Driving the Day
1.Chinatries to cut services trade deficit with US
In the past two days, three Chinese ministries have issued notices warning citizens to be cautious with their existing and planned travel to the US.
- The Ministry of Culture and Tourism warned Chinese tourists about visiting the US, citing “the frequency of recent shootings, robbery, and theft in the US.”
- The Ministry of Education issued its first Study Abroad Warning of 2019, asking Chinese students and scholars to “conduct more rigorous risk assessments” before studying abroad in the US.
- The Ministry of Foreign Affairs warned Chinese citizens and corporations in the US to “raise safety awareness,” citing “numerous harassment cases by US law-enforcement agencies.”
Get this: Only two Study Abroad Warnings had previously been issued against specific US institutions – both in 2016. The ministry had never issued such a warning toward a country as a whole.
Thewarning came despite numerous US universities putting out statements welcoming students from China in recent weeks.
Get smart: China is signaling that it has more levers to pull if thetrade the war gets uglier.
Our question: Will Beijing go so far as to establish outright regulatory restrictions for Chinese citizens who want to study and visit the US?
2.A shifting outlook on the CNY
More and more onshore economists are clearly reading the Tip Sheet.
Why else would Bloomberg report that a growing number of analysts are looking for the CNY exchange rate to go past 7/USD?
- We’ve been arguing that ever since the most recent breakdown in US-China trade negotiations.
We can’t think of any other reason that such a move would increasingly become a consensus view.
We do admit that former central bank (PBoC) governor Zhou Xiaochuan’s recent comments may have had something to do with it:
- “In the four days since ex-governor Zhou Xiaochuan dismissed the importance of 7, at least six analysts published reports laying out why the People’s Bank of China is likely to tolerate a weaker yuan.”
What’s more, there is an increasing sense that authorities are going to have to up their stimulus game given the still-slowing economy and the significantly heightened trade tensions.
- “’Allowing greater flexibility in the yuan is good for monetary policy,’” said Nie Wen, an economist at Huabao Trust Ltd. in Shanghai. “‘It creates more room for China to deal with its domestic problems.’”
Our take: Despite our call for a weaker currency, we still think concerted monetary and credit stimulus will be a last resort. But the chances that authorities will panic and take the stimulus route are rising.
What to watch: Policymakers will be in monitoring mode for the next six or seven weeks. Any big policy changes will likely be signaled at the July Politburo meeting.
Bloomberg: Yuan Watchers Say 7 Is No Longer a Sticking Point for China
3.China moves ahead with 5G rollout
On Monday, the Ministry of Industry and Information Technology (MIIT) announced that it will soon grant commercial 5G licenses.
The move is the latest effort by the government to accelerate widespread adoption of 5G.
MIIT made a point to say that its 5G network will be open to foreign players (Xinhua):
- “China, as always, welcomes enterprises at home and abroad to actively participate in the building, application and promotion of its 5G network and share the sector’s development dividends, the MIIT said.”
- “Foreign enterprises including Nokia, Ericsson, Qualcomm and Intel have been deeply involved in the experiment of the technologies, and China’s 5G is ready for commercial use thanks to the joint efforts from various parties, according to the MIIT.”
Get smart: Despite what the Chinese government says, we don’t expect to see many foreign players in China’s 5G networks.
Get smarter: These PR efforts, meant to look like China is welcoming foreign companies with open arms, grate against the recent announcement of the “unreliable entities list” and the investigation into FedEx.
At best Chinese authorities are sending companies mixed messages – at worst they are making them more nervous. Neither is great for the business environment.
4.Central government clarifies education spending responsibilities
On Monday, the State Council General Office issued a new plan to clarify the relative education spending responsibilities of central and local governments.
Going forward,provincial-level governments will be split into five groups, all with different spending responsibilities:
- Group 1 consists of 12 relatively poor provinces, which will be responsible for 20% of spending related to compulsory education; the central government will pay for the remaining 80%.
- Group 2 consists of 10 provinces, which will be responsible for 40% of spending related to compulsory education; the central government will pay for the remaining 60%.
- Groups 3-5 consistof the remaining provinces, as well as five sub-provincial cities; in these areas local governments will split the compulsory education bill 50-50 with the central government.
Why it matters: These are all part of ongoing fiscal reforms, which attempt to better rationalize spending between central and local governments. If the government can succeed in these reforms, it could go a long way to ensuring the fiscal sustainability of local governments.
What to watch: The central government is currently drafting spending plans across a range of different areas (see yesterday’s Tip Sheet), so we should see more of these in the coming months.
Xinhua: Reform plan on gov’t responsibilities for education expenditure unveiled
5.Xi Jinping tells everyone to sort their trash
On Monday, Xi Jinping urged the Chinese people to get in the habit of sorting their garbage (Xinhua):
- “Garbage classification is related to the people’s living environment and the economical use of resources. It is also an important embodiment of the level of civic-mindedness.”
- “Extensive education and guidance should be carried out to make the people realize the importance and necessity of garbage sorting,”
According to State Council guidelines, garbage sorting systems will be implemented in 46 cities by 2020 and nationwide by 2025.
Some context: This might seem like an oddly trivial use of the paramount leader’s time, but waste management is something of a personal crusade for Xi. China’s 2017 decision to stop importing 24 kinds of waste from abroad was rumored to have come directly from the Big Man himself.
Get smart: It’s an admirable sentiment, but we wonder how widely it will catch on. Apart from building public recycling infrastructure where there was none before, Xi will have to convince more than a billion people to change their entrenched lifestyle habits. Not an easy task.
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