Driving the Day
1.US kneecaps Huawei
This is HUGE. On Wednesday, the US Department of Commerce added Huawei – and 70 other companies – to its “Entity List.”
What that means: Huawei cannot buy parts or components from US companies without the explicit approval of the US government.
Why Commerce did it:
- “This action stems from information available to the Department that provides a reasonable basis to conclude that Huawei is engaged in activities that are contrary to U.S. national security or foreign policy interest.”
The impact: Much of Huawei’s equipment uses components sourced from US companies, so this could effectively kill large parts of Huawei’s business.
That’s not all: Also on Wednesday, US President Donald Trump issued an executive order that will effectively ban Huawei telecommunications equipment in the US.
Not surprisingly, Huawei is not happy (Xinhua):
- “If the United States restricts Huawei, it will not make the United States safer or stronger.”
- “It will only force the United States to use inferior and expensive alternative equipment, lag behind other countries in the construction of 5G networks, and ultimately harm the interests of American enterprises and consumers.”
Get smart: We will need further clarification from the US government to understand the full scope of the measures.
Get smarter: If the US completely bans the sale of products to Huawei, the economic disruption will be orders of magnitudes greater than that of the trade war.
More importantly, it would hasten technological decoupling and put us on a path towards a bifurcated global technological ecosystem.
Reuters: China’s Huawei, 70 affiliates placed on U.S. trade blacklist
US Department of Commerce: President Trump Declares National Emergency to Secure the Information and Communications Technology Critical Infrastructure Supply Chain
2.Stimulus hopes build…again
Chinese equity markets were thrilledwith the terrible economic data released on Wednesday morning (see yesterday’s Tip Sheet).
- The CSI 300 ended the day up 2.3%, largely thanks to the “bad news is good news” mentality.
The conventional wisdom: Subpar economic data, combined with increased uncertainty around the trade war, means that more stimulus is on the way.
But that conventional wisdom is wrong. We have stated over and over in recent months thatChinese stimulus would disappoint. We still believe that.
Get smart: Here is where understanding the Chinese policymaking process becomes increasingly important.
At the April Politburo meeting, which always discusses the economy, top policymakers were adamant that they would stay the course despite lingering downward pressure on the economy and the yet-to-be-resolved trade war.
Get smarter: Policy won’t fundamentally change until the Politburo sends a new signal.
The bottom line: Big stimulus is not currently on the table.
Reuters: China stocks rebound on stimulus hopes, softer Trump tones on trade
Bloomberg: China’s Economy Lost Momentum Even Ahead of Trump’s New Tariffs
Reuters: China’s retail sales growth slumps to 16-year low as trade war risks rise
3.Armyworm infestation is a big deal
In yesterday’s Tip Sheet, we highlighted the unusual steps that policymakers are taking to tamp down rising pork prices – which are being affected by the incredibly quick spread of African Swine Flu.
Pork isn’t the only ag product facing challenges.Prices for vegetable and grain products are starting to rise – and those increases may soon go into hyper-drive.
That’s largely thanks to a quickly growing infestation of armyworm that has come from China’s Southeast Asian neighbors.
The latest case was found in Sichuan (Successful Farming):
- “The pest, already found in neighbouring Yunnan, Guangxi and Guandong provinces, feasts in large numbers on the leaves and stems of many plant species and can infest and damage hundreds of hectares of corn overnight.”
- “Sichuan authorities have launched a campaign against the destructive worm, allocating more than 60 million yuan ($8.7 million) to prevent the pest from spreading and to secure grain output.”
Get smart: The last thing China can afford is a sustained upward shock to food prices. It would force the central bank into a tighter monetary stance at the exact time it is trying to engineer an economic rebound.
Keep an eye on this space.
Successful Farming: China Finds Destructive Armyworm in Corn, Sorghum in Sichuan Province
4.State Council promises faster, cheaper internet
The State Council held its weekly executive meeting on Wednesday.
Top of the agenda: Improving internet services.
The government is vowing to make sure that more citizens and companies have access to high-speed internet:
- “1,000M broadband will be extended to more than 300 cities.”
- “Base stations for mobile internet will be upgraded with expanded capacity.”
- “The goal is to raise the speed of both fixed-line and mobile internet services to 1,000M.”
Schools and hospitals are of particular focus:
- “Broadband networks will cover 97 percent of primary and middle schools nationwide this year.”
- “Dedicated internet services will be made available over time in hospitals and medical consortiums above the county level.”
The government wantto make sure that the internet is affordable:
- “The goal this year is to cut the average broadband service rate for small and midsized enterprises by 15 percent, the average rate for mobile internet services by more than 20 percent, and roaming charges for internet traffic between the mainland and Hong Kong and Macao by 30 percent.”
Get smart: The Chinese government sees the internet as thecritical infrastructure for the economy going forward. And if there is one thing that the Chinese government loves, it’s building infrastructure.
Gov.cn: 李克强主持召开国务院常务会议 部署进一步推动网络提速降费等
Gov.cn: Faster, cheaper internet services to boost demand, benefit people
5.NDRC demands electricity price cuts
The government is out to slash electricity costs.
Yesterday, the NDRC announced measures requiring energy grids to lower electricity prices.
Some context: Li Keqiang announced at the March Two Sessions that the government will cut industrial electricity prices by 10% in 2019.
More context: Electricity accounts for almost 30% of industrial operating costs in China.
To make these prices cuts happen, the government will need to eat some of the costs.
- The government plans to halve the payments that grids are required to make to the National Water Conservancy Construction Fund.
- They’ve also reduced the VAT tax rate for grid operators.
The hard part will be ensuring that energy prices accord with market rates:
- The government wants more industrial and commercial users to negotiate electricity supply agreements with power generators directly.
Get smart: It’s common practice for local governments to intervene in negotiations and suppress energy prices on behalf of industrial consumers. That’s good for consumers in the short term, but not for the energy market in the long run.
6.Misbehaving on the subway can eat up your credit score
Get this – Yesterday, the Beijing government announced new rules for behavior on the subway.
- Eating, drinking, and listening to loud media on the subway will now be penalized.
The penalty: Offenders’ social credit scores will get dinged.
This may win the support of some fed-up commuters, but it’s part of a worrying trend that sees local governments weaponizing the social credit score system to target an increasingly broad range of behaviors.
- In some cities, people can be downgraded for littering and running red lights.
- The Zhejiang government is even considering downgrading the scores of frequent job-hoppers.
Get smart: The consequence of a low credit score can be devastating to an individual’s life. Those with low scores can be barred from public transport and shut out of the financial system.
What to watch: Will wider application of the social credit system trigger public outcry and force the government to put a check on its expansion?
7.Xi wants China to take larger role in world
On Wednesday, The Party’s top journal, Qiushi, published an excerpt of Xi’s speech to senior officials in 2016 in which he explained his “new development concept.”
Context: The “new development concept” is Xi’s overarching economic philosophy. The concept includes five elements: innovation, coordination, environmentalism, opening, and sharing.
Xi was clear that China needs to continue to open up.
Further opening will benefit China’s economy. And it will also increase China’s stature in the world:
- “Today, we are considered to be the biggest standard-bearer in the world to promote trade and investment liberalization and facilitation, and actively fight various forms of protectionism with Western countries.”
- “We can…lead the world in development.”
The time is ripe, according to Xi, for China to take a more active role in shaping the global system.
- “The Western-dominated system of global governance is beginning to show signs of change.”
- “The transformation of China’s economic strength into an international institutional power still requires hard work.”
Get smart: China does not want to overturn the current global system. But it does want to “reform” it to better promote Chinese interests.
The age of Chinese activism is just getting started.