Driving the Day
1. Xi tovisitNorth Korea
Xi Jinping is headed to North Korea.
He will travel there on Thursday and come back the next day.
Some context: North Korean leader Kim Jong-un has traveled to China four times in the last 18 months. But this is Xi’s first visit to North Korea since coming to power in 2012. In fact, it’s the first visit of a Chinese leader since Hu Jintao’s 2005 visit.
On the agenda (CCTV):
- “During his visit, General Secretary Xi Jinping will hold talks with Chairman Kim Jong-un and visit the China-DPRK Friendship Tower, amongst other activities.”
Get smart: The China-DPRK Friendship Tower commemorates the countries’ shared struggles against the United States in the Korean War. Visiting the tower is a not-so-subtle message to the US that the two countries have each other’s backs.
Get smarter: It’s not a coincidence that Xi is deciding to meet with Kim before he meets with Trump in Osaka. It’s a pointed reminder that cooperation with China is necessary for Trump’s goals on North Korea.
2. Regulators prep for more interbank chaos
Authorities are still trying to stay in front of liquidity issues in the interbank market.
- On Sunday, officials from the securities regulator (CSRC) calleda meetingencouragingbrokerages and other non-bank lenders to keeplending to small banks.
- Then on Monday, the National Interbank Borrowing Center (NIBC) cobbled together a trial program for dealing with interbank defaults.
Some context: Notes from the Sunday meeting indicate that there have been some defaults in the interbank market recently (WSJ).
Those defaults – coming in the wake of the Baoshang Bank takeover – have led to the blacklisting of some small banks, by lenders in the interbank market.
That’s one big reason that the NIBC’s new rules use an anonymous method for disposing of defaulted interbank assets.
The key details (wonk alert!):
- If a bank defaults on a pledged repo contract – and the two parties to the transaction cannot resolve the default bilaterally – the lending party can entrust the repo bonds to the interbank center to sell through a blind auction.
- The interbank center has detailed rules as to how it will price the bonds– but generally, they should not sellforless than 80% of the going market rate.
Get smart: We are still working out the fine details on this one. But it’s clearly an attempt to incentivize continued lending to small banks.
Get smarter: Regulators are prepping for more interbank defaults. It’s not panic time yet, but if regulators mess this up, it could be a big problem.
WSJ: Chinese Regulators Try to Calm Fears of a Funding Squeeze
21st Cen Biz:重磅！银行间市场开展回购违约处置，匿名拍卖最低成交价为80%
3. Ren Zhengfei assesses US fallout
On Monday, Huawei founder Ren Zhengfei put a dollar amount on the damage he expects from US sanctions on his company.
Over the next two years, Ren estimates losses will amount to: USD $30 billion.
Ren made the claim during a livestream dialogue alongside American tech experts George Gilder and Nicholas Negroponte, saying he was surprised by the severity of the anti-Huawei measures by the US.
Despite acknowledging the short-term challenges, he remains sanguine about Huawei’s long-term prospects (Caixin):
- “We are strong, I think there is no way we can be beaten to death.”
Get smart: Ren’s statements are remarkably candid, especially since he has tried to project calm and confidence in his previous media appearances.
Get smarter: Ren’s assessment of Huawei’s future trajectory makes sense to us. The company will continue to feel the pinch as it develops and solidifies new supply chains. But once it does, it will never again have to rely on US components.
What to watch: Will this episode ultimately make Huawei stronger?
4. Party reminds the people of cultural confidence
Over the weekend, Qiushi – the Party’s top ideological journal – published a collection of quotes on cultural confidence from speeches given by Xi Jinping between 2014 and 2017.
Some context: In 2016, Xi officially added “confidence in China’s culture” to the Party’s doctrine of Three Confidences – making it the doctrine of Four Confidences.
The other three confidences:
- Confidence in the Chosen Path
- Confidence in the Political System
- Confidence in the Guiding Theories
Xi wants the Party to be proud of its accomplishments:
- “In today’s world, if there is any party, any nation, and any people that have a reason to be confident in themselves it is the CCP, the People’s Republic of China, and the Chinese people.”
Xi sees cultural confidence as fundamental to national strength:
- “Strengthening cultural confidence is a big issue concerning the rise and fall of the country, cultural security, and the independence of the national spirit.”
Get smart: Xi’s push for cultural confidence is not just about making the country strong – it is also about solidifying the Party’s position in power.
5. Environmental protection gets a new enforcer
On Monday, the general offices of the Central Committee and State Council released new rules governing the supervision of environmental protection.
The new rules put the Party firmly in charge of the issue.
In fact, the State Council leading small group (LSG) that had previously overseen environmental work will now be directly overseenby the Party Central Committee.
The Ministry of Ecology and Environment (MEE) will continue to house the office that runs the LSG’s daily operations.
This is important: A few ministries have been kicked out of the LSG, including the macroeconomic planner (NDRC) and the key designer of industrial policy (MIIT).
So what now?
- Ministries and central SOEs will be subject to inspectionregardingtheir work on environmental protection.
- If inspectors find big problems, they will tell the Party’s disciplinary body (CCDI).
Why it matters:Good or bad, performance on protecting the environment will now be a more important component ofofficial evaluations that determine cadre promotions.
Get smart: This new group could create a step change in environmental enforcement.
6. Industrial associations to decouple, sort of
On Monday, the National Development and Reform Commission (NDRC) and nineother ministries released new guidelines meant to give industry associations more autonomy– vis-à-vis the government agencies that oversee them.
Some context: Chinese industry associations largely function as semi-governmental agencies. They are usually funded by the government and headed by current or former officials. In some cases, they even have statutory approval powers over certain licenses.
More context: Efforts to separate industry associations from the government have been ongoing since 2015, when the Party Central Committee and State Council issued a directive to that effect (Xinhua).
Get smart: This is a step towards marketization.
Get smarter: Beijing wants to have its cake and eat it too. The new policy dedicates big chunks of text to Party-building in industry associations (which was absent in the 2015 directive).
Our take: Beijing knows industry associations have to function differently from in the past, but the Party finds it hard to give up control.
7. NPC to meet next week
Mark your calendars!
On Monday, the legislature decided to hold its next bi-monthly session from June 25-29.
Eight draft laws are up for review:
- Draft Vaccine Administration Law
- Draft amendments to the Land Management Law and Urban Real Estate Administration Law
- Draft Civil Code Part on Marriage and Family and Part on Inheritance
- Draft revision to the Forest Law
- Draft revision to the Law on the Prevention and Control of Environmental Pollution by Solid Waste
- Draft Community Corrections Law
- Draft Encryption Law
The always excellent NPC Observer says that the draft parts of the Civil Code bear watching:
- “We are eager to see whether last year’s widespread social media campaign asking the NPC to legalize same-sex marriage has had any impact on the draft.”
Impact or not, the campaign sure gained some serious traction:
- “The campaign’s organizer posted on WeChat an article-by-article instruction for suggesting changes to the first draft of the Part on Marriage and Family.
- It is conceivable that the campaign contributed to a large portion of the whopping 440,491 comments on the draft Code (including all six separate parts) last fall.”
Get smart: This will be an important case study of how much (if at all) public opinion can affectlegislation.