Driving the Day
1. Trade war – here we go again…
The topsy-turvy world of US-China economic relations was on full display over the past three days.
In fact, we didn’t think this was possible, but things actually got both topsier and turvier.
- On Friday evening in Beijing – the State Council announced a new round of retaliatory tariffs on USD 75 billion worth of US exports, to be implemented in September and December (in line with the latest US tariff impositions).
- They also noted that China would reimpose 25% punitive tariffs on US autos and auto parts, which had previously been suspended.
US President Donald Trump was not happy. On Friday in Washington, Trump went on an epic tweet storm:
- He announced that the newest tariffs on USD 300 billion of Chinese goods will be 15% instead of 10%.
- And the existing 25% tariffs on USD 250 billion of Chinese goods will increase to 30% on October 1.
- Trump then “ordered” US companies to “immediately start looking for an alternative to China.”
Of course, none of that was before Trump tweeted the (presumably) rhetorical question:
- “Who is our bigger enemy, [Federal Reserve Chairman] Jay Powell or Chairman Xi?”
Get smart: The. fun. don’t. stop. there. (see next entry).
Politico: Trump hits China with new tariffs in trade war escalation
Driving the Day, cont’d.
Over the weekend at the G7 meetings in France, Trump said “yes” when reporters asked if he was having second thoughts about his Friday tariff announcement – since it sent the US stock market slumping over 600 points.
Then, right on cue, the White House put out a statement saying that Trump was decidedly not having second thoughts.
Now it’s Monday, and we’re still rolling – Trump told reporters that Chinese officials are asking to get back to negotiations (Bloomberg):
- “’China called last night our trade people and said let’s get back to the table,’ Trump said…‘They understand how life works.’”
Of course: A spokesman for China’s foreign ministry said he wasn’t aware of any US-China weekend phone calls.
Finally, just as we were going to press, Trump tweeted:
- “Great respect for the fact that President Xi his Representatives want ‘calm resolution.’”
- “So impressed that they are willing to come out state the facts so accurately. This is why he is a great leader representing a great country. Talks are continuing!”
Get smart: Is it Friday yet? We need a stiff drink.
Get smarter: No one knows how this ends. But a resolution in 2019 is highly unlikely.
3. PBoC announces mortgage rules for the LPR
Over the weekend, the central bank (PBoC) clarified how its new lending prime rate (LPR) mechanism willaffect mortgage loans.
Some context: The PBoC originally excluded mortgage rates when the new methodology was introduced last week. (see August 21 Tip Sheet)
More context: Regulators want to keep mortgage rates relatively high, while lowering rates on loans more broadly.
To do that, authorities laid out the following rules that will go into effect on October 8:
- Mortgage rates for first-time home buyers cannot be lower than the most recently published LPR.
- Mortgage rates for second-time home buyers and for commercial property must be at least 60 basis points above the most recently published LPR.
- Provincial offices of the PBoC can determine a higher floor for mortgage rates based on local conditions.
In addition, the PBoC stipulated that for floating rate loans, interest rates can only be adjusted or renegotiated at a 12-month frequency or longer.
The bottom line: This setup should mean that interest rates on mortgages don’t move that much as the LPR system is implemented. That’s by design.
Get smart: Authorities are committed to keeping the property market in check.
4.China’s fiscal conditions deteriorate further
On Friday, Minister of Finance Liu Kun gave an update on China’s current fiscal situation to the national legislature (NPC).
The news is not encouraging.
Fiscal spending continued to outpace revenues in the first seven months of 2019:
- Budgetary revenue grew by 3.1% y/y – down from 10% growth in in the first seven months 2018.
- Expenditures grew by 9.9% y/y – up from 7.3% in the first seven months of 2018.
The situation in the provinces is also deteriorating:
- 11 provinces saw fiscal revenues contract through July – compared with four last year.
What’s more, local governments don’t have much more space to borrow.
