Driving the Day
1. Fourth Plenum gets started
The Central Committee’s Fourth Plenum kicked off this morning in Beijing (Xinhua):
- “[Xi Jinping] delivered a work report…and explained a draft document of the CPC Central Committee’s decision on some major issues concerning how to uphold and improve the system of socialism with Chinese characteristics and advance the modernization of China’s system and capacity for governance.”
The rub: Details of the reportwere not available. They will not be released until after the plenum ends on October 31.
The focus appears to be on ideology (Reuters):
- “Two Chinese officials who reviewed the draft of the communique said the document was largely political and focused on ideological innovation.”
But pressing issues will also be discussed:
- “Policy insiders say the trade war, China’s slowing economy and Hong Kong will be discussed, even if there is no direct mention of them in the final closing communique.”
The 14th Five-Year Plan is also on the agenda(WSJ):
- “Leaders will discuss their next five-year economic blueprint, according to Chinese officials involved in policy making.”
This could be big: There’s been a lot of chatter of late that the plenum may also designate a successor to Xi.
Our take: We’ll believe it when we see it. We haven’t seen any credible signs that such a move is in the works.
Xinhua:19th CPC Central Committee holds fourth plenary session
Reuters:Amid crises, Xi seems set to uphold Party’s rule at secretive China conclave
WSJ:Beijing Woos U.S. and Other Foreign Companies as Trade War Takes Toll
Straits Times:Talk of Chongqing party chief’s promotion at Fourth Plenum
2.Data dump – industrial profits
On Sunday morning, the National Bureau of Statistics (NBS) dropped the industrial profits data for the first three quarters of 2019.
Surprise, surprise: Things are not good.
- Industrial profits fell by 5.3% y/y in September, down from a 2% contraction in August.
- That brings total industrial profits growth to date this year down to -2.1% y/y.
Xinhua was quick to point out that it’s not all bad:
- Industrial profits grew 6.3% y/y for high-tech manufacturing industries from January to September.
- Industrial profits grew 4.6% for strategic emerging industries over the same period.
Get smart: To put it simply, declining corporate profits are not good. These data are further proof that the economy continues to decelerate.
Get smarter: With global demand looking weak, no end in sight for the trade war, and the government still refraining from large-scale stimulus, the economy is not set to pick up in the near term.
Reuters:China’s industrial profits fall 5.3% in Sept as trade war toll mounts
3. Xi and Bolsonaro were “born to walk together,” but not on Belt or Road
On Friday, Xi held talks with Brazilian president Jair Bolsonaro, who was in town for a three-day state visit.
Some context: China has been Brazil’s biggest trading partner for over a decade. But the relationship has been a bit shaky since Bolsonaro came to power in January.
Xi was all about getting the relationship back on track (Xinhua):
- “China’s policy to develop relations with Brazil from a strategic height and long-term perspective remains unchanged.”
Bolsonaro was not unreceptive:
- “Brazil will open its market to welcome Chinese enterprises to invest in infrastructure construction and oil and gas development.”
But not everything is copacetic: Bolsonaro refused to endorse Xi’s Belt and Road Initiative.
Get smart: Brazil is one of the big winners of the ongoing trade war, as Brazilian exporters benefit from Chinese tariffs on US soybeans.
What to watch: Xi gets a second attempt to get Bolsonaro hooked on the BRI in a few weeks when he travels to South America for the BRICS summit in Brazil and the Asia-Pacific Economic Forum in Chile.
4.Xi Jinping boosts blockchain
You know your annoying friend who never shuts up about blockchain?
Well, his name is Xi Jinping and he wants China to develop strong capabilities in blockchain and other “core technologies”.
Speaking at a Politburo study session on October 25, Xi emphasized the need for improving China’s homegrown technological capabilities (CoinDesk):
- “[We must]…focus on a number of key core technologies, and accelerate the development of blockchain technology and industrial innovation.”
