Driving the Day
1. China doubles down on state-led market economy
Coming in at a chunky 18,000 characters, the Fourth Plenum Decisions finally dropped last night.
The Decisions cover 13 areas of governance (see November 1 Tip Sheet).
We were most keen to see the section on the “economic system.”
According to the Decisions, the state has a big role to play in:
- “Building a new state-led mechanism to make breakthroughs in key technologies.”
- “Enhancing the competitiveness, innovation, control, influence and, anti-risk capabilities of the state-owned economy.”
- “Making state-owned capital stronger, better, and bigger.”
But the emphasis on the state economy should – apparently – not be a problem for private enterprises!
- “[We will] create a market environment in which all entities have equal access to resources in accordance with the law, can openly and fairly participate in competition, and are equally protected by law.”
Specifically, the following reforms are in the works:
- Conducting rigorous reviews of policies to ensure fair competition
- Improving property rights protection
- Imposing stricter penalties on IPR infringement
- Enhancing protectionof trade secrets
Get smart: When it comes to state control vs. liberalization, China is finding it increasingly hard to have its cake and eat it too. That said,officials are still going to give it the good ol’ college try.
2.PBoC cuts, to little avail
China’s central bank (PBoC) stepped up its policy support on Tuesday.
Of course, when we say “step,” we mean the baby kind – and the very smallest of babies, at that.
- The PBoC cut the one-year medium-term lending facility (MLF) interest rate by 5 basis points.
- The rate now stands at 3.25% — down from 3.3% previously.
Why it matters: The MLF is a key facility for the PBoC to provide liquidity to the banking system. It also happens to be the benchmark off of which the new loan prime rate (LPR) is calculated (see August 19 Tip Sheet).
The problem: A 5-basis-point cut is virtually meaningless. It will do little to lower the cost of bank financing, and nothing to reduce the cost of loans for corporates.
Still, the cut got markets all excited: They think – for the umpteenth time – that significant easing from the PBoC is finally in train.
Get smart: It’s not gonna happen.
Our take: If the PBoC wants to ease, it should really cut rates. Small adjustments at the margin do nothing to support credit growth, while sending a confusing signal to markets.
3. The CNY’s breakout month
ICYMI: China’s currency is on a tear recently.
In fact, it hit its strongest point since early August on Tuesday.
The FT has the details:
- “The onshore-traded renminbi firmed to Rmb6.9955 per dollar late in the Chinese trading day.”
We’ll give you one guess as to why the CNY is enjoying its current heyday:
- “Trump administration officials [are] debating whether to remove tariffs on $112bn of Chinese goods as a concession to seal a partial agreement that could pause the trade war as early as this month.”
It gets better: Optimism around the “phase one” deal meant October was the best month for the CNY since January.
- The onshore currency appreciated 1.4% in the month – compared to 2.3% in January.
And keep this in mind: The CNY’s solid performance is yet another reason the PBoC is reluctant to ease monetary policy too strongly (see previous entry). The bank won’t want to destabilize the currency now that things are looking good exchange-rate-wise.
Our take: There’s not a ton of upside for the CNY. Good vibes from the trade talks are baked in. And the USD ins’tlikely to depreciate much from here, given that the Fed looks unlikely to cut rates again, for a while.
4.How the Fourth Plenum sausage was made
On Tuesday, the Party released Xi Jinping’s explanation of the Fourth Plenum Decisions (see entry #1).
And luckily, Xi has heard your cries to lay outthe inside scoop. That’s why he broke down the nitty-gritty of thedrafting process.
The juicy details:
In February and March, the Politburo held meetings to decide on the theme of the Fourth Plenum (see September 2 Tip Sheet).
- They also set up a drafting group for the Decisions.
Then, the drafting group sought to collect input from cadres:
- In April, they sent out a call for opinions and suggestions from all departments in all regions.
Next, the group put together a first draft, which was reviewed by the Politburo in September.
Top officials then sent the draft out for more feedback:
- The first draft was circulated to “old comrades” and others within the Party.
- Xi also invited important non-Party individualsto give feedback at a symposium on September 25.
There was a lot of feedback:
- 1,755 suggestions were put forward.
And a lot of revision:
- The drafting group made 283 revisions based on the feedback.
Get Smart: High-level policy goes through a rigorous, structured process, where a lot of voices feed in. That’s one reason high-level policy tends to be so bland. The default is to find wishy-washy language that satisfies all constituencies.
5.Xi and Macron eat steak, do deals
Xi Jinping has spent a lot of time with French President Emmanuel Macron over the past 24 hours.
- On Tuesday night in Shanghai, the two shared some steak and wine (Euronews 1).
- Then the two men – along with their wives – toured Shanghai’s Yuyuan Garden and watched some Chinese Opera (Xinhua 1).
- On Wednesday, the two got down to business, holding talks in Beijing (Xinhua 2).
Details from the talks have yet to be announced.
The two likely reconfirmed their commitment to the Paris Climate Accord (Euronews 2):
- “The French and Chinese presidents are set to sign a text that mentions the ‘irreversibility’ of the Paris climate agreement, which comes just hours after the US made its first formal step to withdraw from the accord.”
And the trip seems to be facilitating some biz-nass (Bloomberg):
- “France expected about forty contracts to be signed during Macron’s state visit in aeronautics, finance, energy, tourism, health and agriculture.”
- “Talks for a potential contract for nuclear engineering group Orano in China were accelerating, [an]official said.”
- “Aircraft engine maker Safran is in advanced talks over a major order.”
- “Societe Generale SA is also considering a fully-owned brokerage in China.”
What to watch: We’ll get more details over the coming day.
Euronews: Macron treats Xi to French wine and steak at Shanghai trade expo
Euronews:Emmanuel Macron and Xi Jinping to agree ‘irreversibility’ of Paris climate accord
Bloomberg:Macron, Xi Pledge to Uphold Free Trade During China Visit
6.“Phase one” deal is gonna happen – probably
The trade war saga continues.
On Monday, reports surfaced that China wantsthe US to drop at least some of its tariffs as a precursor to a “phase one” deal.
Get smart: That’s always been China’s position, and the US looks set to play ball.
State-affiliated social media account Taoran Notes insisted that tariff reductions are crucial to any agreement:
- “China’s core concern…is the elimination of the tariffs already imposed.”
- “Even with a phased agreement, this core concern should be reflected.”
- “Any misjudgment on this issue may lead to repeated negotiations.”
Why China wants more:
- Many on the Chinese side feel they have made too many concessions and that the deal is “not yet balanced.”
- The optics of Xi Jinping going to the US to sign a deal would be politically unpalatable unless the US makes additional concessions.
Again — the US side seems inclined to play ball (FT):
- The Trump administration is reportedly debating whether or not to roll back tariffs on USD 112 billion worth of Chinese goods imposed on September 1.
Get smart: Nothing is a done deal until it’s signed. But prospects for a “phase one” deal look good.