1. Yi Gang on macro policy
China’s central bank (PBoC) governor Yi Gang wrote a letter to the IMF steering committee late last week.
Some context: The letter coincided with the IMF annual meetings in DC.
Yi’s letter is worth reading for what it says about the policy outlook.
He underscored that central banks don’t have the right tools to deal with the growing uncertainties in the global economy:
- “In the current environment of low growth, low interest rates and low inflation, monetary policy space and its effectiveness is limited in many economies.”
Yi was talking about his own institution, which explains why the PBoC has been reticent to open the credit taps.
And that stance is unlikely to change soon:
- “When introducing further stimulus, countries need to pay due attention to the potential negative effects.”
Get smart: Chinese policymakers are still reticent to enact significant monetary stimulus.
That in part explains why banks didn’t lower their prime lending rate in October (Reuters via CNBC):
- “The one-year Loan Prime Rate (LPR) remained at 4.20%, steady from the previous monthly fixing.”
Get smarter: The banks themselves set the LPR, but its movement reflects the general policy trend.
2.Yi Gang on economic opening
Yi Gang didn’t only address economic growth and macro policy (see above).
He also underscored China’s commitment to continue opening the economy:
- “We will further open up the manufacturing sector, the financial sector, and other modern services sectors, take forward the reform of the exchange rate mechanism and the convertibility of the RMB under the capital account…[and] lower overall tariffs voluntarily.”
This is important:
- “Efforts in all these areas will create an environment conducive to long-term stability and development.”
Regular Tip Sheet readers may be tired of us highlighting these promises to further open the economy. But the messaging here is extremely important.
Why? Lots of our clients ask us how genuinely committed Chinese leaders are to opening the financial sector and other parts of the economy.
- Foreign companies have been burned plenty of times before, so they are rightly skeptical.
But it is precisely because foreign governments and businesses are so fed upthat Chinese officials understand they have to make genuine, concrete progress to assuage their concerns.
Get smart: China’s leaders have doubled down on the opening rhetoric, and know they have to make good.
Get smarter: There is a growing consensus that more opening is needed to improve the domestic economy.
Bloomberg:PBOC Governor Yi Says Yuan Level ‘Appropriate’ After Weakening
3. Yi Gang on IMF reform
One last note on Yi Gang’s letter to the IMF.
After addressing the broad macro issues, Yi weighed in on the lack of reform to the IMF’s quota system:
- “We are deeply disappointed that the Fifteenth General Review of Quotas failed to agree on a quota increase and a quota share realignment.”
- “The IMF should continue to push ahead with quota and governance reforms, which are a prerequisite for the IMF to fulfill its mandate.”
Some context: The IMF quota system allocates voting rights and determines each country’s access to the groups’ financing. China and other emerging markets have long wanted the system revamped to give them a bigger say.
Get smart: China’s IMF voting share has long underrepresented its position in the global economy. Although long-awaited voting reforms were implemented in 2016, China still has only the third-largest voting share – behind the US and Japan – despite being the second-largest economy in the world.
Get smarter: Frustration with underrepresentation at traditional multilateral institutions like the IMF is one reason that China has sought to establish its own multilaterals, such as the Asian Infrastructure Investment Bank (AIIB).
What to watch: China will continue to push for a bigger say in international institutions.
4.China complains about tech decoupling
The World Internet Conference kicked off in Wuzhen, Zhejiang on Saturday.
Some context:The annual conference was established in 2014 as a platform to promote China’s approach to internet governance – cyber sovereignty. That’s the idea that countries can treat digital borders like physical borders and control what information comes across them.
Head of the Propaganda Department Huang Kunming gave the keynote address.
Huang’s message (Xinhua):
- “Efforts should be made…to build cyberspace into a shared community that benefits all humanity, Huang said.”
But that doesn’t mean that China is abandoning cyber sovereignty(Bloomberg):
- “We need to respect each country’s approach to Internet development, governance, policy making and their rights to participate in international governance based on mutual trust.”
Huang’s gotbeef with US restrictions on Huawei and other Chinese firms:
- “Some countries restrain and suppress companies from other countries using cyber security as an excuse.”
- “Such moves cast uncertainty and even antagonism over cyberspace.”
Get smart: China’s complaints about its companies not being allowed in the US ringhollow given the way that China has restricted US tech firms from operating in China over the past decade.
The big picture: It increasingly looks like China and the US will develop largely separate and distinct technology ecosystems.