- 83% of the local government bond issuance quota has already been usedfor the year.
Despite these constraints, MoF remains committed to tax cuts. But to manage the fiscal shortfall, the ministry is requiring various government bodies to:
- Sell assets and puttogether carryover funds
- Stop any unnecessary expenditures
Get smart: The government’s fiscal position is deteriorating. That means no big fiscal stimulus in H2 2019.
Get smarter: We might get an increase in the local government bond quota (seeAugust 20Tip Sheet), but that will be more of a stopgap than a pump prime.
5.Liu He calls for calm
As US-China trade tensions ratchet up again (see entries #1 and #2), China’s chief trade negotiator, Vice Premier Liu He, is in Chongqing for the 2019 Smart China Expo.
Unsurprisingly, Liu hastrade war on the brain.
Liu called for cooler heads to prevail (Xinhua):
- “China…is willing to resolve problems through consultation and cooperation in a calm manner and resolutely opposes the escalation of the trade war.”
Liu also signaled China’s openness to American business:
- “China welcomes enterprises from all over the world, including the United States, to invest and operate in China, and will continue to create a good investment environment, protect property rights, and promote the development of smart industries in an open environment.”
Get smart: To us, that reads like Liu is trying to tone down some of the intense rhetoric that followed China’s tariff announcement on Friday night in Beijing.
Our question: Trump was clearly caught off guard by China’s tariff hike on Friday. Were Chinese leaders likewise surprised by Trump’s immediate follow-up tariffs?
Our guess is yes – but they shouldn’t have been.
6.Shots fired in Hong Kong
Tensions flared in Hong Kong once again this past weekend.
On Sunday, three Hong Kong police officers pointed their revolvers at a group of protesters – with one firing awarning shot into the air.
- This is the first time that firearms have been discharged in 12 weeks of protest.
What happened? Police responded to calls that protesters were vandalizing shops in the Tsuen Wan district. The officers were then chased and beaten by protesters wielding metal pipes.
In response, the officers drew their weapons leading to the firing of the warning shot. The officer who fired the shot said that he felthis life had been under threat.
And that’s not all: Earlier in the day, the police had deployed vehicles equipped with water cannons to disperse protesters in the same area.
Get smart: Over the past few weeks, police conduct has become one of the protesters’ biggest grievances. This incident is sure to heighten tensions further.
Get smarter: This weekend’s standoff also highlights how quickly confrontations can escalate and the danger inherent in violent protests.
SCMP:Hong Kong police officer fired warning shot in air because he felt ‘life was threatened’ by protesters attacking him and colleagues with metal pipes
SCMP:Police officer fires gun, water cannon used for first time on protesters in Hong Kong
7.Mainland officialsreaffirm the right to intervene in Hong Kong
On Saturday, some of Beijing’s top advisors on Hong Kong gathered at a symposium in Shenzhen.
Organized by the Chinese Association of Hong Kong and Macau Studies, the event was attended by 40 advisors and political scientists.
Maria Tam Wai-chu, a deputy chairwoman of the NPC Standing Committee’s Basic Law Committee said that Beijing reserved the right to intervene (HK01):
- “Chaos is happening in Hong Kong, and the central government of course can intervene.”
- “Intervention would be to bring [the city] back to order and get ‘one country, two systems’ on the right track.”
So far, so standard.
But some much more striking language came from Wang Zhenmin, a former top legal affairs official in Beijing’s liaison office in Hong Kong (HGH):
- “If Hong Kong is destroyed, the country will of course suffer a lot of damage, but it will eventually be able to overcome it.”
- If ‘one country’ is not respected…and is threatened, insulted, and attacked wantonly, how can there by ‘two systems?’”
Get smart: Beijing thinks it canwithstand Hong Kong’s “destruction.” That’s not a good sign for the city, but it’s alsothe reason that centralofficialswill not rush to intervene in Hong Kong directly.