Driving the Day
1. Xi wraps up Jiangxi tour
In case you missed it: Xi Jinping has been on a whirlwind tour ofJiangxi province this week (see May 21 and May 22 Tip Sheets).
He concluded his visit on Tuesday with a symposium in Nanchang.
Xi acknowledged the increasing tensions with the US:
- “The international situation is increasingly complicated.”
- “We must be conscious of the long-term and complex nature of various unfavorable factors at home and abroad, and properly prepare for the various difficult situations.”
But, Xi cautioned, officials should not get distracted from the game plan:
- “The important thing is for China to do its job well.”
He also called for a renewed emphasis on the development of central China, laying out an eight-point plan, including:
- Facilitating high-quality manufacturing growth
- Enhancing innovation capability in key fields
- Improving the business environment
- Expanding high-level opening up
Get Smart: Xi is trying to manage expectations as the economy slows and the trade war takes its toll. He is also trying to leverage competition with the US to rally support for his leadership.
The big question: As the relationship with the US becomes more confrontational, with that help Xi’s standing or undermine it?
People’s Daily: 贯彻新发展理念推动高质量发展奋力开创中部地区崛起新局面
Xinhua: Xi Focus: Xi requires new advances in rise of central China
Finance & Economics
2. Huawei’s woes deepen
The hits just keep on comin’ for Huawei.
On the back of the US slapdown (see May 16 Tip Sheet), now Japanese mobile carriers are putting off smart phone order from the Chinese telecoms giant (Caixin):
- “Japan’s largest telecom operators NTT Docomo, SoftBank Corp., KDDI Corp. and UQ Mobile said Wednesday they will put off sales of Huawei’s newest P30 handsets without providing an explanation or a timeframe for resumption.”
- “The companies were scheduled to release the new products in late May, according to their websites.”
- “The moves came one day after Huawei debuted its P30 models in Japan.”
- “Powered by the Android operating system, P30 models are Huawei’s high-end flagship devices this year, featuring advanced cameras.”
In case you didn’t know – the increasingly broad backlash is a big deal for Huawei:
- “Huawei said it imports about 30% of its components, or about $11 billion annually, from American companies.”
And the stakes are high:
- “In the first quarter, Huawei overtook stumbling global tech giant Apple Inc. to become the world’s second-largest smartphone-maker behind Samsung.”
Get smart: The US has really turned up the heat vis-à-vis China with these Huawei restrictions. Technological self-sufficiency is now seen as a must in Beijing.
Caixin: Huawei’s New Phone Sales by Japanese Carriers Postponed
Finance & Economics
3. US target lists to expand beyond Huawei
Stop us if you’ve heard this before…but the hits just keep on comin’ – and not just for Huawei.
The US is considering expanding its export restrictions beyond the telecom giant.
Specifically, some marquee facial recognition companies may be in the crosshairs – with Hikvision being the most likely target.
That’s sent the company’s stock tumbling (Bloomberg):
- “The stock fell as much 9.6% before recovering to be 6.2% lower as of 9:50 a.m. in Shenzhen.”
- “The White House will make a final decision in coming weeks on whether to limit exports of U.S. components to Hikvision.”
In case it isn’t obvious:
- “Such a move would escalate tensions with China and raise questions about whether the U.S. is going after more of the country’s technology champions.”
Some important context:
- “Hikvision has grown into a surveillance giant, selling its cameras around the world after cashing in on China’s obsession with monitoring its citizens.”
- “Its devices use artificial intelligence, enabling them to conduct facial recognition on a vast scale.”
- “That’s helped it build a dominant position in a market that BIS Research says was worth $32 billion in 2017.”
Get smart: US restrictions on Chinese facial recognition companies is the easy prediction of 2019. This will up the ante in bilateral tensions.
Bloomberg: China Surveillance Giant Hikvision Slumps on U.S. Ban Report
Finance & Economics
4. PBoC quietly moving forward with interest rate liberalization
File this one under boring-but-important: China’s monetary authorities continue to progress in their plans to liberalize the country’s interest rates.
