Driving the Day
1. China agrees“phase one” mini-deal with US
On Friday, American and Chinese trade negotiators reportedly agreed to an interim trade deal.
What’s the deal?
The USagreed to forestall new tariffs on Chinese goods that were scheduled for October 15.Butnew levies scheduled for December haven’t yet been called off.
For its part, Chinapromised to:
Significantly increase purchases of USagricultural goods
Implement certain intellectual property protection measures
Make concessions related to currency and the financial services industry
The agreement was characterized as a “phase one” deal by US President Donald Trump. It is meant to de-escalate trade tensions and open the door to a more robust deal going forward.
Get smart: While the agreement is undoubtedly a positive development, the deal does not lower existing tariffs – it only forestalls new tariffs from going into effect. This is stop-gap measure rather than any genuine resolution to the economic disagreements between the two nations.
Get smarter: Ignore the hype, we’re still a long way away from the end of the trade war saga.
Driving the Day, Cont’d
2.China cautious about the mini-deal
At Trivium, we areunimpressed by the “phase one” trade deal. Chinese state media seems similarly unenthused.
Most tellingly: China hasn’t even officially acknowledged the existence of a deal.
Here’s how Xinhua described what happened (Xinhua 1):
- “Both parties made substantial progress in the areas of agriculture, intellectual property protection, foreign exchange rates, financial services, expanded trade cooperation, technology transfer, and dispute resolution.”
- “The two sides also discussed the follow-up negotiation arrangements and agreed to work together in the direction of a final agreement.”
Xinhua was clear that there is much more to be done… (Xinhua 2):
- “There’s a lot of uncertainty around many of the follow-up issues.”
- “We must always maintain sufficient patience and strategic focus.”
…and that we remain far from a final deal (Xinhua 4):
- “Canceling all tariffs… is the ultimate resolution to the trade issues.”
Get smart: The Chinese don’t trust the Americans to honor this mini-deal. So they don’t want to tout its importance just to have it blow up in their face.
Get smarter: The mini-deal is a step in the right direction, but fundamental disagreements between the two countries remain. The likelihood of backsliding is high.
3. Data dump – trade
September trade stats came through early on Monday.
The bottom line: It was a very weak monthfor China’s external sector.
Exports contracted by 0.7% y/y in September – down from a 2.6% increase in August and below expectations for growth of 1.5%.
Imports shrank by 6.2% y/y in September – down from a 2.6% contraction in August and below expectations for a 2.3% decrease.
The trade surplus came in at USD 39.7 billion in September – up from USD 34.8 billion in August and above expectation of USD 34.8 billion.
The trade war with US is taking a toll:
Exports to the US have now dropped 10.7% y/y for the nine months from January to September.
Imports from US declined 26.4% y/y during the sameperiod.
Quick take 1: The continued slowdown in imports reflects the ongoing deceleration in domestic demand.
Quick take 2: Weak exports won’t rebound thanks to the “phase one” trade deal reached over the weekend. If anything the existing tariffs will bite even more over the next two quarters.
Bloomberg:China’s Imports, Exports Both Worse Than Expected in September
CNBC:China’s imports and exports fell more than expected in September
Reuters:China’s nine-month exports to U.S. down 10.7% in dollar terms
4.CSRC announces timeline for lifting of foreign ownership restrictions
This is big.
On Friday, China’s securities regulator (CSRC) released a long-awaited timeline for the removal of foreign ownership restrictions for various types of financial firms.
Some context: We’ve known this reform has been in the works since the CSRC previewed it back in July.
But here’s the fun part: The initial target date was 2021. Now the party is set to begin in 2020.
Foreign firms will be allowed to take full control of:
Futures companies from January 1, 2020
Mutual funds from April 1, 2020
Securities companies from December 1, 2020
But, but, but…don’t get too excited.
Foreign shareholders are first required to gain a 51% share, and then proceed to full ownership by acquiring stakes from smaller shareholders.
And each step will be subject to regulatory approval.
The timing is also interesting.
The announcement came as Donald Trump was set to meet with Chinese vice premier Liu He.
Coincidence? We think not.
Get smart: The lifting of ownership restrictions has long been in the works. There is a clear consensus among policymakers that openingthe financial sector will help improve China’s markets.