CPC People:第六届世界互联网大会开幕 黄坤明宣读习近平主席贺信并发表主旨演讲
Xinhua:6th World Internet Conference opens in China’s Zhejiang
Bloomberg:China Calls for Tech Collaboration While Criticizing U.S. Action
5.Li and Han cozy up to MNCs
By now, you know that Chinese officials are desperate to counter the narrative that China is an inhospitable place for foreign business(see entry #2).
Premier Li Keqiang and Executive Vice Premier Han Zheng kept beating the drum over the weekend.
On Friday, Li met with the International Advisory Committee on Advanced Manufacturing comprised of business leaders from major MNCs.
Friday’s lucky participants included (Gov.cn):
- Schneider Electric
- Rolls Royce
- China’s “healthy development” would create vast new opportunities for MNCs.
- Foreign companies are essential to improving China’s advanced manufacturing sector.
And you’re not gonna believe this, but…
- Li touted the mutual benefits of win-win cooperation.
On Sunday, Han Zheng reiterated Li’s message at the Qingdao Multinationals Summit, where he:
- Acknowledged the positive role that MNCs have played in China’s development
- Pledged continued reduction of tariffs and non-tariff barriers
Get smart: Both the committee and summit are new initiatives. China is trying to send a clear message that it is open for business.
Get smarter: Ironically, despite a trade war with the US and increased frictions with European countries, there’s arguably never been a better time to invest in China.
Gov.cn:Premier: China welcomes advanced manufacturing
Gov.cn:Vice-premier stresses deepened cooperation with multinationals
6.Liu He implies no stimulus
On Saturday, Vice Premier Liu He delivered a speech at the opening ceremony of the 2019 World VR [virtual reality]Industry Conferencein Nanchang, Jiangxi.
Liu used the occasion to discuss his views on the economy.
He identified three drivers behind the economic downturn:
- Economic growth is shifting to a lower gear.
- Ongoing structural adjustments are painful.
- The economy is still digesting the effects of previous stimulus policies.
Get smart: The last point is important. It is yet another clear signal that Beijing will not resort to its old trick of using large-scale stimulus to pump up short-term growth.
Gov.cn:Vice-premier Liu He stresses sound development of VR industry
7.No end in sight for the trade war
This isn’t good.
While speaking at the VR conference on Saturday (see previous entry), Vice Premier Liu He more or less said that there is no end in sight for the trade war.
The key statement:
- Instead of calling for an end to the trade war, Liu said that “preventing the trade war from escalating” is the current aim.
Liu also reminded everyone that the “mini deal” agreed on October 11 (see October 14 Tip Sheet) is still not finalized.
- Instead, he said that the latest round of talks “achieved substantial progress” and built “a key foundation for signing a phased agreement.”
Get smart: Permanent tariffs and increased economic tensions between China and the US increasingly look like the new normal.
8. Talking tough on Taiwan
On Friday, the CISM World Military Games – aka the “Military Olympics” – kicked off in central China’s Wuhan.
The top sportsman himself, Xi Jinping, attended the games and offered an uplifting message (Xinhua 1):
- “Let the ‘sunshine of sports’ dispel the shadow of war, foster communications between different cultures, and bring together people’s hearts for peace.”
Up in Beijing, top general – and Politburo member – Xu Qiliang had a similarly rosy message (Gov.cn):
- “Asia-Pacific needs a peaceful environment and the world needs a stable Asia-Pacific.”
- “[To facilitate] peace and stability [we] need to deepen dialogue and cooperation.”
Xu was speaking at the opening of the Xiangshan Forum on Sunday.
Some context: The forum is China’s homegrown answer tothe Shangri-La Dialogue security forum held annually in Singapore.
Defense Minister Wei Fenghe was a bit less sunny (Reuters):
- “China is the only major country in the world that is yet to be completely reunified.”
- “Resolving the Taiwan question so as to realize China’s full reunification is the irresistible trend of the times, China’s greatest national interest, the righteous path to follow and the longing of all Chinese people.”
Get smart: Despite more assertive rhetoric in Beijing, the PRC is not prepared to forcibly retake Taiwan.
Xinhua:Xi Focus: Xi sends message of peace at “Olympics for military”
Reuters:China’s defense minister says resolving ‘Taiwan question’ is greatest national interest
Xiangshan Forum:Beijing Xiangshan Forum
Xinhua:Xiangshan forum to open in Beijing