Driving the Day
1.NDRC mulls rare earths export controls
On Tuesday, the NDRC convened a symposium with rare earth industry players.
The goal of the symposium (Xinhua):
- “Analyze the current state of sector development, and hear suggestions on how to promote the high-quality development of China’s rare earths industry”
Some context: Xi Jinping visited a rare earths manufacturer two weeks ago (see May 21 Tip Sheet). Ever since, speculation has risen that China would limit exports of rare earths to the United States – in retaliation for the US ban on selling products to Huawei.
Guess what industry players suggested – export controls!
- “Experts at the meeting suggested that rare earths are a non-renewable and scarce resource and that the state should strengthen all-round supervision of the rare earth industry.”
- “[We should] strengthen export controls and establish a traceability and review mechanism for the whole process of rare earth exports.”
What to watch: The NDRC said that it would take the experts’ advice into consideration, and would issue “effective” measures in response.
Our take: China will hold back on export controls for now in the hopes that tensions can be de-escalated with a potential Xi-Trump meeting at the G20 in late June.
2.Local governments to slow bondissuance
Through the first five months of the year, local governments have issued 63% worth of the annual local government bond quota.
That’s according to a piece by The Paper, which has more details:
- “489 local government bonds have been issued nationwide so far this year, for a total amount of RMB 1.94 trillion.”
- “77 local government bonds were issued in May, for a total amount of RMB 304 billion, an increase of RMB 77.6 billion yuan from April’s RMB 227 billion [worth of issuance].”
Some context: The increased issuance in May is still below the Q1 average of RMB 469 billion.
What to watch: That leaves RMB 1.14 trillion worth of local government bonds left for provinces to issue in the coming months.
Given that the quota is supposed to be used up by the end of September, that’s an average issuance of RMB 285 billion over the next four months.
Get smart: The strong local government bond issuance in the first five months of the year has not been enough to stop the economic deceleration.
The bottom line: We still expect the economy to stabilize late in the year. But the recovery will be shallow and short-lived, as lower levels of bond issuance in the coming months will be even less economically supportive.
3.Baoshang fallout continues
The fallout from the regulatory takeover of Baoshang bank is still filtering through China’s financial system (see May 27 Tip Sheet).
After the takeover was first announced 12days ago, interbank rates jump as lenders into China’s wholesale funding market became nervous.
But the PBoC has offered more liquidity in recent days, and that is helping the market largely return to normalcy (21st Cent Biz):
- “The subscription rate of interbank deposit receipts (actual issuance/planned issuance) has been restored to about 60% on June 3.”
Some context: A low subscription rate means that banks in need of financing aren’t getting it.
Despite the short-term improvement, there will be long-term consequences:
- “Now the market is very cautious.”
- “Many institutions have greatly reduced their inter-bank credit for small and medium-sized institutions, and even set up a ‘negative list’ internally.”
- “In the long run, institutions may shrink credit to small and medium-sized banks.”
Get smart: The central bank will offer some liquidity in place of more skittish interbank lenders. But the banking system overall is set to continue deleveraging.
What that means: When banks have a hard time getting funding, they also have a hard time offering credit to businesses. That’s not great for supporting a slowing economy.
21st Cen Biz: 同业存单市场规模减少1700多亿 银行信用分化明显
4.CCIEE explains the Unreliable Entities List
The phones at Trivium HQ have been ringing off the hook ever since China announced that it will release an Unreliable Entities List over the weekend (see Monday’s Tip Sheet).
What everybody wants to know:
- Who will be on the list?
Here’s how one researcher at an important government-affiliated think tank (CCIEE) conceptualizes the list:
- “China is targeting those companies taking their cues from the United States.”
- “They obey the orders of the United States government, ignore business ethics, and insist on keeping in line with America’s containment strategy.”
Ultimately, the CCIEE thinks that China should expand its connections with other countries:
- “In the long run, what China should do most is build a broader circle of friends.”
- “The United States just wants to cut off and isolate China from the rest of the world.”
- “China should have its own set of solid partnerships around the world, deepen reform, and expand opening up.”
Get smart: Of course it would be better to build a circle of friends, but it’s not just the US that is frustrated with Chinese industrial policies at the moment. So that’s no easy task.
Oh and by the way: This still tells us very little about who, exactly, will be on the list.
Jiemian: 张茉楠： 用好不可靠实体清单，构筑更广泛的“朋友圈”
5.Han Zheng pushes opening in YRD
On Tuesday, Executive Vice Premier Han Zheng headed back to Shanghai (where he worked for over 40 years) to chair a meeting of the Yangtze River Delta (YRD) Integrated Development Leading Small Group.
Some context: The May 13 Politburo meeting discussed the YRD (see May 14 Tip Sheet). The three weeks since has seen a flurry of activity to push forward with the initiative.
More context: The YRD is one of three regional integration initiatives. Authorities are also pushing for the integration of Beijing, Tianjin, and Hebei (Jing-Jin-Ji), as well as the integration of Guangdong, Hong Kong, and Macau (Greater Bay Area).
On Tuesday, Han stressed that a key goal for the YRD is to open further (Gov.cn):
- “We should adhere to a high level of openness and jointly build a new highland for opening up [towards the world].”
- “We should use a high level of openness to force reform and comprehensively enhance the new competitive advantages of international cooperation in the YRD.”
- “We should accelerate the construction of new zones in the Shanghai Free Trade Pilot Area, creating special economic zones with more international market influence and competitiveness.”
Our take: We had hoped that this meeting would discuss fiscal integration because that could be a real driver of regional integration. The fact that it did not is a disappoinment.