Driving the Day
1. NDRC’s threatens the rare earth card
Xi’s visit to a rare earths company last week has the world wondering whether China will limit rare earths exports to tighten the screws on the US (see May 21 Tip Sheet).
Yesterday, the National Development and Reform Commission (NDRC) issued a statement that did little to clarify the issue:
- “On the one hand, we adhere to the principle that domestic needs should be given priority when it comes to rare earth resources.”
- “On the other hand, we are also willing to meet the legitimate needs of countries around the world for rare earth resources.”
There is more than a touch of menace in this statement:
- “If anyone wants to use rare earth products that we export to curb China’s development, then … the Chinese people will be unhappy.”
The NDRC’s main point:
- “Today, when the industrial division of labor is highly globalized, there is no development and progress without synergy and cooperation.”
What it means: The NDRC doesn’t want to disrupt global supply chains. But if the US insists on cutting off China from key inputs, then the Chinese government will respond in kind.
Finance & Economics
2. More on the Baoshang saga
There’s good news and bad news in the ongoing fallout from the recent government takeover of Baoshang Bank (see Monday’s Tip Sheet).
The good news: Baoshang does not look to be systemic. That’s in part because the bank had already become persona non grata (Caixin):
- “Mutual funds have been hesitant to hold Baoshang Bank Co. Ltd.’s assets due to its links with Tomorrow Holding, the conglomerate controlled by tycoon Xiao Jianhua, who is reportedly under investigation for graft.”
The bad news: There is still plenty of string left to pull here. That’s why the CBIRC has guaranteed significant chunks of Baoshang’s liabilities:
- “Regulators will guarantee at least 70% of the interbank debts of over 50 million yuan ($7.25 million) and 80% of corporate deposits above that amount.”
Still, it’s unlikely that any major institutions were holding significant amounts of Boashang assets:
- China’s securities regulator stipulates that financial instruments issued by institutions with less than a “AAA” rating must not exceed 10% of a money market fund’s net asset value.”
- Baoshang Bank was rated “AA+”.
Get smart: This story is still unfolding. While we don’t see it as an imminent threat to financial stability, it could help to shed more light on the health (or lack thereof) in the banking sector.
Caixin: Most Mutual Funds Look Insulated From Bank Taken Over By Regulators
Finance & Economics
3. Yi Gang pushes interest rate reform
China’s central banker, Yi Gang, is once again pushing interest rate reform.
The idea has been percolating for months, and authorities seem increasingly serious about scrapping official benchmark lending rates.
On one hand: This is straightforward, technocratic, and boring stuff. The PBoC has been quietly and steadily advancing its technical policymaking for the past six years.
But on the other had: It is pretty gutsy that authorities are looking to move this forward in the midst of the trade war.
Our take: There is rarely a good time for an emerging market to reform its interest rate regime – because authorities are never fully sure what the consequences will be.
What’s more: For years, the PBoC’s mantra has been that reform will take place “when the conditions are ripe.” No one thought that that would mean – “we’ll wait for a trade war to happen before we do it.”
Get smart: The PBoC will be careful to calibrate and sequence the removal of benchmark lending rates to the full extent possible. It will likely take place gradually. But this represents a sea change in China’s overarching thinking around monetary policy.
SCMP: China mulls scrapping benchmark lending rates in line with market conditions in latest reform move
Politics & Policy
4. Xi calls on overseas Chinese to contribute to national rejuvenation
On Tuesday, Xi Jinping and fellow Politburo Standing Committee member Wang Yang met with representatives of the China Overseas Friendship Association (COFA) in Beijing.
Some context: The COFA delegates were in town for the ninth Conference for Friendship of Overseas Chinese Associations, where more than 450 associations from 90 countries and regions were represented.
More context: Working with overseas Chinese is a key component of the Party’s United Front work, which seeks to ensure that non-Party groups support the Party.
COFA members got their marching orders earlier in the day (Xinhua):
- “At the meeting of the COFA board of directors held Tuesday morning, participants were urged to make a greater contribution to national rejuvenation, the country’s opening-up, peaceful reunification of the motherland and mutual learning of civilizations.”
Get smart: Xi Jinping has called the United Front the Party’s “magic weapon” and thrown more resources into United Front work.
Get smarter: The Party’s United Front work is under increased scrutiny abroad as United Front-affiliated groups have become more active in the politics of foreign countries.
CPC People: 习近平会见第九届世界华侨华人社团联谊大会和中华海外联谊会五届一次理事大会代表 汪洋参加会见
Xinhua: Xi meets representatives of overseas Chinese
Politics & Policy
5. China makes potential move towards technological decoupling
On Friday, China’s top cybersecurity regulator (CAC) released draft measures for reviewing network security.
What the rules govern: The procurement of network products and services for operators of critical information infrastructure (CII).
The draft rules require operators to undertake a self-review and identify risks, including:
- “threats to supply chain security which might compromise the… maintenance, technical support, and upgrading of CII.”
Should risks be identified the operator needs to apply to government authorities for a Security Review.
Review authorities will then look at:
- “the risk of supply disruptions as a result of non-technical factors, including political, diplomatic, and trade reasons.”
Get smart: Foreign tech firms take notice! The US government’s sanction of Huawei has shown just how vulnerable China’s technology supply chain is to “political, diplomatic, and trade” factors. So the government could have broad latitude to block the purchase of foreign products and services.
Get smarter: There is not yet an official definition of CII, so these rules could cover both government and business systems.
TC 260: Cybersecurity Review Measures (draft for comments)
Politics & Policy
6. Technological development zones get more autonomy
Yesterday, the State Council announced new regulations designed to promote innovation and improve efficiency in China’s economic and technological development zones.
We told you these were coming (see May 9 Tip Sheet).
Some context: According to Xinhua, there are 219 national economic and technological zones. Collectively they account for around 10% of China’s GDP.
The new regs emphasize the importance of “stepping up innovation” and striving for “high-quality development” all while remaining “market-oriented”.
There are 22 proposed measures to get everyone in an innovative frame of mind, including:
- Diversifying utilization of foreign investment
- Building more R&D centers
- Improving the quality of foreign trade
- Simplifying the investment approval process
- Delegating more autonomy to local stakeholders
Get Smart: It’s that last measure that we find most interesting. These zones will have leeway to offer incentives for investment. With 219 zones all competing with each other, companies looking to make or expand investments should definitely shop around.
Gov.cn: Further innovation and opening-up of national development zones urged
Xinhua: China releases guidelines on promoting innovation in economic, technological development zones