Driving the Day
1. China agrees phase one deal with US
On Friday, China and the US announced that – at long last – they have agreed to a phase one trade deal.
Here’s what China gets (FT):
- “The US agreed not to proceed with a new escalation in levies on $156bn of Chinese consumer goods planned for Sunday, and it will cut tariffs on $120bn of Chinese imports that were introduced in September to 7.5 per cent from 15 per cent.”
And here’s what China will give in return (USTR 2):
- “China [will] import various U.S. goods and services over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion.”
China also agreed to:
- Better protect intellectual property
- Not force technology transfers
- Remove barriers to importsof US agricultural goods
- Open its financial services sector
- Not engage in currency manipulation
Get smart: None of those are big “gives” by China, but rather things that they would largely be doing anyway.
Oh, and before you get too excited, check this out (Xinhua 2):
- “Both sides have agreed to complete their necessary procedures including legal review, translation and proofreading as soon as possible, and discuss the detailed arrangements for officially signing the agreement.”
What that means: They haven’t actually finalized the deal.
Get smart: The deal is good for both economies – and the world. But it’s not exactly historic.
Get smarter: We are still in a trade war, with tariffs on hundreds of billions of goods.
Get even smarter: Considering how difficult it was to get to this relatively lacklusterphase one deal, nobody should expect a phase two deal any time soon – if ever.
Xinhua:China, U.S. agree on text of phase one trade deal
USTR:United States and China Reach Phase One Trade Agreement
USTR:AGREEMENT BETWEEN THE UNITED STATES OF AMERICA AND THE PEOPLE’S REPUBLIC OF CHINA
FT:US and China strike ‘phase one’ deal to de-escalate trade war
2.Data dump – industry and consumption
The stats bureau issued monthly econ data for November on Monday.
- Industrial production grew by 6.2% y/y – up from 4.7% in October and the highest print since June.
- Retail sales of consumer goods grew by 8% y/y – up from 7.2% in October and the highest print since June.
Quick take 1: On the industrial side, part of the uptick appears to have been a snapback from an extremely weak October print – as opposed to a genuine acceleration in the growth trend.
- The steel industry led the improvement in industrial growth, which seems puzzling given no significant rebound in property or infrastructure spending (see next entry). So this looks like a monthly blip.
Quick take 2: An ever-more-popular Alibaba Singles Day sales event (on 11/11) looks to have pumped up consumer growth last month.
Get smart: The headline numbers look good, but we aren’t convinced the economy has turned a corner.
3. Data dump – investment
The stats bureau also released monthly fixed asset investment (FAI) data for November on Monday morning.
The headline number improved:
- Headline FAI grew by 5.2% y/y – up from 3.4% in October and the highest print since June.
But it’s hard to see what drove that improvement. All major sub-components of investment are stuck in low gear:
- Manufacturing investment continued to decelerate, growing by just 1.6% y/y – down from 3.4% in October.
- Infrastructure investment inched up, growing by 2.3% y/y – compared to 2% in October.
- Property investment continued to struggle, growing at 8.4% y/y – down from 8.8% in October, and the slowest growth rate since December 2018.
Hmmm. Those three categories make up 85% of total investment. And they all decelerated or saw negligible improvement.
So it’s hard to say what drove the headline improvement. As of publication time, we are still stumped.
The bottom line: November’s headline numbers show a rosier picture than the more detailed data can support.
4.Xi meets Micronesian president
On Friday, Xi Jinping held talks with the President of the Federated States of Micronesia (FSM) David Panuelo in Beijing.
Another Taiwan ally in the Pacific jumping ship, you ask?
Trick question! The FSM has had ties with the PRCfor 30 years.
Like many leaders from the South Pacificthese days, Panuelo came looking for some of that Chinese casheesh(RNZ):
- An official FSM government statement said Panuelo and Xi would discuss Micronesia’s “request for additional Chinese infrastructural assistance.”
Xi seemed game (Xinhua):
- “China is willing to offer economic and technical assistance to Micronesia.”
Get smart: Micronesia maintains an agreement with Washington whereby the US military has exclusive access to the country’s airspace and territorial waters. But that didn’t stop it from signing on to Xi’s Belt and Road Initiative in 2017.
Get smarter: China’s dollar diplomacy has been remarkably effective in the Pacific.
Xinhua:Xi holds talks with Micronesian president
SCMP:Mike Pompeo’s visit to Micronesia highlights US anxiety about rising Chinese influence in Pacific
China Daily:Xi urges closer ties with Micronesia
5.State Council clarifies Foreign Investment Law
The State Council held its weekly meeting lastThursday.
Top of the agenda: Approving draft implementingregulations for the new Foreign Investment Law (FIL), which comes into effect on January 1, 2020.
Some context: The legislature passed the FIL in March, but the law was vague on many key points (see March 18 Tip Sheet).
The regulations passed Thursday should help to clarify some grey areas.
Some of the main provisions (Gov.cn 3):
- “The regulation requires equal treatment of domestic and foreign businesses regarding government funding, land supply and tax and fee cuts.”
- “Foreign companies are entitled to equal participation in the formulation and revision of national, industrial and local standards.”
- “Government and its departments should not stop foreign companies from entering the market for government procurement.”
- “The regulation … clearly stipulates that foreign investment will not be expropriated by the State.”
- “Forced technology transfer requirements, either through administrative license or penalty, or in disguised forms…are prohibited.”
Our take: Stabilizing foreign investment is a key task for next year. That means officials will be incentivized to follow through on these regulations.
What to watch: The regulations should be officially published in the coming days.
Gov.cn:China to further improve environment for foreign investment