DRIVING THE DAY
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."
- "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.
FT: Mnuchin warns China against competitive devaluations of renminbi
FINANCE & ECONOMICS
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.”
- It would be ineffective – the Fed could buy up the treasuries that China sold.
- 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.
- 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
FINANCE & ECONOMICS
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.
- 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.
FINANCE & ECONOMICS
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 (gov.cn):
- "State-owned enterprise reform is currently at a critical stage in which one action is better than a dozen guidelines."
- "In the spirit of 'breaking one finger is better than scraping ten fingers,' [we will] solidly advance the SOE reform."
- 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.
POLITICS & POLICY
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
- 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.
POLITICS & POLICY
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
POLITICS & POLICY
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”
- Inspections have been too numerous and too pro forma.
- Local officials, businesses, and the public are overloaded and have complained vociferously.
- 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.
POLITICS & POLICY
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 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.
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