Driving the Day
1. Trade tensions escalating
On Monday, the Ministry of Finance announced tariffs on USD 60 billion worth of US goods (MoF).
The move is retaliation for the increased tariffs imposed on Chinese goods by the US on Friday (see Friday’s Tip Sheet).
But, but, but…the Chinese tariffs won’t come into effect until June 1. That leaves room for further negotiations – and potential de-escalation.
Even still, things do not look good. The rhetoric in Beijing is definitely heating up. Nowhere was this more apparent than on the Monday evening edition of the Party’s flagship news program, Xinwen Lianbo.
Anchor Kang Hui delivered a 90-second tirade against the US that has become an internet sensation in China. Some excerpts (CCTV):
- “China has made its position clear from the beginning: it doesn’t want to fight, but it is not afraid to fight.”
- “The Chinese nation has experienced 5,000 years of trials and tribulations; what kind of struggle have we not seen?”
The US certainly seems like it is spoiling for a fight. On Monday, the US Trade Representative began the process to impose 25% tariffs on a further USD 300 billion worth of Chinese goods (USTR).
Get smart: Particularly in this politically sensitive year, President Xi cannot appear to be weak, or bowing to US pressure. That means things could get really ugly.
Request for Comments Concerning Proposed Modification of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation
Driving the Day, Cont’d
2. Trade war is bad for markets
In case you didn’t notice…US markets aren’t crazy about the latest round of tariffs:
- The Dow was down 2.4 % on Monday.
The reaction has been more subdued in China:
- The CSI 300 is down by 0.83% so far this week.
- The CNY has depreciated by 0.8%to6.88/USD so far this week.
Get smart: Things would have been in worse in the Chinese markets, but the government has been stepping in to limit the fallout.
There is likely more weakness to come, given that tensions are only set to ratchet up further in the coming weeks.
Some context: Just a few weeks ago, many observers were expecting China and the US to ink a trade deal at a potential June G20 meeting between Xi Jinping and Donald Trump.
- Bloomberg reports that the meeting will still happen (see link) – but now, it looks more like a chance to revive talks, rather than an opportunity to bring them to a conclusion.
Get smart: This market reaction was fully predictable. The questionnow is whethertanking US markets will cause President Trump (who is obsessed with the markets) to recalibrate his thinking.
Our take: This looks to be a protracted fight, and it’s hard to see much upside for global equity markets while these tensions persist.
U.S. Readies New Tariffs as Trump Says He’ll Meet China’s Xi
Driving the Day
3. MoF sets up tariff exemption system
The Ministry of Finance is taking steps to limit the impact of its new tariffs (see entry 1) on companies in China.
On Monday, the ministry published details of how affected parties (importers, manufacturers, and end-users of taxed US goods) can apply for relief from the tariffs. Successful applicants will be exempted from the tariffs for a year, with the possibility of getting tax reductions for any tariffs already paid.
To qualify, companies must show the following:
- It is difficult to find a substitute good.
- The tariffs will cause serious financial damage to the company.
- The tariffs will have negative structural effects on the industry as a whole.
Get smart: This is the first time China has attempted to implement such an exemption system.
It’s about time: The exemption system has been in the works since at least last autumn, but inter-ministerial debates delayed its promulgation.
Get smarter: The introduction of this long and complicated exemption process signals that Beijing is digging in for a long fight with the US.
4. Auto sector struggles continue
With the trade war kicking into higher gear, it’s not exactly a great time for China’s auto market to see its struggles deepen.
But that’s exactly what’s happening.
- Sales contracted for the tenth consecutive month in April – down 14.6% y/y.
Reuters has more details:
- “[Auto] sales fell to 1.98 million vehicles, said the China Association of Automobile Manufacturers (CAAM).”
- “That followed declines of 5.2 percent in March and 14 percent in February, as well as the first annual contraction last year since the 1990s.”
There are lots of drivers (pun intended!) here. Some are structural, and some are caused by the push for stricter emission standards:
- “April’s sales also suffered from some Chinese provinces implementing new vehicle emission standards earlier than expected, which stoked uncertainty among manufacturers, according to CAAM, analysts, dealers and consumers.”
And in case you forgot – the government continues to put heavy backing behind NEVs:
- “Sales of new energy vehicles (NEV) have been a bright spot, rising 18.1% in April.”
- “NEV sales jumped almost 62 percent last year even as the broader auto market contracted.”
Get smart: The auto sector is a key barometer of the economy – its struggles continue to be concerning given China’s wider economic uncertainty.
China auto sales fall 14.6% on year in April, 10th month of decline
5. Xi Jinping launches new campaign to invigorate Party
Cadres around the country, get excited! The Party is launching a new education campaign.
Xi Jinping chaired a Politburo meeting on Monday, where the Party decided to launch a “Stay true to the Party’s founding mission” education campaign next month.
First and foremost, the campaign looks to further strengthen the authority of Xi:
- “The fundamental task of launching the ‘Stay true to the Party’s founding mission’ education campaign is to deepen the study Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era.”
The campaign aims to make sure that all officials are on the same page:
- “This education campaign will… help cadres achieve theoretical study goals [and] serve as an ideological and political baptism.”
Top officials will be expected to take the lead:
- “Leading officials…must take the lead in grabbing hold of their own education and set an example.”
Get smart: Xi Jinping thinks that the Party has lost its way, and he wants to inject it with renewed purpose.
Get smarter: Most officials will resent the new campaign, which will just mean more time spent “studying” and attending meetings.
6. Politburo looks to develop Yangtze River Delta
Monday’s Politburo meeting discussed more than just the Party’s historic mission.
They also discussed a new draft policy, the “Outline for the Integrated Regional Development Plan of the Yangtze River Delta”.
Some context: The National Development and Reform Commission had been drafting this plan for the past six months.
The goal: To better integrate the economies of Shanghai, Jiangsu, Zhejiang, and Anhui.
The readout was light on details, but we expect to see more cross-border revenue sharing, similar to a pilot already taking place in the region (see April 23 Tip Sheet).
Get smart: More regional integration could help to create more unified markets that would improve economic efficiency.
Get smarter: This is Li Qiang’s time to shine. Li is a Politburo member and Shanghai Party Secretary – and a leading contender for the Politburo Standing Committee in 2022. Li has extensive experience in the region, having previously served as Jiangsu Party secretary and governor of Zhejiang.
What to watch: The plan will likely be released in the coming months.
7. Government prepares to deal with unemployment
Two vice premiers, Sun Chunlan and Hu Chunhua, chaired a national conference on employment yesterday.
And Premier Li sentinstructions too.
Li reminded officials of the mounting employment pressure this year (Gov.cn):
- “Employment pressure is still relatively big.”
- “This year [it is] especially so, as the number of college graduates has reached a new high and there are even more factors affecting stable employment.”
The trade war certainly isn’t helping. The State Council’s in-house think tank, the DRC, estimates that the new US tariffs imposed Friday could result in losses of around 1.16 million jobs. That number could jump to 1.8 million if the US follows through on further tariffs.
What the government worries about: A massive dislocation of workers, which could cause stability issues.
- “Labor-importing provinces should try to keep unemployed people in the local area to prevent large-scale returning to the countryside.”
- “Labor-exporting provinces must help migrant workers return to their hometowns and villages to start businesses and drive rural workers to achieve employment at home.”
The bright side: The fear of massive unemployment is putting increased impetus behind the government’s drive to create a better business environment.