Driving the Day
1. G20 stakes get even higher
China and the US are eyeing each other warily in the lead up to the G20in Osaka on June 28-29.
- On Monday, US President Trump told reporters that he would impose tariffs on an additional USD 300 billion of Chinese goods if Xi Jinping doesn’t meet with him in Japan.
If Trump was looking for a way to poison the well, this was it.
In response, Chinese state media once again ramped up the propaganda machine.
- For its part, The People’s Daily published an op-ed highlighting the negative impact of tariffs on the American economy, which – get this – invoked the words of libertarian economist Milton Friedman.
It’s a bizarre realitywhen a CCP mouthpiece trots out the patron saint of libertarianism to make a point in support of free trade – against the United States.
Welcome to 2019.
Get smart: The only way for trade talks to resume soon is for Xi and Trump to agree on a face-saving compromise in Osaka.
But that looks increasingly unlikely.
The Chinese calculus: Trump will probably put on another round of tariffs no matter what happens in Osaka. So why bow to the pressure for a meeting if tariffs are going to happen anyway?
2.Central bank gets ahead of potential RMB weakness
On Tuesday, the central bank (PBoC) made a one-line announcement that it will issue central bank bills in Hong Kong later this month:
- “In order to improve the yield curve of RMB bonds in Hong Kong, the People’s Bank of China will issue RMB central bank bills in Hong Kong in late June.”
That may seem unimportant, but the timing struck us as curious.
Some context: Everyone is waiting to see whether Xi Jinping and Donald Trump will have a tête-à-tête at the G20 in Japan (see previous entry).
The rub: If the two don’t meet, then increased US tariffs are very likely (see previous entry, again). And even if they do meet – if it doesn’t go well, then increased US tariffs are still very likely.
Either way, markets won’t be happy, and China’s currency will likely come under pressure.
More context: By issuing RMB bills in Hong Kong, the PBoC soaks up offshore RMB liquidity – making it more difficult to short the currency.
So it looks to us like the PBoC is doing some prep work to contain any currency fallout from a Xi-Trump meeting (or lack thereof).
What to watch: The PBoC won’tlook to stop the depreciation outright – but it will look to manage it.
3.Data dump – credit
The central bank released May credit data late on Wednesday.
The details show a bit of a mixed picture:
- Growth of aggregate financing accelerated a touch to 10.6%y/y– from 10.4% y/y in April.
- Growth of RMB bank loans eased a bit to 13.4% y/y– from 13.5% in April.
Get smart: The uptick in aggregate financing was driven by a somewhat-less-slow contraction in shadow banking and solid issuance of corporate bonds.
Get smarter: To us it looks like credit growth is continuing to flatten out. There’s still no credible sign of sustained or significant acceleration.
We’ll have more on this for you tomorrow…gotta get to happy hour!
4.Data dump – inflation
The stats bureau released May inflation data on Wednesday morning.
- Consumer prices were up by 2.7% y/y – the highest reading in 15 months.
- Producer prices were up by 0.6% y/y – down from 0.9% in April.
Quick take 1: The ramp up in consumer prices continues to be driven by pork prices.
The context (CNBC):
- “Pork prices in China have been persistently high this year as African swine fever hit hog herds in the country. Pork prices rose 18.2% from a year ago in May.”
Still, CPI is hardly out of control – so authorities don’t need to think about tightening policy to head off a further surge of inflation.
Quick take 2: Oil prices continue to drive PPI. May’s deceleration in upstream price growth came largely thanks to global oil prices having come off in the last month.
5.China set to breed stink bug army
Chinese researchers might have found a way to battle the large-scale armyworm invasion threatening China’s corn and sorghum crops.
Some context: Armyworm is not a native pest in China – it arrived on the mainland earlier this year, and has been devastating Chinese crops ever since (see May 16 Tip Sheet).
Now, time is of the essence. The pest has already infected crops in 18 provinces and is presently heading towards the northeastern corn belt.
Luckily, researchers believe they have found a…shall we say…”unique” solution to the problem:
- The stink bug.
As a natural enemy of the armyworm, the stink bug is pretty much the Lei Feng of the crop field (Bloomberg):
- “A mature nymph can exterminate as many as 41 fall armyworm larvae a day by… paralyzing the pest and sucking out body fluid causing fatal damage to internal organs.”
Sounds pretty hardcore.
To raise a bug army, the Institute of Plant Protection has set up a breeding factory with a capacity of 10 million little soldiers per year.
Get smart: We’ve said it before. The last thing China can afford is a sustained and significant upward shock to food prices. BetweenAfrican Swine Flu and thearmyworm invasion, the government has a tough job ahead.
Bloomberg: Stink Bugs Could Be Unleashed to Battle China’s Fall Armyworms
6.NDRC launches unprecedented rare earths survey
China continues to assess thefallout from a potential ban of rare earths exports to the US.
That’s why on Monday, three ministries led teams to conduct a broad survey on rare earths production throughout the country:
- NDRC led teams to Jiangxi, Fujian, and Guangdong provinces.
- MIIT led teams to Hunan, Guagnxi, and Sichuan provinces.
- The Ministry of Natural Resources led teams to Inner Mongolia.
The goal: The survey is primarily aimed at gathering “suggestions on how to improve the protection and value of rare earths and other strategic mineral resources.”
Some context: The three ministries sent out the survey teams after the NDRC held three symposiumsto discuss issues in the rare earths industry (see June 5 Tip Sheet).
More context: The experts and industry stakeholders at those symposiumssuggested the government crackdown on illegal mining of the mineral –and strengthen export controls.
Get smart: Beijing is no longer hinting that it has the rare earths card at its disposal. Authoritieshave moved forward, and are seriously looking into the details of how exactly to implement export controls.
Specifically, they are trying to understand how to minimize any negative impact on the domestic industry while maximizingexternal leverage.
Xinhua: 三部委赴多地调研稀土等矿产资源 涉及内蒙古、江西、福建等地
7.Drug reform on the edge
In recent years, improving the drug approval system has been one of the few reform areaswarmly welcomed by domestic industry.
But it’s starting to hit a wall.
The biggest challenge: A key government agencyis running out of money.
Some context: The technical review body for pharmaceuticals (CDE), is running the show here. It acts as the gatekeeper for any drugmaker to access China’s healthcare market – by assessing drug safety and efficacy.
More context: CDE’s biggest constraint is a lack of manpower – that’s why the government increased headcount at the a from 200 to 800 people over the past three years.
The problem: In August CDE won’t have the cash to actually pay its staff.
- That’s partly because the central government’s recent fiscal austerity program slashed the budget of the CDE’s supervisory bodyby 30%.
To make matters worse: The former head of the drug regulator, Bi Jingquan, was the key driver behind reform of the drug approval system.
- Bi had the juice to get the initiative funded, but he had to step down following last year’s vaccine scandal (See August 17 Tip Sheet)
Get smart: Key man risk can upend an industry.