Caixin:China to Lift Limits on Foreign Control of Financial Firms Starting Jan. 1
Regulation Asia:CSRC Sets Key Dates for Cancelling Foreign Ownership Limits
5.Xi and Modi agree to talk trade
Xi Jinping spent Friday and Saturday in Chennai, India with Indian Prime Minister Narendra Modi.
The “informal summit” was a reprise of a similar meeting in Wuhan in April 2018 (see May 2, 2018 Tip Sheet).
Here is how Xinhua described the meeting:
“The two leaders, in a friendly and relaxed atmosphere, held a candid and in-depth exchange of views on bilateral relations and major international and regional issues of common concern.”
The two leaders seem to have avoided many of the thornier issues in the relationship, according to Indian foreign secretary Vijay Gokhale (Bloomberg):
“The contentious issues of China’s Huawei 5G network and India’s decision to revoke the special autonomous status of Kashmir were not discussed.”
That’s not to say that the two did not get things done. The two agreed to establish a high-level trade and investment dialogue.
“Chinese vice premier Hu Chunhua and Indian finance minister Nirmala Sitharaman will lead the new mechanism.”
Get smart: China and India see each other as competitors and rivals. But they also know that they have to find ways to manage differences and coexist.
The big picture: The Sino-Indian bilateral relationship may very well be the most important of the 21st century.
Xinhua:Xi makes proposals on China-India ties as meeting with Modi enters 2nd day
China Daily:Xi-Modi informal meeting achieves fruitful results: Chinese vice-FM
Bloomberg:Xi, Modi Agree on New Trade Mechanism at Seaside Talks in India
6.National Energy Commission meets for first time in years
Last Friday, Premier Li Keqiang chaired a meeting of the National Energy Commission (NEC).
Some context: The NEC is China’s top body for coordinating energy policy. It’s headed by Li and executive vice premier Han Zheng (see August 3, 2018 Tip Sheet).
More context: This is only the fourth publicized meeting of the NEC since its establishment in 2010. The last one was in November2016, when it approved the 13th Five-Year-Plan for Energy.
Friday’s meeting focused on energy security:
“To further diversify the energy supply, the country will strengthen domestic oil and gas exploration, deepen international oil and gas cooperation, as well as foster the development of renewable energy such as hydropower and wind power.”
The meeting also approved liberalizing reforms for the sector:
“[We should] widen market access in many areas such as oil and gas exploration and liquified natural gas receiving stations.”
“[We need to] advance the establishment of a market-based energy price mechanism.”
Get smart: China’shigh – and increasing – dependence on foreign oil and gas makes many officials uneasy. Expect more measures to encourage onshore energy production.
Xinhua:China vows to upgrade energy production, consumption, ensure energy security
7.Xi attempts to woo Nepal
Following his hang with Indian Prime Minister NarendraModi (see Entry 5), Xi Jinping traveled to Nepal on Saturday for a two-day state visit.
Some context: Xi’s visit to Nepal is the first by a Chinese president in 23 years.
Meeting with Nepali President Bidya Devi Bhandari, the two Himalayan heavyweights decided to upgrade their relationship. It’s now a:
Strategic Partnership of Cooperation Featuring Ever-lasting Friendship for Development and Prosperity
Sure sounds cozy!
Meeting with co-chairman of the Nepal Communist Party (NCP) Pushpa Kamal Dahal, Xi even used a phrase commonly reserved for China’s northern ally North Korea:
“China and Nepal are bound by mountains and rivers, and stay as close as lips and teeth.”
The two sidessigned a bevy of agreements (Reuters):
“Officials from both sides also signed 20 deals covering trade, water supply and traditional medicines.”
Included were separate deals for a rail link and road link between the two countries.
The geopolitical context:
“China and India jostle for influence over Nepal, the natural buffer between them, and are investing in infrastructure.”
“India accounts for nearly two thirds of Nepal’s trade and is the sole supplier of fuel.”
Get smart: Xi has made concerted efforts to strengthen China’s ties with South Asian countries.
Xinhua:China, Nepal pledge to elevate partnership: joint statement
Xinhua:China, Nepal upgrade ties
Xinhua:Xi meets Nepal Communist Party co-chairman to advance inter-party ties
Reuters:Nepal pushes to end dependency on India with China rail, tunnel deals
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