Driving the Day
1. Trade war ball in America’s court
On Thursday, China indicated that any move toward resolution of trade tensions will need to come from the US.
The comments came from MofCom spokesman Gao Feng during a briefing in Beijing (Bloomberg):
- “The U.S. keeps escalating the trade tensions, and makes various tricks, which has severely hurt the trade talks.”
- “Whether the China-U.S. trade talks can make any progress largely hinges on the U.S. attitude and sincerity.”
Some context: Since trade talks broke down earlier this month, both sides have indicated that they would be open to further negotiations…while simultaneously blaming the other side for the breakdown and turning up the rhetorical heat.
Get smart: Chinese officials are walking a tightrope. They’re desperately hoping for a resolution to the trade war saga, but can’t be seen to cave to US demands. Stoking nationalistic fervor is one way to galvanize the public, but it makes the stakes that much higher if China can’t get the terms that it wants.
Get smarter: At this point, it will likely take a face-to-face meeting between Xi and Trump to break the logjam. That’s supposed to take place sidelines of the G20 conference in Osaka late next month.
Our thought: That’s another four weeks for things to get worse.
Bloomberg: China Says U.S. Needs to Address Its Concerns to Reach Deal
Driving the Day
2. China to create answer to US Entity List
Late on Friday, MofCom announced that it would be setting up its own version of the US Entity List.
Some context: The US Entity List specifies foreign companies that US companies are forbidden from doing business with.
Who China’s list will target:
- “Foreign businesses or individuals that do not abide by market rules or contractual agreements as a result of economic sanctions imposed against China or severely damage the legitimate interests of Chinese industries.”
What to watch: The announcement promised that specific measures against companies placed on the list would be forthcoming.
The statement is unambiguously hitting out against those companies that cut ties with Huawei after its US blacklisting.
But the formulation around “not abiding by contractual agreements” is interesting. To us it seems like an effort by Chinese authorities to be clearly reactionary, rather than openly aggressive. It’s another attempt to match the US pressure, without turning up the heat.
Get smart: The Chinese government can’t sit idle while the US rips one of its most innovative companies to shreds.
Get smarter: Foreign tech companies are about to find themselves on the horns of a dilemma. Should they follow US laws or PRC rules?
Driving the Day
3. European Chamber urges reforms
On Thursday, Ministry of Foreign Affairs spokesman Lu Kang underscored that while the US might be looking to decouple, European companies are all in on China.
He cited the annual China Business Confidence Survey released by the EU Chamber of Commerce (EUCCC) in China on May 20.
Lu highlighted the following stats from the report:
- “62% of the surveyed enterprises regarded China as one of their top three investment destinations.”
- “56% of the respondents were considering expanding their business in China this year.”
Get smart: That was cherry-picking at its finest.
The EUCCC was far less positive in its press release for the report, highlightign the following:
- Optimism on growth over the next two years dropped from 62%-45% between 2018 and 2019.
- 47% expected regulatory obstacles to increase over the next five years.
- 20% felt compelled to transfer technology as a condition for market access.
Get smarter: Europe is frustrated with both sides in this fight. The EU has been consistent in criticizing Chinese trade and investment practices. But they don’t exactly love Trump’s tariff tactics either.
Go deeper: Check out what European businesses are really think by clicking the link below.
EUCCC: China Business Confidence Surevey Press Release
Finance & Economics
4. Yi Gang reassures small banks
On Thursday, central bank governor Yi Gang hit the speaking circuit to say that China’s central bank was “fully capable” of managing risks at small banks. And it is planning to continue increasing the supply of credit to SMEs.
Some context: Yi’s speech was delivered just days after the announcement of the government takeover of Baoshang Bank (see May 27 Tip Sheet). He wants markets to know that the central bank isn’t asleep at the wheel.
But Yi also discussed the PBoC’s ongoing efforts to support small businesses, reiterating that the central bank will look to ensure that:
- big banks increase their lending to SMEs by 30% this year
- the average cost of financing comes down by 1 percentage point
Get smart: Central bank officials are looking to signal confidence without drawing too much attention to the issue. It’s a tough line to walk.
Get smarter: Like we said yesterday, it doesn’t look like Baoshang’s issues are systemic. Nor are they a concern for the underlying stability of China’s financial system.
The bottom line: China’s banking system has a lot of issues, but Baoshang won’t catalyze a crash.
Financial Times: China central bank chief moves to reassure on small banks
Politics & Policy
5. Portugal issues panda bonds
This week, Portugal became the first eurozone country to issue RMB-denominated bonds in China – aka “panda bonds.”
Some context: EU members Poland and Hungary have previously issued panda bonds (in 2016 and 2018, respectively), but neither of those are part of the eurozone.
More context: Portugal-China relations have been on the up-and-up lately. During Xi Jinping’s state visit to the country in December last year, Portugal signed onto Xi’s flagship foreign policy project, the Belt and Road Initiative. For his part, Portuguese President Marcelo Rebelo de Sousa characterized the state of bilateral relations as being at the “best period in history”.
As per last week’s announcement, Portugal intends to sell RMB 2 billion worth of panda bonds with a maturity of three years.
Here’s Portugal’s finance minister on why the issuance matters (CNBC):
- “It is a positive step in managing Portugal’s external debt in the medium term.”
Get smart: Portugal’s issuance of these bonds is largely symbolic. But in the current geopolitical climate any public show of confidence in China’s economy – or currency – is welcomed in Beijing.
Get smarter: While Portugal-China relations might be at their “best period in history”, China’s growing influence in Europe is viewed warily by many on the continent.
CNBC: Portugal becomes the first euro zone country to issue debt on China’s market
People’s Daily: Portuguese President: Portugal-China relations at best period in history
Politics & Policy
6. Pfizer’s generic drug unit opens global headquarters in Shanghai
The increased trade and technology tensions between the US and China are expected to upend global supply chains – especially for technology companies.
But it’s important to remember that other sectors are still looking to integrate.
A prominent example is the pharmaceutical industry. An American company is leading the charge (Caixin):
- “Pfizer Upjohn, Pfizer’s generic drug unit, opened its global headquarters in Shanghai Thursday, marking the first time any multinational drug company has placed its main office in China, state news agency Xinhua reported.”
This move has been in the works for a while:
- “Upjohn, which also sells older branded drugs like Viagra and cardiovascular disease medication Lipitor, first announced its decision to relocate to Shanghai in 2004.”
But it still says something that Pfizer moved forward, given the current geopolitical climate.
Our take: Economic decoupling will happen – especially in the tech space – but it can only go so far. There are still plenty of companies tripping over themselves to get more access and exposure to the China market.
Caixin: Pfizer Upjohn Becomes First Multinational Drug Company to Open HQ in China