Driving the Day
1.Party stokes nationalist sentiment
The Propaganda Department published a commentary on the trade war in today’sPeople’sDaily.
It reiterated the three points of contention in the trade talks that were spelled out by Vice Premier Liu He over the weekend (see May 13 Tip Sheet):
- “The three core issues of concern to China are the cancellation of all tariffs, that trade purchases be in line with reality, and that the text of the agreement be revised so as to be more balanced.”
- “These issues must be resolved.”
The trade war has highlighted a need for technological self-sufficiency:
- “This trade friction has made us more aware that we have shortcomings in terms of economic structure, quality of development, and core technologies.”
- “[We must] enhance the sense of urgency in accelerating indigenous innovation and resolve the bottleneck imposed by insufficient mastery of core technologies.”
Meanwhile state media outlets are tirelessly stoking nationalist sentiment.
- Last night and today, CCTV replaced regularly scheduled programming with two films about the Chinese army fighting the US in the Korean War.
Get smart: The stoking of nationalism may win the Party more popular support, but it could also make it harder for the Chinese side to compromise and make a deal.
Driving the Day
2.Huawei initiates Plan B
Yesterday, Donald Trump went nuclear on Huawei, effectively cutting off huge parts of its supply chain (see yesterday’sTip Sheet).
The move did not catch Huawei totally unawares.
Last night, He Tingbo, president of Huawei chip subsidiary Hisilicon, sent a letter to all employees saying that the company has a plan:
- “A few years ago, … the company conceived an extreme survival contingency plan [in which we] assumed that one day all advanced American chips and technology would be inaccessible.”
- “Though we never thought this scenario would come to pass,…[we] ave been developing this ‘spare tire’ for the company’s survival.”
- “[This plan] could ensure…a continuous supply of most crucial components.”
Such contingency plans are now de rigeur:
- “Going forward, every new product will have a ‘scientific and technological self-reliance’ plan.”
Get smart: It will be a huge challenge for Huawei to shift its reliance to Chinese companies for all its technological needs. But once it does, its erstwhile American suppliers will lose a huge market forever.
The really big picture: Economic and technological decoupling will make great power conflict more likely.
3.PBoC won’tdefend 7/USD
The Chinese stock market has taken increased trade tensions with the US largely in stride. That’sthanks to state-backed share buying and increased stimulus expectations.
The currency, however, has gotten hammered over the past few days.
- The CNY has fallen just over 2% since the beginning of May – closing at 6.88/USD on Thursday.
- The offshore CNH has depreciated about 2.5% since the beginning of May – closing at 6.92 on Thursday.
We expect that weakness to continue.
- In our view, the currency is quite likely to move through the 7/USD level at some point in Q2.
- In fact, we expect the currency to be trading in the 7.4-7.7/USD range by mid-year.
Our thinking: The PBoC has been crystal clear that its primary concern, when it comes to depreciation, is the role of speculators.
However, the bank is okay with currency weakness driven by geopolitical factors.
How it could all go down: If the PBoC sticks to its recent playbook, it will make sure that depreciation manifests in quick spurts that are both non-linear and difficult to predict – followed by spells of stabilization or even some counter-cyclical appreciation.
But there is no magical line in the sand at 7/USD.
SCMP: Will a falling yuan ‘torpedo’ China’s trade talks with the US?
4.Unintended consequences of private sector support
Regulators’ efforts to support the private sector are having some unintended consequences.
Banks are now in a price war to lower lending rates to small businesses.
The problem: It’shurting China’ssmaller banks, which are already cash-starved, as the big SOE banks undercut their lending rates (Caixin):
- “In the first quarter this year, the overall banking sector’s average interest rate on loans to small businesses — defined as companies with credit lines under 10 million yuan ($1.5 million) — dropped to 6.87% from 7.39% for the whole of 2018, Zhu Shumin, a vice chairman of the CBIRC, said at a briefing in Beijing last month.”
- “During the same period, the average interest rate that the ‘Big Five’ state-owned commercial banks offered to small businesses was 4.76%, down from 4.89% for the fourth quarter last year, according to Zhu.”
Surprise, surprise– some companies are looking to game the system.
- “The price war…[has also] sparked concerns that companies receiving low-rate loans could abuse their privilege by re-lendingthe cheap funds at higher rates.”
Get smart: We’vesaid it a hundred times – officials can’t change the Chinese banking system by fiat. They need better market mechanisms.
Caixin Global: In Depth: Banks Go to War to Meet Beijing’sGoal of Lowering Rates for Small Businesses
5.Beijing promotes digital villages
On Thursday, the general offices of the State Council and Central Committee released new guidelines to promote “digital villages.”
The big thrust of the plan is to increase internet access in rural areas.
The big targets:
- By 2020, 4G internet will be accessible in over 98% percent of villages nationwide.
- By 2025, the urban-rural “digital gap” is to see a notable narrowing.
- By 2035, urban and rural areas should receive equal public services.
What the government wants:
- “More efforts will be made to boost the rural digital economy, with wider use of digital technologies in agriculture and the development of e-commerce and various emerging creative industries in rural regions.”
Get smart: It has not received a lot of attention, but one of the biggest initiatives of Xi’ssecond term is his push for “rural revitalization.” This is leading to increased investment in rural areas – especially in infrastructure.
Go deeper: Want to see what rural e-commerce looks like? Check out the link from our sister site Trivium UB below.
Gov.cn: 中共中央办公厅 国务院办公厅印发《数字乡村发展战略纲要》
Gov.cn: China plans to boost rural development via digital technologies
Trivium UB: “Village Live-streaming”: China’s farmers are becoming content creators