Driving the Day
1. The Corporate Social Credit system is ramping up
The EU Chamber of Commerce and Sinolytics dropped the mic this morning with the joint release of “The Digital Hand: How China’s Social Credit System Conditions Market Actors,” a new report on the buildout of China’s corporate social credit system (SCS).
The key message: it’s time for companies to start prepping for China’s new approach to market regulation.
The Digital Hand includes an interesting take on the SCS as a tool to smooth market entry for foreign companies:
- “China is further opening its market to international players, gradually moving away from hard market access constraints like joint venture requirements, investment catalogues and negative lists.”
- “At the same time, the Corporate SCS is emerging in the background to enhance the government’s ability to steer companies’ behaviour.”
- “The lifting of hard market barriers can, in part, be explained by the government’s growing confidence in its ability to influence companies in [this] more nuanced and targeted way.”
Get smart: The social credit system is coming. Time to get ready.
Go deeper: Do yourself a favor and read the entire EUCCC report, linked below.
Need a social credit primer? In case you missed it, Trivium’s free report, “Understanding China’s Social Credit System,” also walks through SCS basics, exploring the theory behind the system’s construction and its broader implications for companies doing business in China.
EU Chamber of Commerce in China: The Digital Hand: How China’s Social Credit System Conditions Market Actors
Trivium China: Understanding China’s Social Credit System
Finance & Economics
2. PBoC to release crypto ahead of Singles Day
Forbes scoops that China’s central bank (PBoC) could issue its own cryptocurrency to seven financial institutions as early as November 11.
Some context: November 11 is Singles Day in China – the busiest online shopping day of the year.
More context: The PBoC has been working on a cryptocurrency since 2014, and a PBoC official announced it was “close to being out” earlier this month (see August 12 Tip Sheet).
The seven institutions set to test run this thing include:
- Industrial and Commercial Bank of China
- China Construction Bank
- Bank of China
- Agricultural Bank of China
- Union Pay
How it works: The recipient institutions will disperse the crypto to people and businesses, with the ultimate hope that it will spread to spenders internationally through foreign banks.
Get smart: The PBoC’s primary goal here is to cut transaction cuts.
But it’s also looking to beat potential rivals to the punch. The rollout is being expedited because of Facebook’s announcement that it will launch its own digital currency – the Libra.
The bottom line: The PBoC wants to make sure that Libra doesn’t gain traction in China.
Politics & Policy
3. Beijing is increasingly wary of negotiating with Trump
Officials in Beijing are sick of Donald Trump.
That’s according to some great reporting from Bloomberg:
- “After a weekend of confusing signals, Trump’s credibility has become a key obstacle for China to reach a lasting deal with the U.S., according to Chinese officials familiar with the talks who asked not to be identified.”
Officials are increasingly focused on what “no deal” looks like:
- “Only a few negotiators in Beijing see a deal as actually possible ahead of the 2020 U.S. election, they said, in part because it’s dangerous for any official to advise President Xi Jinping to sign a deal that Trump may eventually break.”
- “China has prepared contingency plans in case of a no-deal scenario, three officials said, including putting U.S. companies on its unreliable entity list and stimulating the economy.”
This is not encouraging:
- “Two Chinese officials likened the country’s approach to the U.S. during the Korean War, saying it consisted of fighting while talking, and using fights to speed up talks.”
Quick refresher: Nearly 5 million people died in that war.
The bottom line: There is no end in sight for this trade war. So buckle up!
Bloomberg: Wary of Trump’s Flip-Flops, China Prepares for the Worst on Trade
Politics & Policy
4. Is Xi initiating a new “critical battle?”
In addition to regional development, Monday’s meeting of the Central Commission for Financial and Economic Affairs (CCFEA) also discussed China’s manufacturing sector (see yesterday’s Tip Sheet).
Top leaders found sufficient cause to celebrate:
- China has the biggest manufacturing sector in the world and the only complete industrial value chain.
We’ve heard that line before. Plus, in many ways, Chinese manufacturing is still a triumph of quantity over quality.
That’s why CCFEA meeting said (CPC People):
- “[We must] wage the critical battle to upgrade the industrial foundation and modernize the value chain.”
Xi-Speak 101: The term “critical battle” has been politically charged ever since Xi launched “three critical battles” on pollution, financial risk, and poverty in 2017 (see August 11, 2017 Tip Sheet).
What this means: Upgrading manufacturing is about to become a top policy priority.
Get smart: US sanctions against Huawei and other Chinese companies have revealed how greatly Chinese manufactures depend on foreign technology. Xi sees that as a key vulnerability to address.
What to watch: We expect a major policy initiative on this front to be rolled out in the coming months.
CPC People: 习近平：推动形成优势互补高质量发展的区域经济布局 发挥优势提升产业基础能力和产业链水平
Politics & Policy
5. State Council to boost consumption
On Tuesday, the State Council released new guidelines to boost consumption.
The guidelines are sprawling and include 20 measures covering a range of issues.
The SCMP gives a feel for the measures:
- “The new measures include directing e-commerce companies to partner with factories to customise production designs to improve sales; remodelling struggling department stores; turning old sports stadiums and old factories into shopping malls and entertainment centres; giving facelifts to commercial pedestrian streets; and speeding up the development of convenience store chains.”
Beijing will also try – again – to help the struggling auto market (Gov.cn):
- “Restrictions on car purchases [are] to be eased, in a bid to support auto sales.”
Quick take: We’ve seen a lot of these measures before. They may work at the margin, but don’t expect them to genuinely ramp up consumer spending.
Quick take 2: A lot of this looks like questionable policy. Many of the measures appear market-distorting. And some are pretty vacuous, like this one (Gov.cn):
- “Offline business entities should introduce new business philosophies, technologies, and designs.”
The bottom line: The government wants to address the economic slowdown without resorting to massive stimulus. But they don’t have a lot of good ideas for how to do it.
Politics & Policy
6. Carrie Lam says Hong Kong has protests under control
It’s been a rough couple of months for Hong Kong Chief Executive Carrie Lam. But that didn’t stop her from projecting a confident message during her weekly press conference yesterday.
First, Lam asserted that the Hong Kong government is still in control:
- She said that the government is capable of dealing with the disturbances on its own.
She also called for dialogue:
- Lam revealed that she and two other government officials had met with moderate youth protesters at a closed-door meeting on Sunday.
- She pledged to continue working to build a platform for productive dialogue.
However, she didn’t rule out taking emergency action if the protests intensified (SCMP):
- “All laws in Hong Kong – if they can provide a legal means to stop violence and chaos – the SAR government is responsible for looking into them.”
Get smart: Lam’s message suggests that Beijing will leave Hong Kong to sort out its own mess unless things get well and truly out of control. Imminent intervention by the central government now looks unlikely.
Get smarter: At this stage, it’s hard to see how mere dialogue is going to resolve the underlying issues at the heart of the protest movement.