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“At a time of China information overload, Trivium’s Tip Sheet routinely picks up on important policy debates and developments that other services miss. For me it is an essential daily brief.”

Tom Mitchell
Beijing Bureau Chief
Financial Times

Friday, October 26, 2018

The Tip Sheet

know china better

DRIVING THE DAY

1. Xi's southern tour ends with a whimper

Xi Jinping has finished his trip to Guangdong and is back in Beijing. Before leaving, he met with top provincial officials on Thursday afternoon. He said that he wanted them to concentrate on four tasks:

  • Deepening reform and opening
  • Promoting high-quality development
  • Making sure that development is balanced and coordinated
  • Strengthening Party leadership

Sound familiar? It should. It's more or less what Xi has been saying for six years.

The bottom line: Xi's trip has disappointed those that were hoping for new initiatives or a change in policy direction.

What we can't stop thinking about: Is there going to be plenum this fall? One year after a Party congress is typically when new economic strategies are laid out. This time five years ago it was all that anybody could talk about. But this year…crickets….

What no plenum would mean: Xi is fine with the current policy direction and sees no reason to change it – or even talk about it.

DRIVING THE DAY, CONT'D

2. No path forward on US-China tensions

Bob Davis and Lingling Wei at The Wall Street Journal have been all over breaking developments in the trade war this year.

Their latest piece underscores that the two sides are still miles apart – not only on substance but even on whether to start talking again at all. Both sides are accusing the other of negotiating in bad faith:

"The U.S. is refusing to resume trade negotiations with China until Beijing comes up with a concrete proposal to address Washington’s complaints about forced technology transfers and other economic issues, officials on both sides of the Pacific said."

That doesn’t bode well:

"The impasse threatens to undermine a meeting between President Trump and President Xi Jinping...scheduled for the end of November at the Group of 20 leaders summit in Buenos Aires."

The Ministry of Commerce is fed up (MofCom):

  • "I want to emphasize that negotiation is mutual, it's not… a one-way street."
  • "The Chinese side has always been sincere about the negotiations."
  • "We hope that the US side will show the same sincerity."

Get smart: A resolution to the trade war is nowhere in sight.

Get smarter: Rather than living and dying on the prospects for each successive meeting, markets would be better served by setting their expectations from a sober assessment of the total lack of common ground between the two sides.

FINANCE & ECONOMICS

3. The latest financial opening moves

China's banking regulator (CBIRC) is making life slightly easier for foreign banks in China. That’s according to new draft regulations released on Thursday and open for comment until November 25. According to the new rules, foreign banks would be able to:

  • Underwrite government bonds
  • Take deposits of RMB 500,000 or more – down from a previous threshold of RMB 1 million, meaning that foreign banks have a wider potential pool of customers
  • Increase the amount of their assets that can be invested outside of low-yielding fixed-term deposits – the requirement used to be that 30% of operational funds should be invested in these low risk instruments
  • Lower their capital adequacy ratios – specifically, foreign banks may be exempt from an 8% capital adequacy ratio if their home country requires a lower ratio

Why it matters: We've consistently argued that China is getting more serious about opening its financial sector. Yes, it's a slow process, and yes, China’s banks will still dominate. But it is happening.

Get smart: The efforts outlined above are meant to treat foreign institutions more like domestic institutions.

FINANCE & ECONOMICS

4. SAFE head talks tough on the RMB

The RMB continues to fall. It's down 1% so far in October and 10.6% from its peak in April.

Head FX regulator Pan Gongsheng explained the depreciation at a press conference this morning. He cited four reasons for the weaker RMB (SCIO):

  • Higher US interest rates
  • Stronger USD
  • Disturbances in international financial markets
  • Trade frictions

And then Pan told everybody to get some perspective:

"Compared with [other currencies], the renminbi…is still a relatively stable currency."

Pan said China has no intention of purposefully weakening the RMB:

"We will not engage in competitive devaluation and will not use the RMB exchange rate as a tool to deal with external disturbances such as trade disputes."

And then Pan went all gangsta:

"To those trying to short the renminbi, we fought a few years ago. ... And we got to know each other very well. ...I think it should be fresh in everyone's memory.”

Get smart: Pan is referring to the 2015-2016 CNY depreciation episode. It cost China a lot in FX reserves, but most investors were caught off guard by how quickly and effectively China was able to shut down the capital account, stop outflows, and defend the currency. Short sellers ultimately got burned.

Get smarter: Pan was the architect of that effort, having just been put into the job in late 2015, and he has all the same tools to do the same thing again.

But, but, but: That doesn't mean the CNY won't continue to depreciate. It simply means the PBoC will manage the process, intervening on occasion so that shorts can't predict the exact timing.

Short the RMB at your own risk.

POLITICS & POLICY

5. Tough talk at the Xiangshan Forum

China's annual high-level security confab, the Xiangshan Forum, is taking place in Beijing. Xi sent a letter to the proceedings on Thursday (Xinhua):

"The global governance system and international order are changing at a faster pace.” One way that the international situation is changing – Sino-US relations are increasingly testy (see Entry 2).

That prickliness was on display in Minister of Defense Wei Fenghe's speech (Reuters):

"The Taiwan issue is related to China's sovereignty and territorial integrity and touches upon China"s core interests. ... On this issue, it is extremely dangerous to repeatedly challenge China’s bottom line. ... If someone tries to separate out Taiwan, China’s military will take the necessary actions at any cost."

Some context: Three days earlier, the US sent warships through the Taiwan Strait.

Another way the world is changing: North Korean vice minister of defense Kim Hyong-ryong was at the forum – and he received a warm welcome.

Get smart: Xi Jinping's talk of a changing international order is a bit trite – but it's also true. It's not clear where the world is heading.

POLITICS & POLICY

6. Rethinking population policy

In 2015, China relaxed its one child policy, and allowed all families to have two children. That led to an uptick in births:

New births were 17.9 million in 2016 – the highest figure since 2000. But births fell to 17. 2 million in 2017, and look set to fall further. That's according to He Dan, head of the China Population and Development Research Center, who paints a grim demographic picture in a recent op-ed (CPPCC Paper):

  • "The population growth rate will gradually decrease from the current 5% to zero growth, and then enter a stage of long-term negative growth."
  • "The elderly population… will reach a peak of 430 million in the late 2050s."
  • "At the same time, the size of the working-age population in China will rapidly decline."

Wei Yunpeng, a population policy official with the National Health Commission says population control policies are likely to be scrapped altogether (Caixin). But Wei admits that it will do little to reverse China’s demographic trends.

The bottom line: Scrapping family planning policies now is too little, too late.

The bigger picture: The rapid aging of the population is the country’s biggest medium- to long-term economic and social challenge.

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