Driving the Day
1. HK airport assaults trigger mainland ire
On Tuesday, two mainland men were assaulted at the Hong Kong airport, sparking a ferocious backlash on Chinese social media over the past two days.
One of the men, Fu Guohao, a reporter for the Global Times, was tied up and beaten by several protestors.
The violence firsttouched off an avalanche of condemnation from state media.
More importantly, itsparked outrage amongmainland netizens, where users have taken up Fu’s words during the incident as a rallying cry (SCMP):
- “I support the Hong Kong police.”
- “You can beat me if you want.”
State media is now regularly using the T-word (Xinhua):
- “The radicals’ violent attacks on innocent citizens are tantamount to an act of terrorism that should be condemned in the strongest terms possible.”
- “Such brutal and shameful acts are a flagrant violation of basic human rights, overstepping the bottom line of a civilized society.”
Get smart: While state propaganda has certainly played a part in shaping the protest narrative in the mainland, there’s also lots of organic outrage among ordinary Chinese citizens.
The bottom line: There is little sympathy for the Hong Kong protestors on the mainland.
2.Regulators crack down on internet finance
The banking regulator (CBIRC) has been looking to boost compliance by financial institutions over the past two years. A big part of the push has been increased fines and punishments for malfeasance.
Now the penalties are starting to extend beyond traditional entities (Caixin):
- “WeBank, China’s first internet-only bank, was fined 2 million yuan…for multiple violations including irregular loan issuance and business undertaking, noncompliance in management appointment and employee misconduct.”
This kind of scrutiny is new for the internet lender:
- “The penalty was the first imposed on WeBank since its founding in 2014.”
It turns out Webank employees were up to the same tricks as traditional banks and shadow banking companies:
- “The Shenzhen branch of the China Banking and Insurance Regulatory Commission in an inspection launched last year found that some WeBank employees used consumer loans from the bank to invest in stock and futures trading, violating industry rules.”
Get smart: Cracking down on internet-based financial companies has been a consistent regulatory theme for 2019. There is even a new-ish leading small group for internet finance focused directly on improving the sector.
Get smarter: Compliance and regulatory costs for these companies are about to jump. Only the big, well-capitalized players will survive.
Caixin:Tencent-Backed WeBank Penalized for Multiple Violations
3. Supply chain rejiggering accelerates
US President Donald Trump’s trade pressure on China is working…sort of.
In recent days, a number of large electronics producers have announced plans to move production out of China (Bloomberg):
- “Inventec plans to move its entire American-bound laptop operation to its home base of Taiwan within two to three months, President Maurice Wu said.”
- “Wu’s company assembles Apple Inc.’s AirPods and produces notebook computers for HP.”
Inventec is far from an isolated example:
- “On Tuesday, Compal Electronics Inc. Chief Executive Officer Martin Wong said his company…has also shifted some notebook lines to Taiwan and was considering investing more in Vietnam should tariff-conflicts persist.”
- “Quanta Computer Inc. Chairman Barry Lam told reporters Tuesday his company is definitely re-locating some business to Southeast Asia, though he didn’t mention a timeframe.”
Hold up, though: These companies are clearly not looking to move production to America. They are primarily moving to new locations in Asia.
And while the numbers are growing – there is yet to be a wholesale change in the industry:
- “Still, few major manufacturers have moved output in truly significant amounts.”
Get smart: US-China decoupling is happening at the margin. But so far, it’s just leading to broader US-Asia coupling.
Bloomberg:Tech Suppliers Shift Away From China Despite Trump Tariff Delay
4.Steel companies curb output
With upstream prices recently slipping into deflation (see August 9 Tip Sheet), some commodity producers are looking to cut output.
The most action has come in the steel sector (Caixin):
- “A group of 19 steel mills in interior China’s Shaanxi, Shanxi, Gansu and Sichuan provinces decided at a meeting Monday to collectively cut their output by 35,000 tons per day.”
- “That would amount to more than 1% of the roughly 2.8 million tons the country produces each day.”
That meeting is in line with other cuts from around the country:
- “On Tuesday, six privately owned steel mills in Eastern China’s Shandong province also rolled out a plan to reduce output by a collective 400,000 tons in the near term.”
- “Six steelmakers in Fujian were preparing to pare back production, affecting an average of 7,850 tons per day.”
Heavy downward price pressure is spurring the output curbs:
- “The main futures contract for the commodity tumbl[ed] 17% this month through Tuesday.”
- “Following the cuts this week, related futures prices rose on anticipation that prices could soon stabilize.”
What to watch: We expect output curbs – whether mandated by regulators or self-imposed – to spread to other upstream industries soon as well.
Caixin:China Steelmakers Cut Output as Prices Sag
5.Liu Kun prepares the government for austerity
On Wednesday, the Ministry of Finance (MoF) published an op-ed by Finance Minister Liu Kun.
Liu’s overarching message: We have a tough road ahead:
- “The Party and government tighten[ing] their belts [should be] the long-term work of fiscal policy.”
He warned that austerity could start to affect the government’s spending on key public services.
- “It is necessary to continuously increase [our] efforts in providing for the people’s livelihood on the basis of economic development.”
- “But [we also should not] make promises that we cannot keep due to our [lack of] financial resources.”
Liu’s article also made clear that MoF is expecting local governments to miss their 2019 budget targets.
- MoF will guide certain local governments to adjust their budgets in H2.
Liu also raised the debt issue.
- “Greater efforts should be made to allow local governments to borrow from legitimate channels, monitor risk, deal with debt, and supervise and hold the [the government] accountable.”
What it means: The government wants to get money to local governments. But they are also wary of reversing hard-won gains to bring local debt under control.
The bottom line: The government’s fiscal position is deteriorating. That means no big fiscal stimulus in H2.
6.Party seeks to improve political education
On Wednesday, the general offices of the Central Committee and State Council jointly released new guidelines to improve the teaching of political theory and ideology.
Some context: All Chinese students must take classes in political theory and ideology from elementary school.
More context: In our experience, most students hate these courses, and tend to view them as a chore to be endured.
Xi Jinping wants to change that. He has been actively seeking to increase and improve political education since 2016.
For Xi, this is a matter of fundamental importance, as reflected in the new guidelines (Gov.cn):
- “Education is of fundamental importance for the country, and fundamental importance for the Party.”
To that end, the new guidelines will:
- Improve political theory teaching materials
- Ensure an adequate number of staff to teach political theoryat universities
- Makesure that teachers ofpolitical theoryare trained and competent
Get smart: The education system is a powerful tool for shaping the national psyche. For instance, the patriotic education campaign begun in the early 1990s has done much to create a generation of ardent nationalists.
Our thought: Promoting nationalism is easy. But getting kids into political ideology is a much tougher lift.
Gov.cn: 中共中央办公厅 国务院办公厅印发《关于深化新时代学校思想政治理论课改革创新的若干意见》