1.Markets fixate on the fixing
China’s central bank (PBoC) now has the full attention of markets.
Traders around Asia were watching this morning to see where authorities would set the morning fixing price for the currency – it came in at 7.0039/USD.
Some context: While the currency had been trading above 7/USD since Monday, Thursday was the first time the PBoC set the official morning rate above that level – since April 2008.
More context: As we wrote yesterday, this move shouldn’t come as a surprise – and in terms of China’s current economic prospects, the 7/USD threshold means virtually nothing.
But for anyone who thought the PBoC might be thinking of changing course – and would fight harder against depreciation – today’s fixing was seen as the strongest signal yet that authorities will step back and let the currency continue to slide, albeit in a managed fashion.
The kicker is not so much for the CNY, but for other Asian currencies.
- With regional currencies increasingly linked to the CNY, a host of other developing countries will follow China’s path.
Get smart: The reverberations of the bilateral trade war are widening. That’s not good for the global growth picture.
2. Data dump – trade
The customs bureau released July trade data on Thursday morning.
The takeaway: July trade performance was better than expected – but it wasn’t good.
- Exports grew by 3.3% – up from a 1.3% y/y contraction in June, and beating expectations for a 1% contraction.
- Imports contracted by 5.6% y/y – improved from a 7.3% fall in June, and beating expectations of a 9% contraction.
Of course, trade with the US remained in the doldrums:
- Exports to the US contracted by 6.5% y/y.
- Imports from the US fell by 19%.
Get smart: While the trade numbers were better than expected, it’s not exactly anything to write home about. Imports have now contracted in seven out of the past eight months, underscoring the slowdown in the domestic economy.
Something to watch: Exports to the EU were up by 6.5% in July – compared to a 3% contraction in June. That doesn’t seem sustainable, but it certainly helped this month.
Nikkei:China’s exports to US fall 8% amid trade tensions
3.Beijing’sHong Kong ultimatum
Yesterday, about 500 Hong Kong business leaders and pro-Beijing politicians convened in Shenzhen for a symposium led by mainland officials.
The message: Get Hong Kong under control – or we’ll do it for you.
Looking at the readout from the meeting, it’s pretty clear that mainland officials are hardening their stance toward the protests.
In fact, it seems that Beijing has concluded the unrest is aimed at overthrowing the Hong Kong government.
This is a big statement (Xinhua):
- “The ordinance amendment issues have changed in their essence, and now bear the features of a ‘color revolution.’”
Some context: Invoking that term underscores that the Party sees the protests as an existential threat – and will treat them as such.
Beijing is now one step closer to intervention:
- “If the situation in Hong Kong worsens to a turmoil that the SAR government cannot control, central authorities will not sit by.”
- “Central authorities have ample methods… to promptly settle any possible turmoil should it occur.”
For now, Beijing’s first choice is for loyalists in Hong Kong to take control. But no matter what happens, mainland authorities will not back down:
- “It is now a ‘life-or-death’ fight for the very future of Hong Kong.”
- “There is no room for retreat.”
Get smart: This is Beijing’s ultimatum.
Xinhua: 止暴制乱 恢复秩序 是香港当前压倒一切的急迫任务——国务院港澳办和中央政府驻港联络办共同举办香港局势座谈会
Xinhua: Hong Kong’s most urgent task is to stop violence, end chaos, restore order
SCMP: Business elite and pro-Beijing politicians meet officials from mainland’s Hong Kong and Macau Affairs Office in Shenzhen to rally support for SAR’s prosperity and stability
4.September trade talks likely to go ahead
In recent days, top American and Chinese officials have suggested that trade talks scheduled for September are likely to proceed as planned.
Some context: On August 1, US president Donald Trump threatened to add a 10% tariff on the remaining USD 300 billion of Chinese goods (see yesterday’s Tip Sheet).
Despite this setback, the SCMP reports that a team of Chinese negotiators is still slated to fly to Washington in September in hopes of chipping away at the pile of unresolved issues at the crux of the trade war.
But while the show looks likely to go on, official comments on the future trajectory of the talks have been anything but sanguine.
Here’s Chinese former vice-minister of commerce Wei Jianguo (SCMP):
- “It is possible that the meeting could ease the tensions a bit on some aspects.”
And here’s US economic adviser Larry Kudlow:
- “We’re willing to negotiate. Movement towards a good deal would be very positive and might change the tariff situation. But then again, it might not.”
Inspiring stuff, guys.
Get smart: Negotiators on both sides are aware that Trump is unpredictable. For now, they seem to be gingerly pressing on, despite the massive wrench that he’s thrown into the gears.
5.Xi Jinping, the athlete
The campaign to humanize Xi Jinping rolls on.
After recounting his not-so-inspiring love story with the first lady (see yesterday’s Tip Sheet), the People’s Daily mobile app ran a story today about Xi Jinping, “the fitness fanatic.”
Some context: Today is China’s “National Fitness Day.”
Examples of Xi, the sportsman, include:
- Ice-skating – even withoutproper shoes – as a child
- Learning how to swim at the age of four or five – and swimming 1,000 meters daily, even now
- Boxing as an adolescent
- Being life-long soccer fan – and player
Xi even admits to staying up late and watching soccer, basketball, and boxing matches.
For Xi, playing sports translates to good health. And as he says (People’s Daily):
- “If the people aren’t healthy, [we can’t become] a ‘moderately prosperous [society].’”
Get smart: Party media is not only burnishing Xi’s image as a man of the people. He’s also meant to be self-disciplined and tough – setting an example for all Chinese.
Get smarter: This part of the campaign isn’t happening in a vacuum – it’s right in line with the recently-launched Healthy China Initiative (see July 26 Tip Sheet).
People’s Daily: “健身达人”习近平
6.China signs Singapore Convention on Mediation
Yesterday, China signed the Singapore Convention on Mediation together with representatives from 45 countries – including the US.
Some context: Mediation, together with arbitration and litigation, is one of the legal tools that businesses use to settle cross-border disputes.
Why it matters: One problem with mediation is that enforcement mechanisms for a mediated settlement are weak if one party chooses to walk away.
The convention looks to address that.
How it works: Under the convention, foreign businesses can ask Chinese courts to enforce a meditated settlement reached by both sides if a Chinese company fails to honor the agreement.
The convention is expected to take effect in six months – and requires legislative approval from the National People’s Congress (NPC), in order to be official in China.
Get smart: In order to actually implementthe convention domestically, the NPC will also need to amend some domestic laws – and the Supreme People’s Court will need to formulate detailed implementing rules.
The big picture: The big motivation for China to sign the convention is to put Chinese companies on stronger footing to deal with commercial disputes that may arise as a part of the Belt and Road Initiative.