- “At an opportune time, the PBOC will identify a new policy interest rate and no longer post the benchmark deposit and lending rates, thus doing away with the existing ‘two-track’ interest rate system.”
- “A streamlined lending rate system will promote competition among financial institutions.”
The PBoC blames the current interest rate regime for undermining attempts to finance the private sector:
- “The PBOC has blamed the coexistence of regulated benchmark rates for deposit and lending, and the market-decided rates, as the main stumbling block for channeling cheap capital into the real economy, especially to support private and small companies.”
Authorities are also focused on other structural improvements to the banking system:
- “The PBOC issued a document on Tuesday lowering the rural commercial banks’ RRR to 8 percent by July 15, through three cuts of 1 percentage point each every month starting from May.”
Get smart: All these moves are hugely positive for the long-term health of China’s credit and financial markets. But they will take time to enact – let alone bear fruit.
ECNS: PBOC to streamline lending interest rate system
Finance & Economics
5. Not-so-smart deposits
As China’s financial regulators look to liberalize the financial sector, they are mindful of the side effects.
For instance, the scrapping of the mandated deposit rate may lead to a “deposit war” among banks, as each institution jacks up rates to gain new customers.
Regulators are looking to head off such a development with “smart deposits” (China Banking News):
- “Chinese banks plan to bring an end to the sale of “smart deposits” following pressure from regulators concerned about lenders competing for funds via the covert provision of higher returns.”
- “Regulators convened a meeting at the start of May demanding that the industry adopt self-disciplinary measures to clean up their smart deposit operations.”
- “In China smart deposits are demand deposits for which interest is calculated on a graded basis in accordance with average daily scale.”
While it’s not clear how quickly various banks will institute the ban, this is clearly part of the broader de-risking efforts:
- “[This] comes just after the [banking regulator] issued a directive…announcing that it would conduct inspections of banks for the use of “fake” structured products to covertly provide higher interest rates.”
Get smart: Financial de-risking is still a top priority.
China Banking News: Chinese Regulators Target Smart Deposits, Structured Deposits
Politics & Policy
6. State Council pushes debt-to-equity swaps
On Wednesday, the State Council announced it would continue to promote market-based debt-to-equity swaps (DES) in a bid to ease corporate debt burdens.
Premier Li Keqiang had this to say:
- “Our efforts in pursuing market-oriented, law-based debt-to-equity swaps in the past few years have paid off.”
- “Work on this front has come to a crucial juncture, and will play an important role in fostering an enabling business environment and energizing market vitality.”
Some context: Li has been pushing for DES for over three years. But progress has been slooooow.
Here’s the government’s new plan:
- Expand a pilot program that allows institutions to convert debt into preferred shares.
- Encourage financial institutions to raise capital to facilitate such programs.
- Support financial asset investment firms to launch asset management products.
- Non-state investors, including foreign investors, are also encouraged to take part in the debt-to-equity swap programs.
Get smart: There is still significant resistance to DES, including amongst top officials. Don’t hold your breath for quick progress.
Gov.cn: 李克强主持召开国务院常务会议 确定深入推进市场化法治化债转股的措施等
Gov.cn: Strong efforts to promote market-oriented, law-based debt-to-equity swaps
Politics & Policy
7. New State Council LSG on Employment
Yesterday, the General Office of the State Council issued a notice upgrading the State Council’s joint meeting by various ministries on employment work to a leading small group.
Some context: The State Council sets up a leading small group when it feels the need to steer various ministries in the same direction on prioritized issues.
Why it matters: A leading small group has considerably more decision-making power than a “joint meeting.”
The State Council Employment Leading Small Group (SCELSG) will:
- formulate policies, laws and regulations on employment
- unify different ministry forces and push through implementation of the top leaders’ employment policies
The SCELSG is headed by vice-premier Hu Chunhua.
More than 20 ministries and government agencies are represented in the newly created SCELSG.
Get smart: The government is expecting unemployment to rise.
Gov.cn: Notice on the State Council Employment Leading Small Group