Driving the Day
1.Ren Zhengfei downplays American blacklisting
Huawei founder Ren Zhengfei projected optimistic confidence in a wide-ranging interview with Chinese media today.
Some context: On Wednesday, the United States effectively banned US companies from selling products or services to Huawei, which could cripple many parts of Huawei’sbusiness (see May 16 Tip Sheet)
Ren insists that he isn’tworried:
- “Huawei’s 5G [plans] will absolutely not be affected.”
- “In terms of 5G technology, our competitors are more than 2 or 3 years out from being able to catch up with us.”
Ren also tried to distance the company from the Chinese government:
- “Huawei is a commercial entity.”
- “If consumers like [our products], then they should use them.”
- “If they don’t like [our products], then they shouldn’tuse them.”
- “They shouldn’t draw too strong a connection between Huawei and the government.”
Get Smart: Ren is putting on a brave face, but the company will be severely hobbled if the US follows through on its ban.
Get smarter: Technological decoupling is proceeding, and we are headed towards a splintered global technological ecosystem. That will massively disrupt supply chains and increase costs for all multinational companies.
All Weather TMT: 任正非：我们牺牲了个人家庭，为了站在世界高点的理想，跟美国冲突是迟早的
2.Auto sector struggles deepen further
Specifically, the auto market continues to see epic struggles (Caixin):
- “Sales of passenger cars decreased 24% in the first week of May from a year ago, according to the China Passenger Car Association (CPCA).”
- “Transactions between automakers and dealers fell 44% year on year, the CPCA said.”
That bad news only compounds the recent pain in the sector:
- “The May drop extends a 21.4% decline in auto sales during the first four months this year, following the first annual drop last year in more than two decades.”
Get smart: As we’ve pointed out several times in recent months, the auto sector’s challenges go well beyond the cyclical downturn of the economy.
Get smarter: That being said, the sector’swoes are feeding into – and exacerbating – the economy’sshort-term challenges.
The bottom line: It’s hard to find a positive economic story to tell for China right now.
Caixin Global: China’s Auto Market Continues Deceleration
3.Xi promotes rare earths
Xi Jinping is on the road in Jiangxi.
On Monday, he visited JL Mag Rare-Earth in Ganzhou.
Why that matters (Global Times):
- “The visit [is] seen as a sign of backing from the top leadership for the domestic rare-earth industry.”
- “Many have suggested that China should limit rare-earth exports to the US as a countermeasure to the US decision to slap tariffs on Chinese goods and cut supplies of semiconductors for Chinese companies.”
- “Rare-earth minerals were among the few items excluded from the latest US tariff list.”
Get smart: China is the world’s leading producer of rare earths. It is thatrare (sorry!)good where the US is dependent on China.
Get smarter: These trips are highly scripted, so there is always a message. Xi is pointing out that China has leverage in the trade war – and that decoupling will be painful for both sides.
Global Times: Xi’s visit boosts China’s critical rare-earth sector
4.Xi visits revolutionary sites
While in Jiangxi, Xi also did a little bit of red tourism.
He visited a monument in Ganzhou that commemorates the beginning of the Long March.
Some context (SCMP):
- “The Long March was an epic military retreat from 1934 to 1936 undertaken by the party’s Red Army, the forerunner of the People’s Liberation Army, to evade Kuomintang troops during the Chinese civil war.”
- “The thousands on the march covered some of the country’s most difficult terrain and the feat is evoked as a symbol of unity in the face of ordeals.”
Xi also visited the family of a “revolutionary martyr” in Tantou village.
Get smart: Like we said in the entry above, these visits are highly scripted. The message here is that the Party has a long history of struggle – and it always comes out on top.
SCMP: Chinese President Xi Jinping sounds Long March rallying call as trade war tensions rise with United States
Xinhua: Xi visits village of old revolutionary base
5.Government tackles food safety
Food safety is a perennial problem.
On May 20, the Central Committee and State Council jointly released new measures to address the issue (Gov.cn)
- “Food safety is linked to the health and safety of the people and the future of the Chinese nation.”
- “The implementation of this food safety strategy will allow the people to eat with confidence.”
The immediate goal: 98% of food products should pass spot checks by 2020.
Thinking out loud: So 2% of food will not pass checks? Let’s extrapolate and say that 2% of the meals you eat contain unsafe food. If you eat 1,095 meals a year (365 days x 3 meals/day), that means you would eat unsafe food 22 times a year. Seems like a lot!
The ultimate goal: To become a world leader in food safety by 2035.
Key components of strategy include:
- Improved food safety inspection mechanisms
- Harsher punishment for violators
- Strengthened accountability throughout the food production supply chain
Get Smart: Food safety – like healthcare (see yesterday’sTip Sheet) – is one of the public’sbiggest concerns. The government has thrown huge resources into addressing the issue over the past decade, but it is still a major problem.
6.Former CSRC chief probed for corruption
China’sformer top securities regulator Liu Shiyu is being probed for corruption.
Some context: Liu was appointed head of the China Securities Regulatory Commission (CSRC) in early 2016. He was suddenly demoted in January this year and made head of the All-China Federation of Supply and Marketing Cooperatives, the state-backed organization managing supply and marketing for major agricultural goods.
Now we know why Liu lost his job. He is under investigation for corruption.
Liu has turned himself in and is cooperating with the investigation, according to the National Supervisory Commission (NSC).
Why this matters: China’ssecurities markets are famously dodgy. And Liu knows where the bodies are buried. Expect more corruption cases to come to light.
Get smart: Cooperating with the anti-corruption authorities is all the rage these days. Since the start of Xi’ssecond term in late 2017, more than 5,000 officials have turned themselves in, according to the NSC.
Get smarter: Rooting out corruption in China’s equity markets could go a long way to making them more efficient financing channels.