He pointed out that blockchain is at the crux of several key technologies that, if mastered, could give China a major competitive edge, including:
- Digital finance
- Intelligent manufacturing
- The internet of things
- Artificial intelligence
- Big data
Xi also introduced the idea of “Blockchain+”, a plan to use the technology for a range of social applications. Like a digital Lei Feng, blockchain could eventually serve the people in the areas of:
- Pension management
- Poverty alleviation
- Food safety
- Public welfare
Get smart: Ever since the US started putting the screws to Chinese tech companies, Beijing has become obsessed with technological self-reliance.
Get smarter: People in the West like blockchain partially because it’s decentralized. You can bet your bottom bitcoin that Xi’s version won’t be.
Xinhua:习近平在中央政治局第十八次集体学习时强调 把区块链作为核心技术自主创新重要突破口 加快推动区块链技术和产业创新发展
CoinDesk:President Xi Says China Should ‘Seize Opportunity’ to Adopt Blockchain
SCMP:Chinese President Xi Jinping calls for more research, investment into blockchain technology
5.Legislature passes Cryptography Law
On Saturday, the legislature concluded its bi-monthly session.
The big news: The meeting adopted a new Cryptography Law.
The law initiates a more liberal attitude towards commercial cryptography (NPC Observer):
- “It explicitly provides for the equal treatment of commercial cryptography developed both overseas and domestically and forbids the forced transfer of commercial cryptography technology in connection with foreign investments.”
But there are A LOT of caveats, including:
- “[The law] requires an import license for commercial cryptography that implicates ‘national security or the public interest’ and that ‘provides an encryption-protection function.’”
- “It also imposes export control[s] on commercial cryptography that implicates national security, the public interest, or China’s international obligations.”
- “Further, the Law requires that commercial cryptography that is classified as Critical Network Equipment or Specialized Network Security Product be tested and certified in accordance with theCybersecurity Law.”
- ‘[It also requires] that operators of Critical Information Infrastructure submit to national security review…if their purchase of commercial-cryptography products or services may affect national security.
The timeline: Thelaw takes effect on January 1, 2020.
Get smart: The Chinese government is keen to support the development of cryptography technologies that will help the government to keep information secure – not hide information from the government.
6.Provincial leadership reshuffle gets underway
On Saturday, the legislature also approved the appointment of Li Jiheng as Minister of Civil Affairs. Li replaces Huang Shuxian, who stepped down due to reaching retirement age.
Li had been serving as Party secretary of Inner Mongolia since August 2016.
Li’s promotion has had a domino effect:
- Li was replaced in Inner Mongolia by Shi Taifeng, who had been serving as Party secretary of Ningxia.
- Shi was then replaced in Ningxia by Chen Run’er, who had been serving as governor of Henan.
Get smart: For Li, Shi, and Chen, these positions are likely to be their last. All three will reach retirement age in the next three years and are unlikely to be promoted further.
Why it matters: These moves are just the beginning. We should see a further reshuffling ofprovincial leaders in the months ahead.
What to watch: The Party secretaries of Yunnan and Guizhou are both due to step down soon.
7.Trade talks with US make progress
On Friday, Vice Premier Liu He spoke by phone with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin.
Things seem to be moving along, according to Chinese official reporting (Gov.cn):
- “In the phone talks, the two sides agreed to appropriately address each other’s core concerns, and confirmed that the technical consultations on part of the text of the agreement have been basically completed.”
The two sides also agreed to sellchicken to each other:
- “They also confirmed that the two sides have reached consensus on US importing Chinese-made cooked poultry meat, the equivalence of catfish product supervision systems, China’s lifting of the ban on US poultry exports, as well as on applying the public health information system of meat products.”
Our take: It’s positive that the two sides are keen to show progress. But poultry exports and catfish supervision are hardly the trickiest items on the agenda. We still remain skeptical that a comprehensive deal can be completed.
Gov.cn:Chinese, US chief trade negotiators hold phone talks