Driving the Day
1. China names its terms
Xi Jinping will meet with US President Donald Trump on Saturday in Japan. The meeting is being eagerly anticipated to see if the two sides can reach an accommodation on trade.
Bob Davis and Lingling Wei have the scoop on Xi’s thinking (WSJ):
- “Chinese officials with knowledge of the plan said, Beijing is insisting the U.S. remove its ban on the sale of U.S. technology to Chinese telecommunications giant Huawei.”
- “Beijing also wants the U.S. to lift all punitive tariffs and drop efforts to get China to buy even more U.S. exports than Beijing said it would when the two leaders last met in December.”
For his part, Trump doesn’t seem too worried about not getting a deal. Here’s what he said Wednesday (Bloomberg):
- “My Plan B with China is to take in billions and billions of dollars a month and we’ll do less and less business with them.”
- “My plan B’s maybe my plan A.”
Our take: It looks unlikely that the US will accede to Chinese demands. And the Chinese look unlikely to give ground. The best we can hope for is another temporary truce – a more permanent deal seems very far away.
Driving the Day
2.Xi promises further openings
On Fridayat the G20, Chinese President Xi Jinping gave a “guiding speech” at the invitation of the host – Japanese Prime Minister Shinzo Abe.
The big news: Xi promised increased access for foreign businesses.
Specifically, Xi said that the following sectors would be opened further:
That’s not all. Xi also promised to further liberalize trade by lowering tariffs and getting rid of non-tariff barriers.
Xi also laid out China’s priorities when it comes to trade and investmentdeals.There are three priorities:
- Regional Comprehensive Economic Partnership (RCEP)
- China-EU Investment Agreement
- China-Japan-South Korea Free Trade Agreement
Get smart: Xi is keen to show that China is open for foreign businesses – and position himself as the anti-Trump.
Get smarter: China is keento diversify its economy away from the US. That’s giving greater impetus totrade and investment details with other countries.
3. Monetary policy committee meets
On Tuesday, the PBoC’s monetary policy committee held its Q2 meeting.
This isn’t good:The committee noted a rise in the level of macro leverage during Q2.
- The consensus for Q1 had been that ” the macro leverage ratio is becoming steady.”
- But this time, the verdict was simply that “growth momentum of macro leverage has been curbed initially.”
That’s a subtle but important downgrade in language.It signals that officials are worried about letting the debt genie back out the bottle.
The committee also expressed concern about external risks (PBoC).
- “External uncertain and unstable factors are increasing.”
But the group once again reiterated that the overall monetary policy stance hasn’t changed.
What that means: There won’t be a flood of stimulus in H2.
Finally, officials cautioned against injecting too much liquidity into the banking system.
- The Q1 meeting focused on “adhere[ing] to counter-cyclical adjustment.”
- But the new message is to “enactcounter-cyclical adjustment at the appropriate time and with right forces.”
In other words: The PBoC is already worried that they are overdoing it on the liquidity front.
The bottom line: Financial officials are still focused on containing debt and defusing risks– despite the slowing economy.
4.Minister of finance keeps pressure on local debt
On Tuesday, Minister of Finance Liu Kun gave an important report to the legislature.
He reported that the fiscal situation throughout the country is deteriorating rapidly. In the first five months of the year:
- Government revenue grew by just 3.8% y/y;of that tax revenue growth was just 2.2% y/y, thanks to the big tax cut.
- Government spending grew by 12.5% y/y.
That’s not good.
But Liu also had some recommendations to address the situation.
He doesn’t want to backtrack on tax cuts(NPC):
- “[We] must make sure that the larger scale tax cuts and fee reductions get implemented.”
He wants governments to make up the difference by cutting spending:
- “[We will] further reduce general expenditure and strive to achieve more than a 10% reduction.”
That’s some serious austerity.
And Liu means it. He was adamant that local governments should not be let off the hook no matter how bad things get:
- “No matter how difficult local finances are, it will be impossible to borrow money illegally.”
Get smart: That doesn’t exactly sound like looming stimulus to us.
5. Efforts to support small business are failing
The National Audit Office (NAO) published its annual budget review yesterday.
The key finding: Funding for small businesses still hasn’t improved.
Some context: Yesterday’s State Council meeting unveiled yet another batch of measures to cut costs for small businesses (see yesterday’s Tip Sheet).
Hu Zejun, head of the NAO, said that the efforts to-date have had no real impact (Reuters):
- “Due to risk prevention, there are still some problems for bank financing, such as a relative high threshold (to obtain loans), lengthy procedures, and a long waiting period.”
Hu also noted that illegal fees by some commercial lenders have undermined efforts to cut business costs:
- “Three of the big five Chinese commercial lenders had also illegally charged RMB 230 million in financing fees.”
The NAO report also highlighted an unintended consequence of theSME policy push – a price war between banks (Caixin):
- “To meet targets for lending to small enterprises, some big banks have poached high-quality clients from small and midsize local lenders by offering them lower interest rates.”
Get smart: Officials want small businesses to flourish and rejuvenate the slowing economy. But as we’ve been saying for the past year – the support policies just ain’t working.
6.Xi and Abe make nice
On Thursday, Xi Jinping arrived in Osaka and met with Japanese Prime Minister Shinzo Abe ahead of the G20 summit.
In the spirit of bettering Sino-Japanese ties, the two leaders reached a ten-point consensus.
Most importantly, the two nations want to:
- Unite against unilateral trade actions and preserve multilateralism (that old trope!)
- Manage sensitive issues, such as the Senkaku/Diaoyu islands dispute, in a constructive manner
- Work together to maintain peace and stability in the East China Sea
- Jointly carry forward the achievements of Asian civilizations
Our thought: It looks like Abe is getting behind Xi’s vision for Asia – peaceful, prosperous, and connected (see May 15 Tip Sheet).
On the trade front: The two leaders also agreed to accelerate negotiations on the China-Japan-South Korea Free Trade Agreement – and to conclude negotiations on the Regional Comprehensive Economic Partnership (RCEP) within the year.
But it gets better: There’s even a state visit scheduled…kinda.
- Abe invited Xi to visit Japan in cherry blossom season next spring.
- Xi agreed “in principle.”
Get smart: Sino-Japanese ties have been thawing lately, largely thanks to both sides’ frustration with the US. But historical grudges run deep, so don’t expect these guys to become best buds anytime soon.
Xinhua:Xi, Abe reach 10-point consensus to promote bilateral relations
7.Xi seeks allies at the G20
Xi Jinping has been characteristically busy at the G20 meeting.
On Thursday, Xi met with:
- South Korean President Moon Jae-in
- Japanese Prime Minister Shinzo Abe (see previous entry)
On Friday, Xi met with:
- United Nations Secretary-General António Guterres
- Russian President Vladimir Putin
- German Chancellor Angela Merkel
- Indian Prime Minister Narendra Modi
- Brazilian President Jair Bolsonaro
- South African President Cyril Ramaphosa
- Egyptian President AbdelFattahEl-Sisi
- Senegalese President Macky Sall
According to the Xinhua readouts, in all of those meetings the parties agreed to:
- Safeguard multilateralism, free trade, and an open world economy
- Oppose unilateralism and protectionism
Get smart: Opposing unilateralism and protectionism is a not-so-thinly-veiled jab atUS President Trump’s trade policies.
Get smarter: Xi is trying to get as many countries as possible on the record opposing US tariff measures before sitting down with Trump for the final showdown tomorrow.
Our thought: None of this is likely to sway Trump.