
Xi is still not satisfied with how the Party functions (Xinhua):
- “Our Party must better manage the Party and govern the Party.”
To improve the Party, Xi thinks Party members need more education:
- “Strengthening Party member education and management is a basic, fundamental and regular task of Party building.”
Know what everyone needs to be learning?
If you said “Xi Jinping Thought” – you got it!
- “The primary political duty of the entire Party is to employ the weapon of Xi Jinping Thought on Socialism with Chinese Characteristics in the New Era.”
Get smart: Xi wants rank and file Party members to be more invested in his political program. To us, it doesn’t seem like the rank and file are all that interested. In fact, it’s not clear that senior officials are all that interested either (see entry #8 below).
2.JP Morgan and Nomura get the go ahead
On Friday, the securities regulator (CSRC) officially approved two foreign banks to establish majority-owned securities companies (Reuters):
- “JP Morgan and Nomura have won Chinese regulatory approval to set up majority-owned brokerage joint ventures, in China’s latest move to open its financial sector up to foreign firms.”
There are more approvals on the way:
- “The [CSRC] said…it will continue to approve foreign brokerage joint ventures ‘efficiently,’after announcing its decision for the two banks.”
Get smart: We can’t say it enough. Officials are serious about accelerating financial sector opening in 2019.
The message has been consistent for over a year now – and we continue to see concrete measures to make it happen.
Something to consider: For a while, it wasn’t clear if JP Morgan would be disadvantaged, as an American firm, in the midst of the US-China trade war.
Our take: Chinese regulators are trying to change the narrative that China isn’t open for business to foreign firms. For now, that means Chinese officials are unlikely to use American firms as leverage it the trade negotiations.
Reuters: JP Morgan, Nomura get nod for China brokerage JVs as market access expands
3.Bond inclusion goes forward
It’s not just foreign banks that are looking to up their China exposure these days.
Global bond investors continue to pile in, especially now that Chinese bonds have been included in a critical global benchmark, as of Monday (SCMP):
- “Chinese government and policy bank bonds are being added to the Bloomberg Barclays Global Aggregate Index over a 20-month period.”
- “The addition of 363 Chinese securities to the index, which covers US$54.9 trillion worth of debt, is the start of a process which could lead to other international index providers including yuan-denominated debt into their global benchmarks.”
Why it matters: Many bond investors across the world benchmark themselves against the Barclay’s index, which means those investorseffectively have to start buying Chinese bonds.
What to watch: Other index providers look set to follow suit, which would further support portfolio inflows into China.
What else to watch: It’s still not clear exactly how big thoeinflows will be. Estimates range from just USD 150 billion in the near-term to potentially USD 1 trillion over five years.
4.WMP cleanup marches on
The industry body that oversees China’s wealth management products (WMPs) released its 2018 annual report on Friday.
Some context: WMPs are investment products offered by banks and other institutions. To create high returns, the products have traditionally been invested in speculative assets. That’s why WMPs have long been seen as a potential source of financial instability.
But last year, things improved significantly, along four lines:
- The market hardly grew. There were 48,000 non-guaranteed WMPs worth RMB 22.04 trillion at the end of the year – basically the same as at the end of 2017.
- Interbank WMPs contracted dramatically. At end-2018, the balance of interbank WMPs was RMB 1.22 trillion – a decrease of 62.57% y/y.
- Maturities are lengthening. In 2018, the weighted averageof newly issuednon-guaranteed financial products was 161 days, an increase of about 20 days over the same periodlast year.
- Products are being invested in safer assets. At end-2018, the balance of non-guaranteed WMPs invested in deposits, bonds, and money market instruments accounted for 65.7% of the total.
The bottom line: Cleanup of the WMP market made significant strides last year, and regulators won’t want to backtrack in 2019.
It’s yet another reason why we won’t see significant financial loosening this year.
5.2018 sees record bankruptcies
Chinese bankruptcy cases are rising dramatically.
The latest data from the Supreme People’s Court show that 2018 saw adjudicated bankruptcy cases top the 10,000 mark for the first time on record:
- “On March 28, the Supreme People’s Court held a press conference indicating that in 2018, 18,823 cases of compulsory liquidation and bankruptcy were accepted by the courts – an increase of 97.3%.”
