Driving the Day
1. Beijing escalates rhetoric on Hong Kong
As of this morning, protestors continue to throng Hong Kong’s airport. Aviation authorities havecanceled more than 300 flights scheduled for Tuesday.
In Beijing: The central leadership is fuming.
- A statement issued by State Council’s Hong Kong and Macau Affairs Office said “signs of terrorism were emerging” from within the protest movement.
Watch out: That is a major rhetorical escalation.It’s got lots of folks (including us) worried thatBeijing might send the troops in.
Meanwhile, foreign leaders have expressed concern over the situation and urged Beijing to use restraint.
Here’s Canadian Prime Minister Justin Trudeau (SCMP):
- “We are calling for peace, for order, for dialogue,”
- “We certainly call on China to be very careful and very respectful in how it deals with people who have legitimate concerns in Hong Kong,”
And US Senate Majority Leader Mitch McConnell (SCMP):
- “Any violent crackdown would be completely unacceptable.”
- “The world is watching.”
Get smart: If there’s one thing Beijing hates more than disruptive protests, its foreign leaders offering rhetorical support for the protestors.
Get smarter: The threat of international opprobrium still plays an important role in shaping Beijing’s response to the unrest. But the “terrorism” charge may well be meant as an end-run around foreign condemnation.
SCMP: Hong Kong airport: hundreds more flights cancelled the day after protest chaos
Straits Times: First signs of terrorism emerging in Hong Kong protests: Hong Kong and Macau Affairs Office
SCMP: Canada’s Justin Trudeau extremely concerned about Hong Kong, urges China to be careful
2.PBoC expects continued RMB weakness
Our favorite financial regulator, Pan Gongsheng, feels good about the central bank’s (PBoC) ability to manage the currency.
Pan is a PBoC vice governor and the head of the country’s foreign exchange administrator (SAFE).He published an article on Monday touting the central bank’s ability to deal with any fallout from trade tensions.
He also took US President Trump to task for his own verbal intervention in currency markets, and his politicization of monetary policy.
But for all Pan’s confidence, it’s still clear he sees more currency weakness on the horizon:
- “Although the RMB exchange rate will be subject to external shocks such as trade frictions, we do not judge that a disorderly depreciation is improbable.”
- “After a short period of turbulence, the foreign exchange market will eventually return to the fundamentals.”
Get smart: The PBoC is looking to manage further depreciation – not stop it outright. That’s a far cry from a competitive devaluation.
Get smarter: Officials aren’t overly concerned that a bout of currency weakness will kick off a wave of capital outflows.
Our take: Officials are right to be confident. Money isn’t heading for the exits because the exchange rate shock is so clearly thanks to external factors, not domestic ones.
Financial news: 成方街时评|潘功胜：深化金融改革 扩大金融开放 坚定不移地走中国特色的发展之路
Caixin: Trade War Won’t Throw Yuan Into Chaotic Depreciation, Central Bank Deputy Says
3. Chinese bonds join global rally
The Chinese bond market is signaling a coming interest rate cut. But we don’t think that’s going to happen.
Bloomberg has the skinny:
- “China’s 10-year sovereign bond yield fell to 3% for the first time since 2016, joining a global rally of government debt as the nation’s economy slowed and its trade dispute with the U.S. worsened.”
For the uninitiated, falling bond yields are thanks to rising bond prices – which in turn is thanks to increased investor appetite for those bonds:
- “The bull case for Chinese bonds is pegged on potential easing by China’s central bank.”
Some context:The Chinese bond rally is part of a broader global move – as everything from weak Chinese credit growth (see Monday’s Tip Sheet), to the unrest in Hong Kong, to the US-China trade war, to a recent political surprise in Argentina has investors moving out of equities and into safer instruments.
The problem: With an already weakening currency, Chinese authorities aren’t in a position to cut rates.
And in case you are new to the Tip Sheet: Officials are not keen to rampup stimulus, despite the economic uncertainties.
The bottom line: China’s bond market wants an interest rate cut, but it won’t get one.
Bloomberg:China 10-Year Sovereign Yield Falls to 3% First Time Since 2016
4.Luxury brands get whacked
Foreign luxury brands are having a tough week on the mainland. Rising tensions in Hong Kong are once again bringing out nationalist fervor among Chinese netizens.
The animating issue is a familiar one – products that portray Hong Kong and Taiwan as separate from the motherland (Reuters):
- “Chinese brand ambassadors of fashion labels from Coach to Givenchy have severed ties with the companies over products which they said violated China’s sovereignty by identifying Hong Kong and Taiwan as countries.”
- “Italian luxury label Versace and its artistic director, Donatella Versace, apologized on Sunday after one of its T-shirts, depicting the territories of Hong Kong and Macau as countries, was criticized on Chinese social media.”
Some context: Over the past year, foreign airlines and hotel groups have also gotten whacked for listing Taiwan and Hong Kong as separate jurisdictions from the mainland.
But in those cases, it was government entities lodging the complaints. Here, Chinese citizens are taking it upon themselves to call out the foreign brands.
Get smart:Official Chinese coverage of the Hong Kong protests – blaming foreign forces for stoking unrest – is feeding anti-foreign sentiment.
Reuters:Coach, Givenchy in hot water over China T-shirt row
5.Ministries ordered to improve business environment, again
Stop us if you’ve heard this one before: The State Council is looking to improve China’s business environment.
The latest efforts: On Monday, the group released guidelines specifying individual responsibilities of central ministries and local agencies to keep the improvement going forward.
The big news: A shortened market access negative list will be amended by the end of September – with a key emphasis on the services sector.
In addition, the new circular asks ministries and local agencies to:
- Inspect unreasonable restrictions faced by foreign-invested and private enterprises in bidding processes
- Abolish regulations and practices in government procurement processes that impede fair competition
- Cut, simplify, and clarify administrative and regulatory permits
- Shorten the time needed to start new businesses
- Address illegal and unreasonable business fees collected by local government
- Set up unified, clear, and easy-to-enforce regulations and standards that are open to the public
- Strengthen the social credit system
Get smart: None of this is new – the State Council is simply looking to keep implementation moving forward.
Get smarter: While efforts to upgrade the business environment are often underwhelming – they are way better then unleashing a huge stimulus to juice growth.