Driving the Day
1. CEWC tells cadres to prepare for the worst
The three-day Central Economic Work Conference (CEWC) concluded on Thursday.
Some context: The CEWC is an annual gathering of Party leadership that takes place in December and outlines economic policies for the coming year.
The readout strikes a decidedly gloomy tone (Xinhua):
- “Structural, institutional, and cyclical problems are interwoven…and their influence has deepened, creating increased downward pressure on the economy.”
- “Global economic growth continues to slow…and sources of global turbulence and risk have increased markedly.”
Amidst this gloom, the focus for next year will be on “stability” (surprise!):
- This year’s readout mentioned “stability” 31 times, compared to 22 in 2018.
That said, theoverall policy stance has not changed.
- Fiscal policy remains “active.”
- Monetary policy will remain “stable.”
But there are a few tweaks:
- In 2019, active fiscal policy focused on tax cuts and increased government bond issuance, but in 2020 thefocus will shift toefficiency and promoting structural adjustments — although it’s not exactly clear what that means yet.
- In 2019, stable monetary policy was “appropriately loose and appropriately tight,” thefocus in 2020 will turn tobeing more “flexible.”
But this strikes us as the most important line in the readout:
- “We must make contingency plans.”
The bottom line: 2020 looks to be a very difficult year for the economy. The plan for now is to hold tight to the current policy program.
Our take: Policymakers don’t have many good options to address the economy’s challenges. The fact that they are accepting that reality, instead of hitting the panic button, is a good thing.
2.Phase one trade deal looks imminent
On Thursday, US President Donald Trump met with his economic advisors to discuss a phase one trade deal with China.
Reports are that Trump agreed to sign a deal.
In fact, Trumpimplied as muchvia tweet:
- “Getting VERY close to a BIG DEAL with China. They want it, and so do we!”
The Wall Street Journal sketches the outlines of the deal:
- “The U.S. side has offered to slash existing tariff rates by half on roughly $360 billion in Chinese-made goods, in addition to canceling the tariffs on $156 billion in goods that Mr. Trump had threatened to impose on Sunday.”
- “China [will] buy $50 billion worth of agricultural goods in 2020, along with energy and other goods.”
- “Should Beijing fail to make the purchases it has agreed to, original tariff rates would be reimposed.”
That’s not all. China also promises to:
- Improve intellectual property rights protection
- Open the financial sector
- Prevent currency manipulation
Hold up: No deal has been signed yet. So it will be important to see if the following take place:
- “In what [Trump advisor Michael] Pillsbury described as a ‘goodwill gesture,’ the U.S. plans to announce some tariff rate cuts on Friday.”
- “U.S. trade representative Robert Lighthizer and Chinese Ambassador Cui Tiankai are expected to sign at least the outlines of a deal on Friday.”
Our take: The deal – should it become officially official– de-escalates the trade war. But it does not end it. There are still tariffs on hundreds of billions of goods, and no clear path forward on thornier issues.
Ofnote: As of publication time, mum’s the word from Chinese officialdom. They will want an ironclad agreement before going on record that a deal is inked.
3. SOE defaults on dollar bond
This could be big (FT):
- “China’s Tewoo Group has forced investors to take losses on a US dollar bond, marking the largest failure to repay dollar debt by a state-owned company in two decades.”
- “The commodities trader, which is wholly owned by the city government of Tianjin, completed an exchange offer this week that made investors take significant discounts on their holdings in the company’s debt.”
- “The offer was ‘tantamount to a default’, SP Global Ratings said on Thursday.”
Tewoo gave bondholders two options:
- “The first was to take deep discounts on four outstanding bonds — one of which, a $300m bond, matures on Monday.”
- “The other option was to exchange the Tewoo bonds for that of another Tianjin-based state enterprise and accept far lower coupons.”
Get smart: If more SOEs areallowed to default,funding costs willgo up, which will put further downward pressure on the economy.
Get smarter: This is a good thing for China’s economy. It may cause some short-term pain, but subjecting SOEs to more market pressure is the surest way to make them – and the overall economy – more efficient.
4.Beijing’s new cash ‘Cau
The squeaky wheel may get the grease, but the silent SAR gets the fat stacks.
President Xi Jinping will visit Macau next week to celebrate the 20th anniversary of the end of Portuguese rule and the city’s return to China.
Word on the street is that Xi’s bringing some pretty sweet birthday gifts, including:
- Administrative approval for a yuan-denominated stock exchange
- Acceleration of an under-construction RMB settlement center
- Allocation of chunks of adjacent mainland territory to be developed by Macau
It’s pretty clear that this is about creating alternatives to Hong Kong. An anonymous Chinese official explained (Reuters):
- “The financial industry used to be an idea that we reserved for Hong Kong.”
- “We used to give all the favorable policies to Hong Kong. But now we want to diversify it.”
Get smart: Hong Kong, like Rome, wasn’t built in a day. It will be a long time before Macau can rival it as a global financial center.
Reuters:Exclusive: Protest-free Macau to win financial policy rewards from China
5.Local governments to be inspected on law-based governance
On Thursday, the the general office of the Central Commission for Comprehensive Law-based Governance (CCCLBG) announced that it would be sending inspection teams to investigate local governments.
Some context: The CCCLBG was created as part of the MASSIVE Party-state reorganization undertaken in March 2018. It reflects Xi Jinping’s emphasis on creating a more rules-based governance system.
Unsurprisingly, the teams will be evaluating how local governments are progressingon law-based governance.
There are no details on the inspection criteria, but part of theequation includes creating a better business environment (see May 24 Tip Sheet).
Eight provinces will be inspected:
And theseteams are no joke:
- Each groupwill be led by a ministerial-level official.
- Teams will also include other officials, as well as lawyers, scholars, and reporters.
- The teams have been asked to identify problems and research measures to improve law-based governance.
Get smart: Xi Jinping wants a more rules-based political system. But he is also unwilling to create an independent judiciary. The CCCLBG has the unenviable task of trying to square that circle.