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Wednesday, October 10, 2018

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"The allegations are groundless speculation and irresponsible."

- Lu Kang, Ministry of Foreign Affairs spokesman

Some context: Lu made those remarks at a press conference on Tuesday when asked about America’s claim that China is devaluing its currency for economic gain. The renewed focus on the exchange rate is one of many sticking points in any effort to de-escalate tensions. More in the Tip Sheet below. 

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1. Currency back in focus in US-China negotiations

Every element of the US-China relationship is under the microscope these days.

This week, US Treasury Secretary Steve Mnuchin warned the Chinese against competitive currency devaluation and told the Financial Times that he wants to insert the currency issue into trade discussions.

On Tuesday, a Ministry of Foreign Affairs spokesman was asked about the renewed interest in China’s currency (Caixin):

  • "We have no intention of stimulating exports through a competitive devaluation of the currency, nor of using the RMB exchange rate as a tool to deal with trade or other economic disputes."
He also took a shot at the US, which now seems par for the course:
  • "I would also like to say that the allegations are groundless speculation and irresponsible."

Get smart: China is not purposefully devaluing the currency – it is an outcome of the trade war and diverging monetary policy in the two countries. If anything, China is trying to contain currency weakness.

Get smarter: China will NEVER agree to a Plaza Accord-type agreement to strengthen the CNY against the dollar – policymakers view that agreement as a direct cause of Japan’s economic implosion in the early 1990s.

Caixin: 外交部:不会把人民币汇率作为应对贸易争端的工具
FT: Mnuchin warns China against competitive devaluations of renminbi



2. Why China won’t dump its US treasuries

Speaking of the currency issue – we want to make a public service announcement.

China is not going to sell off its hoard of US Treasuries to influence US interest rates or the US bond market.

That hasn't stopped the idea from being bandied about (NYT):

  • “A growing number of financiers, economists and geopolitical analysts are quietly raising the prospect that China may look to its ability to influence interest rates as its ultimate Trump card.”
There are plenty of reasons that China would never do this:
  1. It would be ineffective – the Fed could buy up the treasuries that China sold.
  2. China would be giving up a huge safety net – the point of the FX reserves (i.e. US treasury holdings) is to have them in case of emergency.
  3. It would send the CNY soaring – the move would inflict massive pain on China by tightening financial conditions dramatically.

And by the way: China sold off a large chunk of US treasuries because it was forced to in 2015-2016 – to keep the currency from freefall. That didn’t roil US treasury markets, why would it roil them now?

Can we please put this idea to rest?

NYT: The Unknowable Fallout of China’s Trade War Nuclear Option 


3. Data dump – R&D edition

China’s stats bureau (NBS) released national R&D spending data for 2017 on Tuesday.

  • At RMB 1.76 trillion, R&D spending was up 12.3% from the previous year – compared to 10.6% annual growth in 2016.
What’s more, on the spending side China continues to close the gap with developed countries.
  • Chinese R&D spending is estimated to be close to 60% of the US level in 2017, up from 40% in 2013.
  • The net annual increase in Chinese R&D spending is now more than the net increase in all of the OECD.
  • Chinese R&D is growing faster than the rest of the world by a long shot – with growth rates below 3% in the US, EU, and Japan.

The problem, though, is that these fast-growing inputs are still not translating into technological outputs in a consistent manner – we’ve pointed that out before (see October 11, 2017 Tip Sheet).

The NBS claims that the structure of R&D spending is improving – with colleges and universities getting much more involved.

But the current inefficiency is not deterring Chinese policymakers. If anything, the high rate of spend only underscores China’s willingness to put huge amounts of resources into moving up the value chain and becoming a technological leader.   

NBS: 2017年全国科技经费投入统计公报
NBS: 国家统计局社科文司高级统计师张鹏解读《2017年全国科技经费投入统计公报》



4. Liu He’s latest push on SOE reform

Vice Premier Liu He chaired a meeting on SOE reform with officials and SOE executives on Tuesday.

The goal of the meeting was to reinvigorate the stalled SOE reform program (

  • "State-owned enterprise reform is currently at a critical stage in which one action is better than a dozen guidelines." 
Liu wants policymakers’ efforts to be more focused:
  • "In the spirit of ​​'breaking one finger is better than scraping ten fingers,' [we will] solidly advance the SOE reform." 
But Liu actually wants to break six fingers. Here are the updated goals:
  • Develop a unique corporate governance system in which the party, the board, and management co-exist
  • Pursue mixed-ownership reform where state capital can improve efficiency and the private sector gets more support
  • Improve incentives for cadres working in SOEs – both executives and employees
  • Continue cutting capacity and reducing debt
  • Continue piloting the holding company model for state capital
  • Transform the SOE overseer (SASAC) to help them improve productivity

The bottom line: Xi Jinping sees SOEs as key to winning the technological competition with the developed economies.

