Driving the Day
1. Carrie Lam backs down
On Saturday, Hong Kong Chief Executive Carrie Lam agreed to shelve the proposed extradition law – for now.
She offered a classic non-apology (FT):
- “I feel deep sorrow and regret that the deficiencies in our work and various other factors have stirred up…disputes in society.”
By Sunday, she was more contrite:
- “The chief executive apologizes to the public and promises to accept criticism with the utmost sincerity and humility, to improve, and to serve the general public.”
Beijing appears to have weighed in on the decision (Reuters, FT):
- “According to Hong Kong’s Sing Tao newspaper, Lam had a clandestine emergency meeting with Han [Zheng], a member of the Politburo’sseven-person Standing Committee…across the border in Shenzhen on Thursday.”
- “According to people briefed [on the matter]…it was Mr Xi’s administration that made the decision to pull the amendment.”
Even so, millions of protesterstook to the streets again on Sunday.
Why it matters: This isa sign that Beijing can be practical, and willing to change course when things go wrong.
Our question: Will there be ripple effects on the mainland? Has this shown that protests can change Beijing’scalculus?
What to watch: There is widespread speculation that Lam will be dismissed.
2.Liu He looks to calm small bank nerves
Vice Premier Liu He spent Thursday and Friday in Hangzhou, surveying small- and medium-sized banks.
Some context: Liu’strip comes amidst growing worries about the health of small banks following the government takeover of Baoshang Bank (see May 27 Tip Sheet).
More context: Supporting local banks is part of thebroader policy push to boost lending to SMEs.
Liu stressed the need to:
- Create a better policy environment for smaller banks
- Study ways to provide investment and financing support for tech-focused small enterprises
- Solve the information asymmetry problem
On the heels of Liu’s trip, the central bank (PBoC) got to it, announcing on Sunday that it will strengthen liquidity support for smaller banks by:
- Raising the rediscount quota by RMB 200 billion
- Increasing the standing lending facility (SLF) quota by RMB 100 billion
- Accepting interbank certificates of deposit (CDs) and bank bills as collateral from small banks that request liquidity support
Get smart: Financial policymakers have repeatedly emphasized that the Baoshang takeover was an isolated incident, saying markets shouldn’tbe concerned. But regulatory actions belie a sense of unease.
3.Markets still nervous about Baoshang effects
Regulators are moving quickly to restructure Baoshang Bank. So far, everything is going swimmingly.
That’s according to an articlein the central-bank-affiliated newspaper The Financial News.
Reuters has the recap:
- “Chinese regulators had completed debt repayment and transfer for Baoshang bank’s big institutional and interbank clients as of June 7, and will move on to verify and evaluate the lender’sassets ahead of the restructuring.”
The piece was clear that some lenders are taking haircuts:
- “Although a very small portion of the lender’s clients didn’t get 100% guarantee of their principals, it’s a lesson to those who have been aggressively buying high-yielding investment products with little risk control.”
Get smart: This tiny effort to address moral hazard is making onshore traders nervous.
Now, the nervousness is spreading from banks to non-bank institutions:
- “At a meeting held on Sunday, the country’s leading brokerages discussed options to address liquidity risks, proposing that counterparties should be rationally priced for risk, and recommending that institutions do not suspend their repo lending businesses.”
Get smarter: The central bank has plenty of fire power, but getting liquidity to the right places can be tricky.
The Paper: 包商银行接管组负责人6月16日就有关问题答记者问
Reuters: Chinese regulators will restructure Baoshang Bank as soon as possible
21st Cent Biz: 独家丨监管层维稳非银同业风险 头部券商“发债+流动性支持”成化解路径
4.Xi-Putin bromance reaching new heights
Xi Jinpingcelebratedhis birthday with his “bosom friend” Russian President Vladimir Putin in Dushanbe, Tajikistan, over the weekend(see June 6 Tip Sheet).
RT recaps the festivities:
- “Putin congratulated Xi on his 66th birthday while in Dushanbe, Tajikistan, wishing him ‘best of luck,’ warmly shaking his hand and saying: ‘I’m glad to have such a friend like you.'”