- “11,669 cases were adjudicated – an increase of 86.5%.”
- “The 21st Century Business Herald…found that this was the first time that 10,000 bankruptcy cases have been settled by the national courts since the implementation of the Enterprise Bankruptcy Law in 2007.”
Get smart: The speedy rise of bankruptcy cases is policy-driven – saying little about the state of the economy.
But there are still problems:
- “The distribution of bankruptcy cases is extremely uneven.”
- “The number of bankruptcy cases in Zhejiang, Jiangsu, and Guangdong provinces accounts for about 40% of the total.”
- “This [concentration] is related to…the imperfection of the bankruptcy trial system, and the subjectivity of judges.”
Why it matters: Making it easier to wind down loss-making companies will boost overall productivity.
21st Century Biz: 破产案件连续三年暴增超50% 破产法修改即将启动完善配套机制
6.Trade talks focus on Cybersecurity Law
The latest round of US-China trade negotiations wrapped up in Beijingon Friday, and both sides said they made “progress.”
The Journal has more details:
- “Issues related to Chinese regulations of information security and cross-border data flows, as well as high-tech sectors such as cloud computing, crowded the negotiation agenda.”
China’s controversial Cybersecurity Law was a key focus. It has been a headache for foreign companies ever since its passage in 2017.
- “Of particular concern for foreign businesses is a requirement for operators of ‘critical information infrastructure’ to undergo stringent security reviews to ensure that data systems are ‘secure and controllable.’”
- “As a result, U.S. firms operating in China, be they American technology firms, banks or energy firms, have to keep their networks’ data in China and in many cases have to source servers, routers and other equipment and products from Chinese suppliers.”
It’s positive that China is willing to discuss these issues:
- “In recent weeks, Chinese officials have shown a willingness to discuss those issues, which they previously viewed as off-limits for negotiation.”
- “Washington negotiators…and their Chinese counterparts…are shooting to close a deal by the end of April, officials on both sides say.”
What next: Talks resume Wednesday in DC.
7.Xi speech expresses political insecurity
Over the weekend, the Party’s top journal, Qiushi, published a speech by Xi Jinping form January 2013 – less than two months after Xi had taken over the Party.
The speech is a fascinating look at how Xi sought to define his leadership in its early days.
It’s worth reading in full, but here are a few things that stuck out to us.
First, Xi – and the Party – are obsessed with not “collapsing.” Xi speaks a lot about how many have predicted (and even tried to foster) the collapse of the Party for a long time. The upshot is that the CCP is more or less in a permanent siege mentality.
Second, Xi is resolute in creating a political system unique to China.
- “In the past, [we] couldn’t do full Sovietization; now [we] can’t do full Westernization.”
- “We firmly believe that…the superiority of our socialist system will surely become more apparent.”
Third, how to deal with the West is a vexing problem.
- “[We] must cooperate with, and struggle against,…capitalism for a long time.”
- “[We] must also carefully study and draw on the beneficial civilizational achievements created by capitalism.”
The bottom line: The CCP is fundamentally insecure.
8.Xi wants to improve Party-building in central institutions
On Thursday, the Central Committee issued a document aimed at improving Party-building in central Party and state organizations.
Some context: This is the second high-level document focused on Party-building that has been issued in justover a month(see February 28 Tip Sheet).
You know what Xi Jinping wants? For everyoneto do what he says(gov.cn):
- “[Central organizations] will resolutely implement…General Secretary Xi Jinping’s important instructions to specific department on specific areas.”
The new document has instructions for Party groups:
- “The Party group (Party committee) of the department should strengthen leadership of ideological work…dare to speak loudly, guide Party members and cadres to distinguish between right and wrong, …, and resolutely oppose and resist all kinds of erroneous thoughts and negative remarks.”
These rules still apply when cadres leave the office:
- “[Officials] need to be especially conscious to regulate political speech and action outside working hours.”
- “[They] must not allow the dissemination of statements that violate the Party’s theory and line, principles, and policies.”
Get smart: You don’t keep putting out documents like this if everything is going well.
Get smarter: If things are bad at the central level, they are even worse at the local level.