Driving the Day
1. China upgrades ties with Russia
Xi Jinping is in Moscow, hanging out with his bestie, Russian President Vladimir Putin.
We’re not kidding about this bestie stuff. Check out what Xi said in an interview with Russian media (Global Times):
- “I have had closer interactions with President Putin than with any other foreign colleagues.”
- “He is my best and bosom friend.”
- “I cherish dearly our deep friendship.”
Following talks on Wednesday, the two decided to upgrade the bilateral relationship (Xinhua):
- “China and Russia agreed on Wednesday to upgrade their relations to a comprehensive strategic partnership of coordination for a new era.”
Get smart: Despite a long history of mutual suspicion, China-Russia ties are arguably at an all-time high. That’s because both Xi and Putin are fiercely anti-Western and see each other as useful allies in promoting alternatives to liberal democracy.
What to watch: That dynamic should keep ties tight for the foreseeable future.
Global Times: Xi tells Russian media he cherishes deep friendship with Putin
Xinhua: China, Russia agree to strengthen contemporary global strategic stability
2.Huang Xiaolong shoots himself in the foot
“I don’t see what all the fuss is about.”
That’s effectively what Huang Xiaolong, deputy head of the Financial Stability Bureau at the central bank (PBoC), said about China’s increasing debt load at a press conferenceWednesday.
- Huang was responding to the idea that China’s macro debt ratio jumped in Q1 – as researchers at the Chinese Academy of Social Sciences (CASS) recently showed (see May 30Tip Sheet).
- CASS data has debt-to-GDP at 248.8% as of March 2019 – up from 243.7% at the end of 2018.
Some context: A jump of five percentage points in one quarter is scary, and harkens back to the 2010-2016 period when credit-to-GDP was rising 10-15 percentage points a year.
But Huang says not to worry. His argument:
- First, the macro leverage fell in 2018 – dropping by 1.5 percentage points from 2017 levels according to PBoC data.
- Second, the large Q1 rise wasn’t really about the pace of debt accumulation, but more about price movements.
- He says a low GDP deflator is to blame.
Our take: Huang is right, but his argument is not reassuring.
Get smart: He is implicitly saying that the issue is not about high credit growth, but about weak nominal GDP growth.
Get smarter: Neither is a good problem to have.
The Paper: 央行官员回应一季度杠杆率上升：与GDP平减指数变化相关
3. NDRC holds another rare earths meeting
On Wednesday, the National Development and Reform Commission (NDRC) held another meeting about the rare earths industry.
Some context: On Tuesday, the commission gathered industry experts to discuss how the government should foster the industry (see yesterday’s Tip Sheet).
On Wednesday, the commission invited rare earths companies to weigh in on how to best develop the industry.
Their advice (NDRC):
- “Attending companies recommended…[that] precious resources be protected and rare earths export controls be strengthened.”
Get smart: That’s more or less the same advice that industry experts gave on Tuesday.
Get smarter: We look at the NDRC website every day. It is rare for them to have such detailed readouts of meetings like this. It is very clear that they are trying to send a message.
The message: China will use export controls on rare earths as a bargaining chip in the trade war with the US.
4.The Party highlights its negotiating prowess
On Wednesday, the Central Party School newspaper, Study Times, published a front-page article about the Korean War.
More specifically, the article focused on China’s approach to negotiations to end the war with the US.
Here’s how the article describes what happened (Reuters):
- “China and North Korea went into the talks with the United…with sincerity and suggestions both sides could basically accept, the paper said.”
- “[That echoes] wording China has used to describe its approach to the trade discussions.”
- “But China and North Korea would not make concessions in the face of U.S. ‘hegemony’ and would not accept terms signed under duress, the commentary added.”
- “Another reference to expressions used today by China on the trade war.”
The good news: It’s positive that Chinese leaders are still thinking about how best to get back to the table and find a resolution with the US – they are not looking to escalate tensions, if possible.
The bad news: Getting to that resolution in the Korean War took two years…
- “Finally, in 1953 the armistice was signed, largely based upon China and North Korea’s original proposals put forward in 1951, the paper said.”
The message: China’s still wants to get back to the table, but it is willing to wait things out, if needed.
What to watch: Time to accept it. This is going to be a long trade war.
Study Times: 争取停 不怕拖 准备打
Reuters: China Paper Cites Drawn-Out Korean War Talks as Reason Not to Bow to U.S.
5.State Council gives shout out to entrepreneurs
The State Council held its weekly executive meeting on Wednesday.
Top of the agenda: Promoting entrepreneurship and innovation.
The government wants to make it easier to start and run a business (Gov.cn):
- “The government will draft and issue the Regulations on Improving the Business Environment and work to lower institutional transaction costs.”
- “Support will be given to encourage innovation and entrepreneurship demo centers in undertaking pilot programs in the approval and implementation of science and technology projects.”
The government also wants to make it easier for start-ups and small businesses to get financing:
- “Financial institutions will be guided to lower real interest rates and overall cost for loans to micro and small enterprises.”
- “A higher ratio of nonperforming loans made to micro and small firms will be allowed.”
- “The NPL ratio of such loans will be relaxed to no more than 3 percentage points higher than the overall NPL ratio, from the current 2 percentage points.”
- “Venture capital firms will receive support in financing through bond issuance.”
Get smart: The government sees facilitating entrepreneurship as a key tactic in its efforts to combat unemployment.
Gov.cn: 李克强主持召开国务院常务会议 确定按照创新驱动发展战略要求把大众创业万众创新引向深入的措施等