Driving the Day
1. Hopes rise for meager mini trade deal
The latest round of trade negotiations with the US kicked off on Thursday in DC.
The two sides met for eight hours on Thursday. Negotiations continue on Friday.
Chinese lead negotiator, Vice Premier Liu He, and his US counterparts, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, were all smiles after Thursday’stalks.
There are rumblings that the negotiations could lead to a “mini-deal.”
The Americans may agree to some of the following:
- Notraise tariffs further
- Grant licenses to US companies to sell equipment to Huawei
- Lift sanctions on Chinese shipping company Dalian COSCO
The Chinese may agree to:
- Increase purchases of American pork, soy, and wheat
- Commit to not engage in competitive currency devaluation
- Better protect intellectual property rights
US President Donald Trump said he was pleased with Thursday’s talks:
- “We had a very, very good negotiation.”
- “I think it’s going really well.”
Other US officials were similarly upbeat (Reuters):
- “A White House official said talks had gone very well, ‘probably better than expected.'”
What to watch: Liu He is scheduled to meet with Trump on Friday. That meeting should give a good read on how the negotiations are going.
Get smart: The proposed mini deal is really meager; none of the proposed measures represent real concessions from either side.
The bigger picture: We are miles away from a long-term, comprehensive deal.
Xinhua: China, U.S. start new round of trade talks in Washington
Reuters: Day 1 of U.S.-China trade talks ends with hopes for limited deal
Financial Times: What’s on the table for a US-China trade mini-deal
2.Local economies under pressure
China’s headline GDP growth looks strong.
But a look at provincial data tells a more worrying story.
Following a mid-August call from the Ministry of Finance (see August 15 Tip Sheet), provincial governments have started to adjust down annual fiscal revenue forecasts. One example (Caixin):
- In September, Hubei reduced it’s expected revenue growth from 8% to about 1.5%.
Lower levels of government show even steeper reductions – some with downward adjustments of as much as 25 percentage points.
The drop in government revenues reflects the fact that businesses are hurting.
The Zhejiang statistics bureau recently posted some bleak data:
- Enterprise profits are down 1.7% nationally so far this year.
And things look particularly bad in some of the country’s most important provinces:
- Profits in Beijing are down 14.4%.
- Profits in Shanghai are down 19.6%.
- Profits in Jiangsu are down 3.5%.
Get smart: While the trade war isn’t helping, the main causes of the slowdown are domestic. Arguably the biggest driver is the central government’s financial de-risking campaign.
3. Local governments investing in questionable projects
In September, the State Council decided to move up issuance to Q4 of this year of up to RMB 1.3 trillion of government special bonds earmarked for 2020.
Needless to say – local governments are stoked.
They have been working tirelessly to get their investment projects onto the National Development and Reform Commission’s (NDRC) approval list.
Yunnan Governor Ruan Chengfa summarized the feeling well (Caixin):
- “[It’s] a once in a thousand years opportunity to expand effective investment.”
So far, the NDRC has two lists of projects ready to go.
But there’s a problem. According to a local finance bureau official in Zhejiang (21st Century Biz):
- “In some places, they rarely consider whether they can pay back [the bonds] in the future.”
Some local governments are even faking applications by inflating expected revenue from the projects.
That’s because local governments are not accountable:
- City- and county-level governments submit projects to provincial governments for review.
- Provincial governments then submit the projects to the NDRC.
- If something goes wrong, the blame is on the provincial government for not catching it.
Get smart: Getting the balance right between boosting investments and containing fiscal risks is no easy task.
4.MSCI moves to add STAR Market stocks to indexes
Yesterday, MSCI announced that it plans to add stocks from China’s STAR Market to a global index beginning next month.
Some context: Informally known as China’s Nasdaq, the Shanghai Stock Exchange’s high-tech Star Market debuted in July(see July 23 Tip Sheet).
More context: MSCI began including Chinese A-shares in its indexesin June 2018. RivalsFTSE Russell and SP added A-shares to their indexes in June and September 2019, respectively.
According to a statement by MSCI, STAR Market securities will be eligible for inclusion in the MSCI Global Investable Market Indexes (GIMI), provided they meet the necessary minimum requirements.
Why it matters: Inclusion in the index means more capital inflows to China — something which has been high on the government’s financial to-do list.
Get smart: Trade war or no, China’s financial opening and global integration are proceeding (cautiously) apace.
5.NBA gets a reprieve
The NBA has been under intense pressure in China following a tweet by the general manager of the Houston Rockets supporting protests in Hong Kong on Friday October 4 (see Tuesday’s Tip Sheet).
Now the authorities are trying to calm the situation.
News outlets have been told to dial down their coverage.
Global Timeseditor Hu Xijin said (NYT):
- “I think this issue will gradually de-escalate — Global Times will not push to keep it hot.”
Foreign ministry spokesperson Geng Shuang also took a softer stance on Thursday.
Instead of repeating talking points about the need for foreign companies to abide by Chinese law, Geng said (MoFA):
- “Foreign institutions and individuals are welcome to China for exchange and cooperation.”
This is positive: An NBA preseason gamein Shanghai went aheadon Thursday.
Get smart: Given its wide appeal – and the lack of an alternative – the NBA is a special case. Foreign companies will continue to come under increasing pressure to hew to Beijing’s political line.