Driving the Day
1. Xi promotes Party-building…again
Xi Jinping loves Party-building.
The latest evidence: On Tuesday, Xi convened a high-level meeting to discuss Party-building in central Party and state institutions.
Some context: Xi has been on a Party-building frenzy since taking over the top spot in 2012. He has thoroughly restructured the Party-state, re-written the Party’s rules, and launched three massive study campaigns.
Xi does not sound happy (Reuters):
- “Don’t be muddle-headed officials who are politically apathetic and do things half-heartedly; don’t be lazy officials who spend the whole day eating and idle their time away.”
And he is tired of excuses (Xinhua):
- “Xi said that officials should not use anti-corruption campaigns as an excuse for shirking responsibilities or refusing to perform duties.”
But don’t worry. He’s got a plan to make it all better:
- “Special training should be carried out among young cadres on consolidating their political theory, strengthening their political orientation, improving their political ability and guarding against political risks.”
Get smart: Reinvigorating the Party is Xi Jinping’s number one priority. Everything else he does is in service of that goal.
People.cn: 习近平：全面提高中央和国家机关党的建设质量 建设让党中央放心让人民群众满意的模范机关
Xinhua: Xi highlights Party building in central Party, state institutions
Reuters: China’s Xi tells officials not to be lazy and ‘spend whole day eating’
2.Rate cut on the way? Not likely.
Expectations of stepped-up stimulus from China continue to grow.
In particular, speculation is growing that the PBoC may ease monetary policy in reaction to an expected rate cut by the Federal Reserve later this month.
The latest talk is of a potential cut to benchmark interest rates.
Such a move would contradict pretty much every high-level policy statement in recent months, but some in the market are unconvinced by regulators’ statements (Reuters):
- “While Chinese officials continue to downplay the likelihood of more aggressive easing, the economy has been slow to respond to a host of earlier stimulus measures, while the U.S.-China trade war is growing longer and costlier.”
Our take: An outright rate cut would be a big move – and we think it is unlikely to happen.
Instead we expect more of the same:
- “In a bid to spur more lending, the PBOC has injected huge amounts of liquidity into the financial system in various forms over the past year, targeting small and private companies in particular.”
- “It also has quietly guided some short-term rates lower to reduce corporate financing pressure.”
Get smart: Until we see a more definitive easing signal from the State Council or Party – policy easing will remain targeted.
Reuters:Fed easing could prompt first China rate cut in four years – analysts
3.Central bank cautious about Libra
Facebook’s coming cryptocurrency launch –Libra – has gotten financial regulators’ knickers in a twist all over the world, including in Beijing.
Some context: As a trans-sovereign global currency (see June 21 Tip Sheet), Libra has long-shot potential to upend the global financial system.
So the People’s Bank of China (PBoC ) launched looked into the matter, and… surprise! It found that Libra needs more oversight.
According to Mu Changchun, deputy director-general of the PBoC’s Payment and Settlement Department (Caixin 2):
- “[Libra ]cannot happen without the support and supervision of central banks, being incorporated into their regulatory frameworks.”
Mu also cautioned against the cross-border use of digital currencies:
- “We must prevent them from becoming monopolies.”
- “All of this requires supervision and cooperation… something that may even lead to the emergence of an international central bank.”
Meanwhile, former-PBoC governor Zhou Xiaochuan warned about Libra’s potential impact on capital flows (Sina):
- “In the future, [Libra] could become a strong currency that erodes weak currencies.”
In the face of which, the RMB needs to remain strong:
- “Maintaining a strong currency status may give us a favorable position in the process of internationalization of the RMB.“
Get smart: An unregulated cryptocurrency will never make inroads in China – regulators will do whatever they can to stymie Libra.
Caixin: Opinion: Facebook’s Libra Needs Central Bank Supervision
Sina: 周小川:Libra代表数字货币的趋势 中国应未雨绸缪
4.Data dump – inflation
The stats bureau released June inflation data on Wednesday morning.
- CPI was up2.7% y/y – the same rate as in May.
- PPI saw exactly 0% growth y/y – down from 0.6% growth in May.
Quick take 1: Food prices continue to drive headline prices. Food inflation was up 8.3% y/y in June, with fresh fruit up 42.7%. But overall broad consumer prices are not seeing heavy upward pressure.
Get smart: That gives the central bank room to maneuver if it wants to cut rates – but we still don’t see that happening (see Entry #2).
Quick take 2: Next stop for PPI – deflation. Prices haven’t contracted on a y/y basis since August 2016, and authorities will not be happy to see the return of deflationary pressure.
What to watch: The move toward deflation may finally prompt Chinese authorities into more concerted easing. The next few weeks will be critical in determining any change in policy trajectory for H2 2019.
National Bureau of Statistics: 国家统计局城市司处长董雅秀解读2019年6月份CPI和PPI数据
Reuters: CORRECTED-China’s June PPI unchanged from year earlier; CPI up 2.7% y/y
5.Another US-China phone call
On Tuesday night in Beijing, China’s top trade negotiator, Vice Premier Liu He, spoke on the phone with US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin.
The two sides exchanged views on how to move forward with the consensus reached between the two heads of state at the G20 summit in Osaka 10 days ago(see July1 Tip Sheet).
The call went…ok.
The White House’s economic advisor Larry Kudlow described it as constructive:
- “The two sides are talking about having a face-to-face meeting.”
Our thought: There’s not much to get excited about here.
But one thing was new.
- The Chinese readout specifically mentioned that Minister of Commerce Zhong Shan was on the call.
That’s unusual. And it raises the question: Going forward, does this mean that Zhong and MofCom will have a bigger role in the negotiations?
Reuters: Trade call between U.S., Chinese officials was constructive – White House
6.PLA to keep boots off Hong Kong streets
This is important:
- Reuters recently scooped that last month, a People’s Liberation Army (PLA) general toldhis UScounterpart that the Chinese army had no intention of clearing the protests in Hong Kong.
Specifically, Major General Chen Daoxiang, the Chinese military commander responsible for Hong Kong, told David Helvey, the US Principal Deputy Assistant Secretary of Defense for Indo-Pacific Security Affairs that (Reuters):
- “The PLA would not breach their long-standing principle of non-interference in Hong Kong affairs.”
Some context: Chen said that at the beginning of a courtesy meeting with Helvey on June 13 at the PLA’s Hong Kong headquarters.
Get this: Chen “took it upon himself” to make that statement.
Get smart: Sending the PLA to clear Hong Kong’s streets would not only bring enormous international criticism – and pressure – on Beijing, but also signal to the world that situation in Hong Kong is on the brink of spiralling out of control.
The bottom line: Beijing wants Hong Kong leaders to take the blame for the failed extradition bill, but also wants to be seen as in control.
Get smarter: That is a delicate dance, but nominally letting “Hong Kong people govern Hong Kong” is probably the only plausible path to fulfilling both narratives.