Driving the Day
1. Xi and Putin open China-Russia gas pipeline
On Monday, the 8,000 km Power of Siberia gas pipeline linking Russia and China began operation.
The details (Xinhua):
- “The pipeline is scheduled to provide China with 5 billion cubic meters of Russian gas in 2020 and the amount is expected to increase to 38 billion cubic meters annually from 2024, under a 30-year contract worth 400 billion U.S. dollars signed between the China National Petroleum Corp (CNPC) and Russian gas giant Gazprom in May 2014.”
There is a clear logic for both sides (WSJ):
- “Russia, which has the world’s largest proven gas reserves, needs cash as its economy buckles under Western sanctions.”
- “China, with the world’s second largest economy after the U.S., needs fuel and wants to wean itself off coal.”
Xi Jinping and Russian President Vladimir Putin both joined the launching ceremony by videoconference.
Xi was all praise (CPC People):
- “The pipeline…is a model for the two sides’ deep integration and win-win cooperation.”
Get smart: China’s political and military relations with Russia are strong, but economic links remain relatively weak. The new pipeline will help to change that.
2.Credit rating agencies in for a shakeup – maybe
The financial de-risking campaign officially has a newtarget– ratings agencies.
On Friday, the central bank released new measures to better regulate the industry. They will take effect later this month.
Caixin has the details:
- “The measures…stipulate the responsibilities of credit ratings firms…and give details of punishments and fines that could amount to 50% of income received for a particular project or rating that is found to violate regulations.”
Some context: Everybody knows China’s rating agencies are terrible.
They are getting particular attention now in large part thanks to a high-profile scandal from 2018, when:
- “Dagong Global Credit Rating Co. Ltd. was slapped with a one-year ban on providing credit ratings after it was found to have broken a string of regulations.”
More broadly, regulators want better ratings to help build confidence in the local bond market:
- “Regulators are trying to restore trust and confidence in the credit ratings sector after a wave of corporate bond defaults by companies that had scored relatively high rankings from domestic ratings agencies.”
Our take: We’ve been pretty impressed with the de-risking program so far. But the local ratings system is a mess. Don’t expect swift progress on this front.
Caixin:Regulators Unveil New Rules to Clean Up Credit Ratings
3. New capital rules for banks
Not to be outdone by the central bank – the banking and insurance regulator (CBIRC) also issued new rules on Friday.
These were meant to clarify the types of capital raising instruments banks can employ.
More critically, the regulator laid out how those capital cushions might be used in an emergency (Caixin):
- “Under the CBIRC’s rules, perpetual bonds and preferred stock will be paid at the same time as they are both tier-1 capital replenishment tools.”
- “The commission ruled that when a trigger event occurs, all of the same class of capital instruments shall initiate a write-down or conversion at the same time in proportion to the total amount of capital instruments of that class, before the write-down or conversion of the next level of capital instruments.”
Get smart: There’s a reason the CBIRC is thinking about “trigger events” for banks to tap into their emergency capital. That’s the string of…errrr…”hiccups” we’ve seen among China’s small banks recently.
You can’t put it any plainer than this:
- “Trigger events include those that affect going-concern status and those that make banks unable to survive.”
The bottom line: Regulators are actively preparing for more banking challenges to manifest in 2020.
4.NEVer say NEVer again
On Tuesday, the auto industry regulator (MIIT) released a draft of the New Energy Vehicle (NEV) Industry Development Plan (2021-2035) for public comment.
Some context: MIIT has been working on this plan for about a year and has been under the gun to submit a draft by the end of 2019.
More context: The plan is a follow up to an earlier NEV development plan that runs from 2012-2020.
The big news: The new plan is much less ambitious than its predecessor.
- The previous plan set out numerous specific goals related to market share and technical performance, but the new plan only stipulates that NEVs account for one quarter of new auto sales by 2025.
- The latest draft also gets rid of several targets that were in a previous version fromOctober, including for things like energy usage requirements.
This is important: The plan promises equal treatment for all companies and vows to eliminate local protectionism.
Why that matters: Local government support for domesticmanufacturers has led to a hugely diffuse and inefficient NEV industry.
Get smart: NEV policy will affect a large swathe of the economy. Expect further revisions as various interests try to get their way.
5.Yangtze River Delta to share tax revenue
On Sunday, the Central committee and State Council jointly released a high-level strategic plan aimed at integrating the Yangtze River Delta (YRD) region (see yesterday’s Tip Sheet).
The big news: The YRD directive orders local governments to explore ways to share their tax revenues – for the first time, ever.
But don’t get too excited. Not all tax revenue will be shared. Only a portion of tax revenues collected from new company registrations will be shared.
Local governments are also being asked to poolinvestment funds.
- The Shanghai, Jiangsu, and Zhejiang governments will all put money into a joint fund for investment.
Reality check: The richer localities will push back against supporting less well-off regions.
Get smart: This is worth watching. Burden sharing – and more importantly tax revenue sharing – could be a game changer for regional integration.
6.Study campaign tackles local window dressing
The era of flashy fourth-tier city construction projects is over.
That’s the most recent message fromthe leading small group for the“Stay true to the Party’s founding mission” study campaign.
Some context: The study campaign has been all the rage in Party circles ever since it’s launch at the May Politburo meeting (see June 3 Tip Sheet).
The notice tackles the problem of local “vanity projects,” saying that such projects (The Paper):
- “…not only cause the waste of national financial and social resources, but also facilitate a bad atmosphere of fraud and extravagance.”
Now it’s up to local Party committees and governments at all levels to identify and rectify all such projects.
Get smart: The current study campaign is focused on solving concrete problems – in addition to ideological study.
The Paper: 中央主题教育领导小组发重磅通知：整治政绩工程、面子工程
7.China strikes back over Hong Kong democracy bill
Last week, we notedthat Beijing is hopping mad over US President Donald Trump’s signingof the Hong Kong Human Rights and Democracy Act (see the November 29 Tip Sheet).
Now, Beijing is really sticking it to the US by…sanctioning American NGOs?
Foreign Ministry spokeswoman Hua Chunying promised unspecified sanctions against Freedom House, the National Endowment for Democracy, and Human Rights Watch among others, stating (MoFA):
- “There is a lot of evidence proving that these NGOs have supported anti-China forces to create chaos in Hong Kong, and encouraged them to engage in extreme violent criminal acts and ‘Hong Kong independence’ separatist activities.”
Just for good measure, Chinese officials will also temporarily deny allUS military vessels and aircraft fromdocking or land in Hong Kong.
That’ll teach ‘em!
Get smart: Foreign NGOs, especially those dedicated to democracy and human rights, have virtually no latitude to operate in China as it is. Additional “sanctions” are basically meaningless.
Get smarter: As we predicted, China opted for a (largely symbolic) political response rather than blowing up trade negotiations with the US. That’s a sign that Beijing is eager to get a deal done.