Driving the Day
1.Trade war with US looks set to escalate
The potential for a positive outcome to this week’s trade negotiations looks grim.
In a statement late on Wednesday, theMinistry of Commerce finally acknowledged US plans for tariff increases on USD 200 billion worth of Chinese goods from 10% to 25%, scheduled for Friday (MofCom).
That statement came after the US Trade Representative formally filed the plan to increase tariffs.
Get smart: By publicly acknowledging the US threat just before trade talks resume in Washington, China is attempting to restore an even hand for Liu He in negotiations. If Chinese media had continued to censorthe US’s proposed tariffs, it would have shown Beijing as worried – and vulnerable.
Get smarter: Acknowledgement of the tariff threat makes Chinese retaliation almost a certainty.
Our latest hot take: Given the formal filing by the USTR, it now looks like the increased tariffs are definitely coming.
What to watch: While the announcement will come on Friday, it looks as though implementation will still take a couple of weeks. But markets certainly won’t wait to react.
In the meantime, there is still one potential offramp: By leaving out the specific details of any retaliation plans, Beijing is giving itself some leeway for de-escalation.
USTR: USTR Notice of Modification of Section 301 Action: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation
Reuters: China’s gag on Trump tweets raises doubts about its global market ambitions
2.Data dump – credit
China’s central bank unexpectedly released monthly credit data for April on Thursday morning.
The headline: After March’s BIG credit print (see April 12 Tip Sheet), loan growth fell back to earth last month.
- Aggregate financing grew at 10.4% y/y – down from 10.7% in March and missing expectations of 10.5% growth.
- After adding in local government bonds, adjusted aggregated credit growth came in at 10.7% – down from 11.1% in March.
- RMB-denominated loans grew by 13.5% y/y – down from 13.8% in March.
Markets aren’t loving these numbers, especially when combined with renewed trade war uncertainty.
But it’s not all bad: The 10.4% headline growth number for April was perfectly in line with the Q1 average.
So we still see credit growth as having bottomed out, and we expect it to stay basically level from here – at around 10.5-11% y/y growth.
But a leveling out of credit growth is very different from the big ramp-upthat markets were expecting on the back of theMarch credit jump.
The upshot: We have argued this for months, but the April data makes it clearer than ever that a major acceleration of credit is not coming any time soon, which means the economy will still struggle to gain traction.
3.Data dump – inflation
The stats bureau released inflation data for April on Thursday morning.
- CPI was up 2.5% y/y – up from 2.3% in March and in line with expectations.
- Within CPI, food inflation was up 6.1% – compared to 4.1% in March.
- Within food, pork prices were up 14.4% – compared to an 5.1% increase in March.
- PPI was up 0.9% y/y – up from 0.4% in March and beating expectations of 0.6%.
Quick take 1: The spread of African Swine Flu continues to have a negative effect on pork supplies, pushing up prices. We don’t seem to be in panic territory yet, but policymakers are increasingly concerned and the potential for a further spike needs to be on investors’ radar.
Why it matters: A spike in inflation, driven by rising pork prices, would constrain the central bank’s ability to support the economy.
Quick take 2: PPI was up more than expected thanks in largepart to a continued run-up in oil prices last month.
- The oil sub-component of PPI was up 10.1%, compared to 9.7% in March.
The bottom line: Improving PPI is not indicative of a strengthening industrial sector.
CNBC: China’s food inflation rose 6.1% in April as pork prices spiked
4.Xi encourages the masses to take part in law enforcement
Xi addressed the country’s top law enforcement officials at the National Public Security Work Conference, held on Wednesday and Thursday.
These conferences used to beheld roughly every five years. But this year’s conference marks the first one since 2003.
Those worried about China’s creeping police state will not find Xi’s comments soothing:
- “We must actively prevent…all types of societal contradictions.”
That sounds like law enforcement has wide latitude to act before any crime has been committed.
It gets worse. Xi also wants everybody to spy on each other:
- “We must persevere in…mass prevention and mass control, and support the “Fengqiao Experience.”
- “[We must] fully mobilize the masses, organize the masses, [and] rely on the masses.”
What is the Fengqiao Experience you ask? It describes the Mao-era mobilization of the masses to “re-educate” “reactionary” elements in Fengqiao County, Zhejiang (much more info in the CMP link below).
The bottom line: The already tight political environment is only going to get tighter.
5.State Council looks to improve national tech zones
It’s been a busy week for the State Council. On Wednesday, they held their second executive meeting in four days (see Tuesday’s Tip Sheet).
Top of the agenda Wednesday: Boosting innovation.
Specifically, the meeting focused on attracting more foreign investment into the country’s 219 national-level economic and technological development zones.
Some context: These zones already constitute an important component of the economy:
- “These economic development zones contribute around 10 percent to the national GDP and some 20 percent to the country’s foreign trade and paid-in foreign investment.”
How will the State Council improve the zones?
- “The zones will be supported to implement a simpler permitting process for investment projects and the practice of pre-commitment of compliance.”
Officials will be evaluated based on how well they attract investment:
- “Performance in attracting investment will be included as part of the assessment and incentive system in the national zones.”
Foreign companies will like this:
- “The government will support pilot programs to facilitate foreign exchange settlement and payments of revenue under the capital accounts in these national zones where conditions permit.”
Get smart: If you are looking to make or expand an investment, these zones could be the place to do it. With 219 all vying to attract business, there could be some sweet deals on offer.
Gov.cn: 李克强主持召开国务院常务会议 部署推进国家级经济技术开发区创新提升等
Gov.cn: New measures to boost national development zones for further opening-up
6.State Council supports semiconductors
Wednesday’s State Council meeting also discussed an industry that is near and dear to Chinese leaders’ hearts – semiconductors.
Specifically, the government has decided to extend already-existing tax cuts for semiconductor and software makers.
- “The integrated circuit and software industries are strategic, fundamental, and guiding in supporting economic and social development.”
In plain English: These sectors are critical to building China’s high-tech sector.
Foreign companies welcome: The meeting was explicit that foreign chip and software companies would receive the same preferential tax treatment as domestic companies.
Get smart: China’s semiconductor industry cannot compete with those of the most advanced producers, such as the US and Taiwan. Because the sector is seen as so critical, Chinese leaders will pull out all the stops to develop the industry.
Gov.cn: China to extend tax preferences for IC, software companies
7.Top officials to be held accountable for policy failures
Ever wonder how officials make policy?
We now know – at least in theory.
Yesterday, the State Council released Order No. 713, otherwise known as the “Interim Regulations for the Process of Major Administrative Decisions.”
The document provides the procedural rules that governments must follow when making “big decisions” – think policies that will have large economic or social impacts.
Here is what we found interesting: The top official in any jurisdiction has final say over “big decisions” in his/her area. But if they decide to veto a proposal, they have to explain their reasoning in writing.
And get this: If it is later found that that veto was a bad decision, the official will be penalized.
What it means: The Party wants policymaking to be collaborative and consensus-based. So they are trying to up the stakes for officials that decide to go against their colleagues.
Gov.cn: 中华人民共和国国务院令 第713号