Driving the Day
1. Terms of phase one deal emerge
On Tuesday, the South China Morning Post scooped the terms of the long-awaited phase one trade deal between the US and China.
According to several US sources, China will agree to purchase an additional USD 200 billion of American goods per year, including (SCMP):
- USD 75 billion of manufactured goods
- USD 50 billion worth of energy
- USD 40 billion of agricultural goods
- USD 35-40 billion worth of services
In return, the US side has pledged to reduce its 15% tariffs on USD 120 billion worth of Chinese goods to 7.5%.
The deal will also contain an enforcement provision, enabling the US to unilaterally reimpose tariffs if China doesn’t live up to its side of the bargain.
Our take: This strikes us as a pretty big concession and may be the reason the Chinese side has so far been mum on the details of the deal.
Red herring alert:
- On Monday night, the US Treasury Department removed China from its list of currency manipulators.
Why that doesn’t matter: The designation was completely symbolic when China was added to the list in August. The removal will have no practical consequence.
Next steps: Vice Premier Liu He will meet US President Donald Trump at the White House on Wednesday to ink the deal.
2.Data dump – trade
Speaking of trade…monthly trade stats for December dropped on Tuesday.
CNBC has the details:
- “In December, dollar-denominated exports rose 7.6% on-year, against a 1.3% drop in November.”
- “December imports were 16.3% higher from a year ago.”
- “Economists…had expected dollar-denominated exports to rise 3.2% on-year and imports to rise 9.6% in the same period.”
Quick take 1: This was the first month that export growth was in positive territory since March 2019. That’s a very welcome development.
Quick take 2: The huge jump in import growth – from just 0.8% y/y growth in November – was largely a base effect, as Chinese imports began slumping in December 2018, making last month’s y/y numbers look rosy.
Get smart: The improvement in trade data continues a string of solid monthly stats that began in early November. And the coming trade deal will further boost sentiment, if not actual economic activity.
What to watch: We still aren’t quite convinced the economy has bottomed out, but if the positive trend in the data continues in coming weeks, we’ll have to update our view. We’ll get monthly and quarterly “hard econ” data later this week.
3. NEV subsidies to stabilize this year
The 2020 China EV100 Forum took place over the weekend.
The hot topic:What to do with subsidies for new energy vehicles (NEVs).
Vice chairman of the central political advisory body (CPPCC) WanGang argued that:
- Financial subsidy policies for NEVs should remain stable in 2020.
- And no adjustments should be made to the technical criteria for subsidy eligibility.
Minister of Industry and Information Technology (MIIT) Miao Wei had a different take, saying that this year’s NEV subsidies will not see “significant reductions.”
Some context: Authorities cut NEV subsidies by more than 70% in 2019. And were expected to cut more in 2020.
Hold up: Abysmal NEV sales in 2019 have caused a rethink, with officials now slowing the pace of subsidy removal.
- NEV production and sales dropped 2.3% y/y and 4% y/y, respectively, in 2019.
- In December 2019, NEV sales fell by a whopping 27.4% y/y.
Get smart: The government is committed to rolling back of NEV subsidies. But different interests are still arguing over the pace of those roll backs.
What to watch: According to Miao, the draft NEV Industry Development Plan 2021-2035 will be finalized and released before mid-year (see December 3 Tip Sheet).
4.Xi urges more oversight ofthe use of power
On Monday, Xi Jinping spoke at the annual plenary meeting of the Party’s anti-corruption watchdog – the Central Commission for Discipline Inspection (CCDI).
These meetings are a big deal: All seven Politburo Standing Committee members were in attendance.
Like every year, the meeting focused on the need to continue the fight against corruption (Xinhua):
- “Party members [should] be soberly aware of the grave, complex, long-term and onerous nature of the anti-corruption fight.”
But Xi also introduced a new priority – oversight of the use of power (Gov.cn):
- “We must ensure that power operates on the right track… and urge fair, lawful, and honest use of power.”
Here’s where it gets tough.
Xi wants officials not to overstep – but also not to skirt their duties:
- “We should not only investigate the abuse of power, but also the dereliction of duty.”
In other words: Don’t do too much, but don’t do too little.
Get smart:Xi is sick of the anti-corruption campaign scaring officials into inaction. But we’re skeptical this meeting will change that.
5.MiC 2025 marches on
On Monday, Li Yizhong, former Minister of Industry and Information Technology, spoke at a big-time forum on manufacturing.
Li’s key message: The real manufacturing bottleneck preventing China from climbing the value chain is not fancy, next-generation technologies, but basic technical capabilities (Sina):
- “The biggest problem [facing Chinese manufacturing] is that basic industries are still weak.
These weaknesses can be found in:
- Basic components
- Basic materials
- Basic technical processes
That’s why policymakers want to boost self-reliance in these areas.
Some context: Improving the basic building blocks of the manufacturing sector is a key component of the Made in China (MiC) 2025 strategy – which has undergirded official efforts to get manufacturing fundamentals up to snuff in ten sectors since 2016.
Li outlined the continuing efforts:
- “China’s self-sufficiency rate in [the production of] key components and materials is only one third. [We plan] to reach 40% by the end of this year and 70% by 2025.”
Get smart: MiC 2025 may have disappeared from public view, but Beijing is still vigorously pursuing the strategy’s underlying objectives.
The big picture: From Chinese leaders’ perspective, abandoning attempts to strengthen domestic manufacturing capabilities is tantamount to ceding the field to developed economies.