Driving the Day
1. Party increasingly focused on “stability”
On Friday, Chen Yixin, secretary-general of the Party’s Political and Legal Affairs Commission (PLAC) gave a speech at the Central Party School.
The topic of Chen’s speech:
- “Preventing and resolving major risks affecting state political security.”
Some context: Chen is a Xi Jinping guy, in a trusted position. The PLAC oversees the country’s law enforcement, including the security services and judiciary.
More context: Xi identified political security as one of seven risks threatening the Party in his mid-January “risk speech” to top officials (see January 22 Tip Sheet).
On Friday, Chen raised A LOT red flags. He identified 30 different risks to political security, and had a case study for each one.
Chen said that officials need to make sure that risks in one area don’t exacerbate risks in other areas:
- “It is necessary … to prevent economic and financial risks from transforming into political and social risks, cyberspace risks becoming actual social risks, risks from external conflicts becoming risks to internal security and stability, and the risk of domestic problems being exploited by foreign hostile forces.”
Get smart: The Party seems increasingly anxious.
Our question: What is fueling this anxiety? Is Xi really worried about political stability? Or is he creating a crisis mentality to garner more support for his political program?
2.PMIs fuel market optimism
Global markets were buoyed on Monday, driven in large part by surprisingly strong PMI data out of China.
And while the rally loststeam in Asia on Tuesday, it’s worth looking athow China is feeding into market mentality right now.
What happened: On Monday, both official and private Purchasing Managers’ Indices (PMIs) for March came in well above expectations:
- The official manufacturing PMI registered 50.5 – up from 49.2 in February.
- The official services PMI registered 54.8 – up from 54.3 in February.
- The Caixin manufacturing PMI registered 50.8 – up from 49.9 in February.
Markets loved it…But we’ve got serious reservations about China’s PMIs (see next entry).
Our take: Investors got overly excited about this data point.
What this tells us about market mentality: Many investors are trying to will Chinese stimulus into existence. On the ground, we just don’t see it.
What to watch: The occasional above-consensus data print, which sends markets soaring and fuels hopes of a Chinese recovery, only means the disappointment will be that much greater during the next data miss.
3.Getting wonky on the PMI
We typically refrain from putting too much stock in Chinese PMIs, especially in the first quarter of the year.
That’s because we see two big problems withthis data.
First, while China’s PMIs are seasonally adjusted, statistical programs still haven’t figured out how to properly account for events that move around on the calendar, like the Chinese New Year.
- The upshot is that March tends to see residual positive movement in the PMIs, even after seasonal adjustment.
- So the jump in March almost certainly overstates the case for positivity.
Second, and more importantly, the PMI doesn’t measure what most people think it measures.
- Because the PMI s a diffusion index, it tracks the proportion of firms that say business improved from month to month – and says nothing about how big, or small, any improvement may have been.
- In general, economists expect breadth and depth of economic activity to be correlated.
- But when the diffusions index is hovering around the 50-point breakeven threshold, which it is now, the correlations are much weaker.
- So it’s hard to say anything concrete about the pace of growth from this reading.
The bottom line: It pays to be data dependent. So if Monday’s print was the first in a string of better data, we are prepared to eat out shorts. But we wouldn’t bet the house on a single set of PMIs.
4.PBoC tells police to go after rumormongers
PMIs weren’t the only developments grabbing attention in mainland markets on Monday.
On Friday, rumors startedswirling among domestic traders that the PBoC was set to cut reserve requirements ratios (RRRs) in the first week of April.
By Friday evening, the PBoC had come out and denied the rumors (The Paper):
- “The General Office of the People’s Bank of China immediately came forward to clarify, pointing out that the news was untrue…and preventing the rumors from spreading on a large scale.”
But markets were still optimistic about a cut,further underpinning the solid onshore equity performance on Monday.
The strange thing is how persistent the RRR cut rumors have been, despite a very strong denial from the PBoC (The Paper):
- “The Central Bank has also formally writtento the public security organs on this matter.”
- “Please investigate and punish the act of fabricating and issuing false information according to law.”
According to The Paperarticle below, this was a particularly egregious episode of rumormongering. The fact that it was referred to the public security forces is novel.
We can’t decide if that’s good or bad in terms of market transparency.
5.Steel production cuts enacted
Despite flagging activity in the property market, steel prices may be set for a jump.
That’s because authorities are once again pulling back on production in major steel producing centers (Reuters):
- “Steel mills in the two biggest steelmaking cities in China – Tangshan and Handan – will be required to continue production restrictions in the second quarter.”
- “Mills in the two cities will have to cut back the operations at about 20 percent of their blast furnaces under the restrictions for the April to June period, down from 30 percent for the restrictions during the November to March period, according to the five sources who spoke to Reuters on Friday and Saturday.”
Apparently, the curbs are officially unofficial:
- “’We received oral notices from the local government to carry on production restrictions in the second quarter, but the enforcement will be more sophisticated,’said one of the sources, an executive at a steel mill in Tangshan with output of 11 million tonnes per year.”
Get smart: Moves like this are partly about curbing pollution. But they are also about curbing upstream deflation. We’ve been expecting them for a while, as China edges closer to contraction in upstream prices.
Reuters: China’s top two steel producing cities to extend output curbs -sources
6.New Zealand PM visits Beijing
New Zealand Prime Minister Jacinda Ardern was in Beijing Monday, where she met with Xi Jinping and held talks with Li Keqiang.
Some context: Sino-New Zealand relations have looked rocky in recent months (CNN).
But, in public, the two leaders had nothing but kind words:
- “China has always viewed New Zealand as a sincere friend and partner, Xi said, adding that China-New Zealand ties, established 47 years ago, had always been at the forefront among relationships between China and Western countries.”
Ardern responded in kind (SCMP):
- “It is one of our most important and far-reaching relationships … we are committed to advancing our ties.”
Behind closed doors, they discussed more difficult matters (Stuff):
- “The pair held a 20-minute formal discussion behind closed doors, during which regional security, Huawei and spying and trade were the main agenda items.”
There were some practical outcomes. The two sides agreed to move forward on upgrading their free trade agreement, and signed four cooperation agreements on taxation, agriculture, finance, and science and technology.
The bigger picture: New Zealand – like most countries in the region (and the world) – is attempting to navigate relations with a more assertive China. The question is how to expand areas of cooperation, while also standing up to China’s more aggressive behavior.
CNN: New Zealand’s special relationship with China is on the rocks. Can Jacinda Ardern’s Beijing trip save it?
Xinhua: China, New Zealand agree to deepen comprehensive strategic partnership
SCMP: New Zealand leader Jacinda Ardern talks trade and Huawei on whirlwind trip to China
Stuff: Prime Minister Jacinda Ardern meets with President Xi Jinping in Beijing