Get smart: US-China tensions may help to jumpstart SOE reform. But it won’t be liberalizing reform, not by a long shot.

READ MORE 刘鹤出席全国国有企业改革座谈会并讲话


5. China’s plan to restructure the transport industry

On Tuesday, the central government released a three-year action plan to restructure the transport sector.

Some context: This is part of the three-year action plan for blue skies.

The plan in nutshell:

  • More investment in railway freight and shipping
  • Less reliance on long-distance road freight
The goals for 2020 (using 2017 as the base year):
  • Increase railway freight volumes by 1.1 billion tons – a 30% jump
  • Increase waterway freight volumes by 500 million tons – a 7.5% jump
  • Ensure that over 50% of newly-added light freight vehicles are new energy or clean energy vehicles

The plan focuses on 15 key provinces – mostly developed regions, including Beijing, Shanghai, Jiangsu, Shandong, and Zhejiang.

Get smart: The transport sector works like a system of arteries – connecting and pumping life into the real economy. Its restructuring will affect all kind of industries.

Get smarter: Getting the program to work will require getting the costs right. Businesses choose how to transport goods primarily bases on cost and convenience. If the economics don’t add up, companies won’t buy in.

READ MORE 国务院办公厅关于印发推进运输结构调整三年行动计划(2018—2020年)的通知


6. Discipline inspections focus on poverty alleviation

Xi Jinping has promised to eliminate poverty by 2020. As that deadline approaches, he is mobilizing the Party’s resources to make sure it happens.

On Tuesday, head of the Party’s discipline commission Zhao Leji announced that he is sending inspection teams out to make sure that everybody is pulling their weight on poverty alleviation.

The details (Xinhua):

  • “The inspection[s]…will see inspection teams deployed to Party organizations at 13 provincial-level regions, mostly in the central and western parts of China, and 11 central government agencies, including the Finance Ministry and the Ministry of Agriculture and Rural Affairs.”
  • “Party organizations at the state-owned Agricultural Bank of China and Agricultural Development Bank of China, a policy bank, are also on the inspection list.”

Get smart:  Discipline inspections are the Party’s most powerful tool for ensuring policy implementation. The fact that they are focused on poverty alleviation indicates what a high priority it is for Xi and the Party.

CPC: 赵乐际:扎实做好专项巡视工作 为打赢脱贫攻坚战提供有力保障
Xinhua: China to launch new round of disciplinary inspection on poverty reduction



7. Party backs off on discipline inspections

The Party is scaling back its overall use of discipline inspections, despite the new inspections for poverty alleviation detailed in the entry above.

That’s according to a new document released Tuesday by the Party’s General Office, called: 

  • “Notice on Coordinating and Planning of Supervision, Inspection, and Assessment Work”
The document admitted problems with the old system:
  • Inspections have been too numerous and too pro forma.
  • Local officials, businesses, and the public are overloaded and have complained vociferously.
Going forward, there will be changes:
  • ONLY the Party Central Committee and the State Council can authorize nationwide inspections.
  • Inspections at the county and district levels should be reduced by at least 50%.
  • The Party center must be notified of all province-wide inspections.
  • Government should harness technology to improve efficacy. 

Get smart: It’s encouraging that the system recognizes a problem and takes steps to address it.

Get smarter: The problem of too many inspections is a result of Xi Jinping’s top-down approach to governance. A top-down solution isn't likely to genuinely address the problem.

This is ironic: When it comes to discipline inspections, we hear the most complaints about those aimed at poverty alleviation.

Xinhua: 中共中央办公厅印发《关于统筹规范督查检查考核工作的通知》


8. Angolan president in Beijing, looking for more money

On Tuesday, Xi Jinping held talks with Angolan President João Lourenço.

It was Lourenço’s second trip to Beijing in as many months, having attended the Forum on China-Africa Cooperation (FOCAC) in September.

Some context: Angola is the third-largest supplier of crude oil to China after Russia and Saudi Arabia. China owns over half of Angola’s foreign debt.

On the agenda: Lourenço is hoping to open a new credit line worth USD 11 billion (Macauhub).

No details of the talks have been released yet, though Xi was – unsurprisingly – positive in his official remarks (Xinhua):

  • "China is confident of the future of bilateral cooperation."
Xi also used the occasion to reinforce China’s no-strings-attached approach to relations with African countries:
  • “Xi said that China has empathy with the historical experiences of African countries and firmly supports people of African countries in opposing foreign interference, and independently choosing their path of development.”

Get smart: As relations with the West become increasingly testy, China is focusing more time and energy on improving relations with developing countries.

CPC: 习近平同安哥拉总统洛伦索会谈
Macauhub: Angola and China sign agreements during further visit by President João Lourenço
Xinhua: China, Angola agree to promote ties as presidents meet in Beijing


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