Trivium China

TUESDAY, MAY 28, 2019

The Tip Sheet

Know China Better.


"There is no longer blind panic."

- Guo Shuqing, People's Bank of China Party Secretary

Some context: Guo gave his second interview in three days on Monday. He once again sought to reassure his audience that China can weather the trade war. More in the Tip Sheet below.

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Driving the Day

1. Guo Shuqing promises more financial opening

Guo Shuqing, central bank (PBoC) Party secretary and head of the banking and insurance regulator (CBIRC), really wants everyone to know how totally not worried he is with the latest developments in the US-China trade war (see yesterday's Tip Sheet).

On Monday, Guo gave his second high-profile interview in three days.

Guo repeated that the impact on China's financial markets will be limited:

  • “When China US trade frictions began last year…financial markets overreacted.”
  • “This year, financial markets…are relatively stable.”
  • “I believe that the impact will be smaller moving forward.”
Guo said the trade war won't disrupt regulators' domestic agenda. They will continue to focus on two issues:
  • making sure that finance serves the real economy
  • de-risking the financial sector
Foreign financial institutions pay attention. Guo promised that China will push forward with financial sector opening:
  • “The door to financial openness will open wider.”
  • “The room for financial opening in the future is still very large.”
  • “We will...treat all domestic and foreign entities equally, and build a fair competitive market environment of fair competition.”

Get smart: China is opening its financial sector in order to introduce more competition and upgrade the sector. That will continue to be the policy with or without the trade war.

Xinhua: 中国金融业运行稳健 经得起外部变化冲击——人民银行党委书记、银保监会主席郭树清就美对我新一轮加征关税影响答记者问
The Paper: 郭树清:市场心态恢复稳定,不再盲目恐慌


Finance & Economics

2. Industrial profits fall as economy slows

China's economy is hurting.

The latest evidence: Industrial profits data, released on Monday.

The details (Reuters):

  • “Industrial profits dropped 3.7% year-on-year to 515.4 billion yuan ($74.80 billion) in April, partly due to a high base of comparison in the previous year, according to data published by the National Bureau of Statistics (NBS) on Monday.”
  • “That compared with a 13.9% surge in March, which was the biggest gain in eight months.
  • “For the first four months, industrial firms notched up profits of 1.81 trillion yuan, down 3.4% from a year earlier, compared with a 3.3% drop in the first quarter this year.”

Get smart: These numbers come on the back of the painful macro data for April (see May 15 Tip Sheet).

Get smarter: The economy is still decelerating. We are not likely to hit bottom until Q3.

Reuters: China's industrial profits shrink in April, add to pressure on economy

Politics & Policy

3. Party takes back control of cadre promotions

Cadres rejoice! The days of unruly nepotism might well be behind us.

Yesterday, the general office of the Central Committee released a new set of supervisory rules on promotion procedure for cadres.

So what's new?

According to the new rules, the Party collective should have absolute control over promotions, taking away decision-making power from headstrong individuals.

  • The rules explicitly prohibit leading cadres from contravening the decisions of the Party committee.
It will also be harder for leading cadres to promote their protégés. Approval from a superior Organization Department is now needed for any proposed promotions by leading cadres that:
  • are made just before retirement
  • concern their closest staff (i.e. secretaries)
  • concern relatives under their purview

Get smart: It's not unusual for leading cadres to hijack promotion procedures in order to put their own people in important positions. It's a prime strategy for creating a loyal network and growing one's influence.

Get smarter: Xi is trying to break up the myriad cliques within the Party – except for his own, of course.

People's Daily: 中共中央办公厅印发《干部选拔任用工作监督检查和责任追究办法》

Politics & Policy

4. Vanuatu PM wins big in Beijing

On Monday, Vanuatuan Prime Minister Charlot Salwai met with Li Keqiang in Beijing.

During their meeting, Li and Salwai agreed to expand cooperation across a range of areas.

Li wasn't shy about earmarking some coveted BRI bucks for the South Pacific nation:

  • “China is willing to better align the Belt and Road Initiative with Vanuatu's development strategies and deepen mutually beneficial cooperation in such areas as infrastructure, economy and trade, fisheries and tourism.

Some context: In recent years, China has made a concerted effort to court Pacific island nations with various grants, loans, and debt forgiveness programs.

Get smart: This could be huge for Vanuatu. With a population of just over 272,000, a little bit of Chinese money would go a very long way in terms of improving the country's relatively poor infrastructure.

Get smarter: Of the 17 countries that still recognize Taiwan, six are Pacific island nations. Beijing wants those six holdouts to know that it will be worth their while to recognize the PRC.

READ MORE Premier Li Keqiang holds talks with Vanuatuan PM to promote ties
China Daily: Li urges stronger ties with Vanuatu


Politics & Policy

5. Environmental protection drives up construction prices

Prices of sand and gravel, key construction materials, have been on the rise for the past year.

A prominent example:

  • In Guangdong, costs have more than doubled in 15 months.
Why is this happening? According to Caixin, industry experts believe a supply shortage resulting from increasingly stringent environmental protection measures is behind the rising prices.

Some context: Efforts to combat the degradation of China's rivers by restricting the scope of sand and gravel mining went into effect in June 2018.

The price hike has put the hurt on construction companies, since many have contracted work based on original material prices.

Some local governments stepped in to manage the supply shortage with the old planned economy toolkit, requiring that:
  • companies get government approval to buy sand and gravel
  • sand and gravel be sold at a government-set price
Others are working on a longer-term fix:
  • Coastal provinces are increasing imports from overseas.
  • The central government is encouraging the use of manufactured sand.

Get smart: Top leaders have insisted that local governments should reduce approvals and get out of the way of business. But the planned economy instinct can kick in whenever markets produce volatility.

Caixin: 砂子去哪儿了

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