Putin showered his friend with gifts:
- “The birthday cake came first…followed by a luxury vase, lavishly decorated by Russian craftsmen.”
- “Proceeding with the gift-giving ceremony, Putin offered the Chinese president a sizeable box of Russian ice-cream – the one that has once won Xi’s heart and palate.”
Putin knows what Xi likes:
- “Xi had once confessed that he loves Russian sundae cups, telling the media that he always asks for the ice-cream every time he visits Russia.”
- “‘You have the best cream, and it makes it so tasty. I like it very much,’he said back in 2016.”
Get smart: Xi and Putin have gone out of their way to show that their relationship is close in recent years.
5.Xi lays out foreign policy priorities
It’sbeen a busy weekend for Xi Jinping.
On Friday, he was in Bishkek, Kyrgyzstan attending the 19th summit of the Shanghai Cooperation Organization (SCO) (see Friday’sTip Sheet).
Xi’sstatements at the summit reflect China’sforeign policy priorities (Xinhua):
- “SCO members need to…enhance de-extremization cooperation.”
What that means: Xi is trying to win support for his Xinjiang strategy.
He also said that:
- “The group…needs to play a constructive role in promoting peace, reconciliation, stability and development in Afghanistan.”
Why that matters: China is worried about a possible power vacuum as the US withdraws from Afghanistan.
Xi also shared his thoughts on economic cooperation, calling on member states to:
- “Advocate multilateral trading system, build an open world economy, and put forward more institutional arrangements in trade and investment liberalization and facilitation.”
Get smart: Amid the deepening US-China trade war, diversifying trading partners is a top priority for Xi and co.
Chinese president calls for closer SCO community with shared future
6.Xi promises Asian countries that China’s rise will be great
On Saturday, Xi Jinping was in Dushanbe, Tajikistan, where he attended the 5th summit of the Conference on Interaction and Confidence Building Measures in Asia (CICA).
Some context: Since 2014, Xi has sought to promote the conference as part of an overall push to strengthen multilateral institutions in which China plays a leading role.
At this year’s meeting, Xi laid out China’spitch for Asian leadership:
- “Firstly, China will steadfastly pursue a peaceful development path [and] never… seek benefits at the expense of others.”
- “Secondly, China will stick to opening-up and all-win approaches, and share development opportunities with various countries.”
- “Thirdly, [China will] firmly uphold multilateralism and safeguard the international order based on international laws.”
Get smart: Xi is going out of his way to tell other Asian countries that China’srise will be to their benefit.
Xi complemented his message with a seriesof bilateral meetings: In addition to his BFF Putin, Xi also met with the leaders of India, Pakistan, Iran, Turkey, Afghanistan, Mongolia, Belarus, Qatar, Kyrgyzstan, and Tajikistan over the weekend.
Get smart: The SCO and CICA are often poo-pooed as nothing but talking shops. But these gatherings are important for pushing forward bilateral relations. Nothing mobilizes the bureaucracy like a meeting between leaders.
7.The Party is digging in for a prolonged trade war
There’s stillno end in sight for the US-China trade war.
Over the weekend, top Party journal Qiushi published a lengthy commentary describing official thinking on the issue.
The article’sbellicose takedoesn’t bode well for an easing of tensions.
The commentary rejected the US’s insistence on reciprocity:
- “Absolute reciprocity seems fair on the surface, but is in fact unfair because it ignores developing countries’ right to development.”
The commentary said that China will not back down:
- “Some people in the US are trying to force China to give in by imposing extreme pressure.”
- “It is a doomed effort.”
Finally, the article enumerated reasons why China’s economy can survive without the US:
- There are 900 million workers, of which 170 million have received higher education.
- China has the biggest middle class in the world, which will drive demand.
- China is the only country with a complete industrial value chain.
The message: Things are fine, even in the face of mounting American pressure.
Get smart: The Party would still prefer to strike a deal with the US, but they are simultaneously digging in for a protracted battle.
Qiushi:认清本质 洞明大势 斗争到底——中美经贸摩擦需要澄清的若干问题