Driving the Day
1.None of the key players know what’s going to happen
All eyes are on Washington where Vice Premier Liu He began the latest round of trade talks with his US counterparts late on Thursday, US time.
We guess Liu’s working dinner with US Trade Representative Robert Lighthizer didn’t go so well.
As you may have heard, at12:01 pm Beijing time Friday, the US increased tariffs on USD 200 billion of Chinese goods from 10% to 25%.
What happens next is anybody’s guess. The Chinese have promised to retaliate, but have not specified how they will do so.
As always, US President Trump is the most important player in this drama. But he doesn’t see to know what is going on, according to statements Thursday(FT 1):
- “I have no idea what’s going to happen. We’re going to find out about China tonight.”
Trump does think a deal is possible (SCMP):
- “I did get last night a very beautiful letter from President Xi [saying] ‘Let’s work together, let’s see if we can get something done.’”
The consensus is still that we will get a deal soon, even if it doesn’t happen this week (see FT 1).
Other reporting by the FT has Xi Jinping recently saying he thinks the likelihood of a deal is 50-50 (FT 2).
To us, it is telling that none of the main actors in this drama seem to have a clear idea of the likely outcome.
That doesn’t bode well for a speedy resolution in our view.
FT: Risk temperature at boiling point
FT: China’s Xi faces a ‘big gamble’ after Trump rebuke
SCMP: Donald Trump says trade war deal with China may still happen after Xi Jinping sent him a ‘beautiful letter’
2.Monetary policy advisor prepares market for no deal
China’s financial policymakers are looking to get ahead of coming market volatility.
The game plan: Manage the fallout of “no deal” in the US-China trade negotiations on Friday.
To get ahead of the game, the central bank’s (PBoC) official newspaper, The Financial News, published a short interview with Ma Jun last night.
Some context: Ma is a member of the monetary policy committee and a highly respected China economist, so his opinions carry weight.
Ma offered his analytical modeling of a full-on trade war:
- “If the United States raises the tariff rate on USD 200 billion worth of Chinese exports from 10% to 25% and China implements corresponding countermeasures, the negative impact of this scenario on China’s GDP growth rate will be about 0.3 percentage points.”
- “That is within the controllable range.”
Ma then offered some words of comfort for nervous markets – underscoring that monetary authorities have things under control:
- “Despite the internal and external uncertainties, China’s monetary policy still has sufficient room to cope [with challenges].”
- “The central bank’s monetary policy toolbox is very rich.”
Get smart: Interviews like this – in the official PBoC newspaper – underscore that Chinese officials are seriously preparing for Liu He to leave DC with no deal.
Financial News: 央行货币政策委员会委员马骏：中国经济和金融市场抵御外部冲击的韧性增强
All was quiet on the econ front in China on Friday, as the trade negotiations dominated the news cycle.
That of course hasn’t kept the CSI 300 from losing 8.1% over the past four days – the biggest four-day losing streak since early October.
Nor has it kept the CNY from falling through the floor. The Chinese currency closed at 6.823/USD on Thursday – it’s weakest point since January 9.
Now that the US has announced more tariffs,more currency weakness is a near certainty.
The only question is whether the full brunt of the tariffs will be reflected in currency weakness.
- Another 10-15% depreciation, reflecting the tariff increase to 25% from 10%, would take the currency down to the 7.5-7.8/USD level.
- Even if the process was well-managed, such a move would likely cause contagion in other Asian currencies.
While China’s central bank (PBoC) will most certainly manage any depreciation, it’s hard to see the PBoC trying to fundamentally stop the process if that is where the market is pushing the currency.
The bottom line: Any lingering market optimism is misplaced. Things are about to get nasty.
Bloomberg: China’s Yuan Tumbles to Lowest Since January on Trade War Fear
4.Party extends its “grassroots” tentacles
On Wednesday, the Party’s General Office released “Opinions on Strengthening and Improving Urban Grassroots Party Work,” which aims to enhance Party oversight over key areas of everyday life in cities.
The Party wants businesses to be more involved in Party work. Property management companies, industrial parks, and internet companies – among MANY others – are all encouraged to set up Party groups and promote Party-building.
Chinese urbanites can expect their personal lives to get a bit more political:
- “[We should] establish a coordinated operating mechanism for [Party-building] forcommunity resident committees, owners’ committees, and property management service enterprises.”
The Party didn’t mince words when it came to describing the purpose of this new drive at grassroots governance:
- “[Grassroots Party work helps to] resolutely resist the influence and infiltration of hostile forces…and resolutely fight against activities that weaken and oppose the leadership of the Party.”
Get smart: This is just the latest in the Party’s recent efforts to tighten its grip on society. Expect more government propaganda and oversight in daily work and life.
5.Xi puts security forces on notice ahead of anniversaries
Xi spoke to China’s top law enforcement officials this week urging them to root out “contradictions in society” and to follow the Party’s lead (see May 9 Tip Sheet).
While this might sound like pretty standard Party-speak, the next few months are going to be a particularly critical time for the CCP to keep a lid on unrest.
Why’s that?A slowing economy andescalating trade warmean that passions will be running high. Xi wants to head offpopular discontentover weak economic prospects. He also doesn’t want anyhard-to-control demonstrations against the US.
But that’s not all Xi has to worry about. 2019 is fraught with symbolically significant anniversaries:
- The 100th anniversary of the May 4th Movement (May 4)
- The 20th anniversary of the Belgrade embassy bombing (May 7)
- The 30th anniversary of the Tiananmen Square crackdown (June 4)
- The 70th anniversary of the founding of the PRC (October 1)
Navigating these milestones and managing popular sentiment will be tricky. Xi needs all the help he can get.
Get smart: If ever there was a year that needed to go smoothly for the Party, 2019 is it. Xi is going to do all he can to make sure it does.
New from Trivium UB
Trivium UB is a new project exploring the human factors driving China’s user markets. It sits at the cross-section of user behavior, sociology, and consumer research.
China’s ever-expanding travel apps
Do yourself a favor and check out the latest long read from Trivium UB.
In it, our Creative Director and head of tech research, Kendra Schaefer, explores a key trend for China’s online tourism portals – they are expanding into anything and everything under the sun.
As she explains, this is a key difference between Western and Chinese apps – while the former become increasingly niche, the latter seem to be accumulating new features and functions by the minute:
- “China’s travel portals are prime examples of the more-is-more approach to service offerings. While western outlets like Expedia and Kayak focus almost exclusively on bookings and reservations, China’s travel champions serve as more of a one-stop-shop for all things tourism.”
- “Big players like CTrip 携程, Qunar 去哪儿 and Fliggy 飞猪 have extended their offerings along other verticals, moving into retail, financial, telecom and niche-market services.”
The piece then runs down a few of the more interesting emerging features:
- Destination wedding photography
- “Freestyle” vacation packages
- Financial services
- Visa services
- Travel retail
The key takeaway:
- “New retail and service channels on tourism platforms can offer foreign firms — even those not affiliated with the travel industry in their own markets — new potential channels through which to reach Chinese users.”