1. Data dump – May econ data
Oof. May was another tough month for China’s economy, according to data released on Friday.
Investment and industry continued to struggle:
- Headline fixed asset investment (FAI) slumped.
- FAI came in just shy of 4% y/y – down from 5.7% in April and below expectations of 6%.
- Industrial production came in at 5% y/y– down from 5.4% y/y in April and missing expectations of 5.4%.
If only there was a daily email, dedicated to China, that kept trying to tell its readers that the Chinese economy is struggling, that stimulus measures have been small and ineffective, and that the economy won’t bottom out until late in the year.
Now that’s something we’d subscribe to.
Get smart: This data is going to ramp up further calls for stimulus. But so far, authorities are standing their ground, and keeping support measures targeted.
That being said, we are now closely watching for any signals of policy change at the mid-year Politburo meeting that will discuss the economy.
One bright spot:
- Consumption held up in the month.
- Retail sales grew at a healthy 8.6% y/y – up from 7.2% in April and beating expectations of 8%.
The bottom line: We expect more pain to come.
A quick rant: If anyone from the stats bureau is on this list…you’re killing us with these late Friday data releases!
2.Guo Shuqing plays down Baoshang
Financial regulators are still trying to calm market nerves after the Baoshang Bank takeover (see May 27Tip Sheet).
The latest example came from the chairman of the banking regulator (CBIRC) Guo Shuqing.
Some context: Guo gave a rousing speech on how to fix the financial system on Thursday at the Lujiazui Financial Forum in Shanghai (see yesterday’s Tip Sheet).
Later, on the sidelines of the forum, Guo addressed concerns about insufficient interbank liquidity thanks to the Baoshang saga (Caixin):
- “Interbank liquidity was somewhat affected by the recent government takeover of a troubled private bank, but now the situation is improving.”
Sounds simple enough.
More context: After the government took over Baoshang, interbank lenders started getting nervous about offering money to thesmall banks. That’s called counter-party risk – something the Chinese financial system hasn’t known much about in recent years.
Get smart: There is an increasing sense on the mainland that Baoshang marks a watershed moment for the banking industry. In particular, the fact that regulators are winding down the bank’s assets – instead of bailing it out – is a new approach.
What to watch: This could be a pivotal moment in accelerating banking consolidation.
Caixin:Exclusive: Baoshang Takeover Impact Diminishing, Top Regulator Says
3. Liu He talks silver linings
Yesterday, Vice Premier Liu He put a positive spin on China’s recent economic woes.
We already spelled out the key points of his speech at the Lujiazui Financial Forum in Shanghai (see yesterday’s Tip Sheet), but today the full text of his speech was released – so we had a gander (see link below, which includes pics of his dual English and Chinese slides!).
Liu said that economic challenges were not just survivable – but they’re actually good for the economy (SCMP):
- “We do face some external pressure at the moment, but this is the inevitable test that China’s economic upgrade must experience,”
- “The external pressure will help us improve innovation and self-development, speed up reform and opening up and push forward with high quality growth.”
Get Smart: In recent years, officials have begun touting the importance of quality over quantity when it comes to economic growth. Liu might be right in that an economic rough patch could force Chinese companies to innovate or die.
Get Smarter: While a little external pressure might be a good thing, US tariffs amount to a full-court press on Chinese industry. It’s tough to be optimistic when the stakes are this high.
4. Zhou Xiaochuan warns against competitive devaluation
This morning, former central bank chief Zhou Xiaochuan, spoke on a panel at theLujiazui Forum.
He expressed concern over the impact of a protracted trade war.
Specifically, he worried that other countries would devalue their own currenciesto offset the trade war’s negative effects on the Chinese currency (Sina):
- “Problems arising in the trade sector are likely to trigger a competitive devaluation in many countries around the world.”
- “If everyone relies on competitive devaluation, the financial order of the entire world will be chaotic and nobody will benefit.”
