Driving the Day
1. Trade deal finally inked
Listen closely: Can you hear the heavenly choir singing?
If you can, it’s because everyone in heaven and on earth is celebrating the signing of the phase one US-China trade deal that took place in Washington, DC, Wednesday.
Okay, not really: There’s a pretty big disconnect between how the US administration is playing this and how the Chinese are playing it (see next entry).
The details – the deal includes seven main chapters on:
- Intellectual property
- Technology transfer
- Trade in food and agricultural products
- Financial services
- Macroeconomic policies and exchange rate matters
- Expanding trade
- Bilateral evaluation and dispute resolution
Get smart: On the first two chapters, there is quite a bit of detail – but the Chinese side still was able to keep enough fuzzy language to obscure exactly what the commitments are.
Get smarter: Chapters five and seven havethe most detail – the Chinese side made solid commitments on concrete financial openings and agreed to ramp up purchases of US goods by USD 200 billion this year and next.
The bottom line: Chinese negotiators made a lot more promises than the US. The impact of the deal will depend on China’s follow through.
Driving the Day, Cont’d
2.Trivium’s trade deal quick takes
Our hot takes:
- We are still in a trade war. Tariffs remain levied on hundreds of billions of USD worth of goods.
- A phase two deal looks dead in the water. US President Trump has already said that he might wait until after the November election to negotiate the next phase. More importantly, there is little appetite in China to make concessions on any of the remaining issues.
- Third countries are getting screwed. China’s overall import bill is unlikely to jump by USD 200 billion over the next two years, so increased purchases of US goods will come at the expense of producers in other countries.
- This deals another blow to the multilateral trading system. The world’s two largest economies just bypassed the multilateral rules-based system to negotiate a deal that undermines the principles of free trade.
- China is downplaying the deal. The fact that Liu He – not Xi Jinping – signed the deal sent a strong signal domestically that this is not a big deal. And Chinese officials have said that most of these measures would have happened irrespective of a deal.
- Finally, the deal is a positive for stability. This will serve to halt – or at least slow– economic decoupling. That’s a positive for the global economy and security.
3. Don’t call it a concession
Earlier today, the central bank (PBoC) put out an official statement on the section of the phase one trade deal covering financial services.
The notice restated China’s primary financial opening goals (PBoC):
- “[We want to] broaden market access for financial services…which is consistent with many opening measures introduced in China in the past two years.”
- “In areas that have already been opened, [we will] accept and approve business qualification applications from U.S.-funded institutions according to law.”
- “[We will also] optimize and clarify regulatory rules.”
The PBoC was at pains to point out that the Chinese side didn’t give the US any new openings.
- “The content of the Chinese commitment in the financial services chapter is basically a reaffirmation and elaboration of [existing policy].”
The question: If these aren’t US-specific openings, can financial institutions from other counties get in on the action?
According to Liu He, the answer is yes (Caixin).
- At a press conference after the signing, Liu told reporters thatfinancial market openings in the deal will apply to other countries as well.
The bottom line: The deal doesn’t give US financial institutions special treatment within the Chinese financial sector.
4.Data dump – credit
The more important development for the growth of China’s economy over the past 24 hours was the release of December credit data late on Thursday.
- Total credit growth accelerated for the second consecutive month, but it wasn’t much to write home about – with December growth at 10.69% y/y, compared to 10.67% in November.
- RMB-denominated banks loans looked similar, growing at 12.54% y/y – up a smidge from 12.51% in November.
Stop us if you’ve heard this one before:
- All the major forms of shadow credit remained deep in contractionary territory in the month.
Excuse us while we patourselves on the back:
- Back in Q1 2019 we forecast that total financing would not crack the 11% mark in 2019, as authorities stuck with the de-risking program.
Why it matters: With credit growth barelyinching up, we still aren’t convinced authorities have done enough to stabilize the economy.
Key to remember: The weak credit impulse means that when the economy does stabilize growth won’t accelerate very much – or for very long.
Reuters:China December new bank loans miss forecast, but hits record in 2019
5.Banking rules for the digital age
On Monday, Reuters scooped that China is in the final stages of writing up a first set of rules for online-only banks.
The new guidelines aim to:
- Minimize risk in the financial sector
- Attract players to the sector – including foreign lenders
Some context: Since 2014, only four online-only banks have gained regulatory approval:
- WeBank (backed by Tencent)
- MYbank (Alibaba)
- AiBank (Baidu)
- China Citic Bank Corp Ltd.
So far, they’re small potatoes – together accounting for a mere 0.15% of China’s total banking assets.
Apparently, these talks have been underway for a while:
- “About a dozen groups including foreigners are in talks with Chinese regulators over the new rules and have shown interest in launching digital banking operations.”
Under the new rules, foreign lenders can:
- Team up with tech firms for independent digital banking platforms
- Own a majority stakein online-only ventures
Get smart: Foreign lenders have struggled to make money in domestic retail banking. Getting the jump on the fintech space could be yet another incentive for these companies to ramp up investment in their China businesses.
What to watch: This is the first comprehensive move to standardize oversight of the digital banking sector. Expect more action in this space in the months to come.
6.Li convenes expert panel
On Wednesday, Premier Li Keqiang met with experts in a range of fields to get their feedback on the State Council’s Government Work Report.
Some context: This meeting occurs every year and serves as a policymaking brain trust, allowing the Party to get buy-in on its policies from business leaders, academics, entrepreneurs, legal experts. etc.
This year, the luminaries in attendance included:
- Gao Peiyong, vice president of the Chinese Academy of Social Sciences
- Zhong Zhengsheng, chief economist at Caixin’s think tank
- Lei Jun, CEO of Xiaomi
- Zhang Xiaolun, chairman of Sinomach
In a departure from previous years, state media didn’t report what topics the attendees raised.
- Why not? We don’t know.
Luckily, Premier Li brought enough verbiage to share with the class (Gov.cn):
- “The government needs to tighten its belt and significantly shrink general expenditures, particularly those for administrative purposes.”
- “Tax and fee reductions, including those of an institutional nature, should lead to tangible long-term results.”
Get smart: Li’s comments were yet another signal that the country should brace for a tough 2020.
Get smarter: The combination of tax cuts and strict fiscal discipline essentially mean that the government will need to do more with less. No easy task.