Driving the Day
1. Phase one deal on track for mid-January signing
Before the break, we reported that the US and China looked set to ink a phase one trade deal in January (see the December 20 Tip Sheet).
The deal is still on course to be signed this month.
On December 31, US President Donald Trump announced via tweet that the deal would be signed in Washington on January 15 by “high level representatives of China”.
Trump’s tweet caught Beijing off-guard (SCMP):
- “The Chinese side had not expected Trump to make a unilateral announcement about the date, or to say that he would be willing to sign the deal even if President Xi Jinping was not available.”
China has not officially confirmed the Chinese delegation’s visit. But sources report that Vice Premier Liu He will visit Washington from January 13-16.
That’s not all: In the same tweet, Trump claimed that he would be visiting Beijing “at a later date” to begin negotiations on a phase two deal.
Get smart: The prospects for a phase one deal look good, but nothing is certain until the ink is dry.
Get smarter: Given how difficult it has been to get a phase one deal agreed, we don’t expect a phase two deal any time soon – if ever.
SCMP:Donald Trump says he will sign phase one US trade deal with China on January 15
2.PBoC says “Happy New Year” with RRR cut
On Monday morning, the central bank (PBoC) cut banks’ required reserve ratios (RRRs).
Some context: The PBoC announced the cut on January 1. It marks the first RRR cut of 2020, after three cuts in 2019.
- The PBoC estimates the cut will inject RMB 800 billion of long-term cash into the banking system.
- Authorities are pushing banks to be targeted with the fresh cash – channeling it primarily to SMEs.
- The PBoC also indicated that the injection is partly to head off the Chinese New Year cash crunch.
- Authoritieshopethe cut will work to lower funding costs for a broad cross-section of corporate China.
More context: The RRR cut came in the wake of another move to lower funding costs in late December. The PBoC announced that in 2020 it will officially scrap the benchmark lending rate, and require banks to price all floating-rate loans off the new loan prime rate (LPR).
Get smart: We’re picking up where we left off. These moves will lower companies’ cost of capital at the margin – but they aren’t the start of big stimulus or a major change to monetary policy.
3. Central bank unveils 2020 priorities
On Sunday, the People’s Bank of China (PBoC) released a readout of its annual work conference held last week.
The meeting outlined the bank’s top priorities for 2020.
The big takeaway: Financial institutions will continue to be in the crosshairs as regulators press on with the financial de-risking campaign.
Some details (Xinhua):
- “Work will continue in addressing the risks of major financial institutions in accordance with laws and regulations.”
- “China will establish and improve mechanisms regarding the recovery, loss sharing, as well as incentives and constraints of financial institutions.“
- “[The PBoC will advance] the issuance of perpetual bonds by banks for replenishing capital.”
Moreover, the government will continue to keep its eyes on systemically important banks:
- “Assessment on systemically important banks will be conducted.”
Some context:The PBoC released draft criteria for systemically important banks in November (see November 27, 2019 Tip Sheet).
This is new: Fintech got a specific mention in the readout.
- The bank aims to establish and improve basic rules for fintech supervision.
Get smart: Chinese financial institutions will continue to be under pressure in 2020.
Xinhua:China Focus: China’s central bank outlines policy priorities for 2020
4.New national AMC in the works
On December 31, Chinese financial media reported that the country is getting closer to having a fifth asset management company (AMC) which can conduct business nationwide.
That’s according to Li Mei, chairman of state-owned China Galaxy Financial Holdings Company.
In a New Year’s letter, Li revealed that one of China Galaxy’s asset management subsidiaries – Jintou Zhongxin – is in the process of becoming a national AMC.
Some context: China set up its first batch of four AMCs in 1999 – over 20 years ago – to dispose of distressed assets at state-owned banks.
More context: The setup of the fifth AMC has been in the works for almost two years.
Get smart: This is another sign that the government is expecting a rise in distressed assets.
5.Party looks to develop Chengdu and Chongqing
On Friday, Xi Jinping chaired a meeting of the Central Commission for Financial and Economic Affairs (CCFEA).
Some context: The CCFEA is the Party’s top body for deliberating economic strategies.
The meeting focused on two topics (Xinhua):
- “Chinese President Xi Jinping on Friday stressed efforts to enhance ecological protection and high-quality development of the Yellow River basin”
- “[Xi] promote[d] the construction of an economic circle covering the western cities of Chengdu and Chongqing.”
Some context: Chongqing, one of China’s four municipalities, and Chengdu, capital of Sichuan province, are the main economic powerhouses of western China and are close to each other geographically.
Xi’s goal is for Chongqing and Chengdu to become an influential economic hub, technological center, and testing ground for economic reform and opening.
Get smart: This marks the fourth regional development strategy that Xi has launched. The other three are Beijing-Tianjin-Hebei (Jing-Jin-Ji), the Greater Bay Area, and Yangtze River Delta region.
Get smarter: The main challenge of developing a region with two centers is coordination.
6.State Council aims to boost manufacturing sector
The State Council kicked off the new year on Friday with an executive meeting.
Top of the agenda: Developing the manufacturing sector.
Some context: Since August, the Party has been increasingly focused on helping China’s struggling manufacturing sector (see August 28, 2019 Tip Sheet).
We may see some more tax cuts (Gov.cn):
- “To strengthen manufacturing development, work must be done to push forward reform and innovation that improves the business environment, including tax and fee reductions and financial innovation.”
It said that advanced manufacturing – particularly smart and green manufacturing – should be given extra attention.
The meeting specifically singled out the auto industry:
- “Improved measures should be rolled out to boost auto industry development.”
And the need to encourage Chinese homegrown high-quality brands:
- “The government should encourage the supply of industrial products that are diversified, high-quality and well branded.”
Get smart: Chinese officialsarelooking to move the economy up the value chain. They no longer want China to be the workshop of the world – they want it to be the design studio of the world.
What to watch: More detailed policies are likely in the weeks and months to come.
Gov.cn:China to maintain manufacturing growth, upgrade service outsourcing
7.Hong Kong Liaison Office gets new chief
There’s a new top PRC official in Hong Kong.
On Saturday, the government announced that Luo Huining will be taking over as head of the Liaison Office in Hong Kong.
Why that’s weird: Luo has already reached retirement age. Just one week ago, Luo had been appointed deputy director of the legislature’s economic affairs committee, a common assignment for officials after retiring from high office.
Luo replaces Wang Zhimin. Beijing is not happy with the way Hong Kong has been handled over the past year. Wang’s ouster has been rumored for months.
Why Luo got the job: For the past three years, Luo has been top dog in Shanxi province. He is thought to have done a good job dealing with corruption and rebuilding the provincial Party apparatus.
This is notable: Unlike his predecessors, Luo has not focused on Hong Kong affairs previously.
The bottom line: Beijing’s management of Hong Kong has been a disaster. It needs a new approach.
What to watch: Will other top Hong Kong officials also get the ax?