But then, Zhou expressed hope that the upcoming G20 could address the issue – although, not through a Xi-Trump meeting:
- “The G20 Osaka Summit will be held soon.”
- “The Financial Stability Board should focus on this issue and give a stability signal to the global financial market.”
Get smart: One interesting thing about Zhou’s remarks is that they imply that he sees more weakness coming for the CNY.
Get smarter: Zhou maybe retired, but the evidence seems to be mounting that the central bank won’t prop up the currency if trade tensions deteriorate further.
5.Xi Jinping attends SCO summit
Xi Jinping was kicking it up in the Kyrgyz capital in on Friday, in anticipation of the 19th Shanghai Cooperation Organization (SCO) summit.
Some context: The SCO and its predecessor, the Shanghai Five, have been around since 1996. The group is a China-led eight-member strong organization, focused on economic and security issues.
For this summit, all eyes will be on:
- Problems between member states India and Pakistan
- What will – or won’t – be said about China’s Uighur camps in Xinjiang
Why does Xinjiang matter? Kazak nationals have reportedly been interned in the camps. Given that Kazakhstan is an SCO member, we’re curious to see whetherKazakh officials raise any objections withthe Chinese.
Xi kept busywhile waiting for the summit. Yesterday, he held separate bilateral talks with Indian Prime Minister Narendra Modi and Kyrgyz President Sooronbay Jeenbekov.
He’s also expected to chat with Russian President Vladimir Putin and Pakistani Prime Minister Imran Khantoday.
Get smart: Most people pay little attention to the SCO. But this is a China-led security bloc whose member states comprise close to half the world’s population – not to mention half the Nuclear Club. It’s definitely worth watching.
6. Li Keqiang promotes entrepreneurship and innovation…again
On Thursday, Premier Li Keqiang delivered a speech in Hangzhou to kick off National Entrepreneurship and Innovation Week.
Li sees mass entrepreneurship and innovation as:
- A way to kick Chinese productivity up a notch
- Key to China’s economic resilience – especially against downward economic pressure
- A critical support for employment – especially foryoungsters
To achieve mass entrepreneurship and innovation, Li asked all levels of government to:
- Delegate power, streamline administrative requirements, optimize government services
- Improve the business environment by cutting taxes and fees
- Ensure fair competition
Some context: Mass entrepreneurship and innovation – called Shuāng Chuàng in Chinese – was first enunciated by Li at the 2014 Summer Davos Forum in Tianjin.
Get smart:Since then, Lihas been onaquest to create jobs by supporting small businesses and private entrepreneurs. Best of luck, comrade!
Xinhua:Chinese premier underlines mass entrepreneurship, innovation
People’s Daily:李克强：进一步提升“双创”水平 更好发挥稳就业促创新增强新动能作用
7.National Pipeline Company delayed
Sad news, guys…
The establishment of a much-anticipated National Pipeline Company (NPC) will be delayed until August.
Some context: In March, the Party’s top policymaking body decided to establish theNPC to run China’s oil and gas pipelines (see March 20 Tip Sheet).
Industry players were expectingthe NPC to be up and running by the end of June.
It turns out that spinning off multi-billion-dollar assets from three entrenched national oil companies (NOCs) is more than a three-month job.
Who would’ve guessed?
For now, we’ll make do with a few juicydetails on the (eventual) pipeline company:
- The NPC will be a vice-ministerial-level SOE – on par with the three NOCs.
- It will be under the administration of SASAC, which will have majority ownership.
- NPC ownership willotherwise be divided between the three NOCs and other investors.
- Its pipelines will be open to all users, not just shareholders.
Finally – all pipeline assets owned by the NOCs will be transferred to the NPC (except cross-border assets).
Our take: Having a separate NPC is better than letting the NOCs control pipeline access.
But still, the new company reminds usof State Grid. That’s the electric utility monopoly, which started out great, but eventually became the sector’s biggest force of resistance to further market reform.
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