Finance & Economics
1. Guo Shuqing tells everyone to chill out
On Saturday, the head of the banking regulator (CBIRC), Guo Shuqing, waxed optimistic about the “limited” short-term impact of the trade war on China’s economy.
According to Guo, everything is going to be just fine because:
- Growing domestic consumption can make up for export shortfalls.
- The BRI is opening up new export markets for Chinese goods.
- Many American importers are willing to simply eat the tariff costs.
- China needs to begin moving production overseas anyway to accelerate the growth of high-quality manufacturing.
- Shocks to financial markets in recent years have made the country more resilient.
Guo also echoed Li Keqiang (see entry #3) in framing the trade war as an opportunity to double down on indigenous innovation (21st Cent Biz):
- “[Sanctions can] stimulate [a country’s] determination to research and develop independently and speed up its technological progress.”
Finally, he issued a stern warning: Any speculators unscrupulous enough to try and profit from CNY depreciation will “inevitably suffer huge losses.”
Get smart: That last bit doesn’t mean regulators will stop depreciation, it just means they will make it very expensive to short the currency.
Get smarter: Guo is painting an awfully rosy picture of what is likely to be an ugly and protracted trade conflict.
21st Century Biz: 郭树清清华五道口谈中美贸易摩擦（全文实录）
Bloomberg: China Regulator Downplays Trade War Impact, Warns on FX
Finance & Economics
2. Baoshang bank taken into receivership
On Friday, the central bank (PBoC) made the highly unusual announcement that Baoshang Bank, based in Inner Mongolia, will be taken into receivership for one year (Asia Times):
- “A special team will be set up to take over the operational management of the…bank.”
- “Its daily operations will be entrusted to China Construction Bank.”
- “The bank’s businesses will continue as usual after the takeover.”
The reason behind the move: the bank’s “serous credit risks.”
This is a very rare move: Baoshang is the first commercial bank to be taken over by regulators in the past 20 years.
But it gets even more intriguing, as the bank is linked to financier Xiao Jianhua.
Some context: Xiao used to be well known as a white glove that helped China’s elite move money out of the country.
More context: He was abducted in Hong Kong in early 2017, just as the crackdown on both the financial sector and tycoons moving money out of China began – and hasn’t been heard from since.
The big question: Is this a one-off case to unwind Xiao’s financial assets, or the start of a trend?
The latter would add jet fuel to banking consolidation.
PBoC: 中国人民银行 中国银行保险监督管理委员会依法联合对包商银行股份有限公司实施接管
Asia Times: China’s Baoshang Bank taken over for 1 yr on ‘serious credit risks’
WSJ: China Takes Over Bank Linked to Missing Financier
FT: China seizes bank connected to tycoon abducted from Hong Kong
Politics & Policy
3. Premier Li visits Shandong, stresses tax cuts
On May 24-25, Premier Li Keqiang went on a two-day inspection tour of East China’s Shandong province.
Li stressed that tax and fee reductions are key to dealing with the downward pressure and complex threats that the Chinese economy faces.
That being said, Li also noted that the economy currently remains stable…
Li once again explained to local governments why tax cuts are at the heart of the Central government’s policy package (Gov.cn):
- “Although tax and fee reductions will reduce current fiscal revenue, they will enhance the confidence and motivation of enterprise investment and development, drive employment expansion, and ultimately achieve sustained economic growth and continuous expansion of tax revenue.”
Sounds pretty optimistic.
Li also wants local governments to be ready for the tax cuts:
- “All localities should tap their potential by revitalizing existing fiscal funds and government assets and increase local-SOE dividend payments.”
Finally, he promised central support should local governments encounter fiscal difficulties.
In case you forgot: This is all about employment. The idea is that taking tax pressure off businesses will help keep people employed.
Politics & Policy
4. NEV maker dupes local government
Officials in Nanyang, in Henan province, recently paid a visit to a local auto plant.
Why is that of interest?
Because Pang Qingnian, the CEO of China Youngman Automobile Group, claimed that the company’s latest car could turn water into hydrogen through a “catalytic chemical reaction” without refueling or charging.
According to the local Party Secretary, this is a big deal (Guancha):
- “The water-hydrogen engine has come off the assembly line in our city… this strengthens our confidence and determination to develop hydrogen energy vehicle projects.”
And the Nanyang government has reportedly offered Youngman a sweet deal, including promises of government contracts and other inducements to get the company to invest locally.
Only one problem.
The car Pang described defies the laws of physics (Caixin 1):
- “Scientists remain dubious of the claim for various reasons, such as confusion over the required additional energy source to derive hydrogen from water and doubts over the cost of such an engine.”
Get smart: The Youngman debacle highlights the problem of having an industry’s technical goals set by the government.
Instead of genuinely innovating, companies often lie or cheat to get government funds that are linked to those goals.
Caixin 1: ‘Water-Powered’ Carmaker Speaks, But Mysteries Remain
Caixin 2: Just Add Water, Physics-Defying Car Company Claims
Politics & Policy
5. A top scientist’s view of China’s semiconductor industry
Opinions in China are divided on whether the country’s tech sector can break US attempts at containment.
That’s why it caught our eye when Wei Shaojun, chief scientist at the government’s most important R&D project for semiconductors, recently shared his outlook on domestic chip development.
Wei isn’t particularly worried about China’s reliance on foreign chips (Guancha):
- “We are afraid they won’t sell to us; they are afraid we won’t buy from them.”
Some context: China buys 34% of the world’s semiconductors. But Chinese-made chips only account for 7.9% of the market, so the other 26% need to be imported.
But Wei’s take on Chinese self-sufficiency in chip making sounds less optimistic:
- “Investment in domestic chip development is lacking.”
- “While total investment in R&D is on par with that of the global chip giants, China has spread the money among many developers.”
Wei thinks the biggest hurdle for the industry is a shortage of talent:
- “Not only does the quality of talent rarely meet the demand, but the quantity is lacking as well.”
Get smart: While the government has been preparing for a scenario where foreign countries cut the supply of core technologies, officials did not anticipate it would happen so fast.
It’s not a good sign when one of the country’s top scientists isn’t so sanguine on China’s ability to catch up.