Trivium China

THURSDAY, JULY 23, 2020

China Markets Dispatch

Policy intelligence that drives markets

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exec summary

One big thing: China still mulling retaliation for Houston consulate closure

Macro: Xi Jinping seeks to make China's economy less vulnerable to external shocks

Finance: PBoC standardizes rules for blockchain technology; Victims of CBIRC’s 38 deadbeat shareholders named

Commodities: Scarcity drives canola oil prices to record highs

one big thing

1. Consulate kerfuffle continues


Things were pretty quiet in China's domestic markets over night, as US-China tensions continued to drive sentiment.

The latest: Chinese officials in Houston are still scrambling to close the Chinese consulate there by Friday.

Some context: On Tuesday, US officials told the consulate that it must shut down and vacate the premises within 72 hours.

On Wednesday, the US gave more insight into the reasons behind the closure (WSJ):

  • “Assistant Secretary of State David Stilwell…called the order to close the Houston consulate ‘long overdue’ and said it followed a series of malign activities including visa fraud and research theft—trends he said have accelerated since the coronavirus pandemic.”
But that’s not all:
  • “U.S. officials said that FBI investigations into allegations of economic espionage and influence operations often led back to the Houston consulate.”
So what’s next? Officials from the Chinese foreign ministry have vowed to retaliate, but so far given no details.
  • The latest reporting indicates the US consulate in Chengdu might be in the crosshairs (SCMP).
  • But nationalist rag Global Times says the US consulate in Hong Kong may also be under consideration.
Get smart: This decision is high stakes. Closing the Chengdu consulate would be a restrained, like-for-like move. Closing the Hong Kong consulate would up the ante.
  • Our money is on the former.
What to watch: It looks like China will wait until after the 72-hour period is up to announce its retaliation – in hopes the Trump administration will reverse the decision.
  • That ain’t gonna happen.

 

read more

macro

2. Xi explains how economic policy is evolving


At Tuesday’s meeting with the business community (see yesterday’s Tip Sheet), Xi Jinping explained everybody’s favorite new economic policy framework:

  • The “dual circulation” strategy.

Some context: The Politburo Standing Committee introduced the dual circulation concept in May. It represents an important new framework for economic policy.

Quick refresher: The “dual circulation” concept is all about ensuring “development security,” which means making the economy less vulnerable to external shocks.

Here is Xi’s rationale (Xinhua):

  • “In the current external environment of rising protectionism, downturn in the world economy, and shrinking global markets, we must give full play to the advantages of the domestic super-large market, and add impetus to my country's economic development by prospering the domestic economy and smoothing the domestic economic circulation.”
  • “It is [also] necessary to enhance the modernization level of the industrial chain and supply chain, vigorously promote technological innovation, accelerate the research on key core technologies.”

In plain English: Xi is saying that the economy needs to become more self-reliant.

But don’t worry.

That does NOT mean the end of opening-up: 

  • “It is by no means to close [China’s] door.”
  • “[We] are better connecting the domestic market with the international market by realizing the potential of domestic demand.”

Get smart: Becoming self-reliant in key technologies is now the driving force in economic policy.
 

read more

finance

3. PBoC issues rules for blockchain


Yesterday, Caixin scooped that the central bank (PBoC) has issued a series of standards for regulating blockchain applications developed by financial institutions. 

Some context: Since 2017, many financial institutions, including big state-owned commercial banks, have been testing out blockchain applications for their banking services. 

More context: On July 21, Shanghai announced the eight fintech projects that would participate in the PBoC’s regulatory sandbox pilot program, seven of which will be built on blockchain technology. 

Clearly, there’s been a pronounced uptick in interest in blockchain technology in recent months.

That’s why the PBoC wants to make sure the applications are all safe and secure (Caixin):

  • “Financial institutions will need to...establish and refine risk control mechanisms for their blockchain applications and conduct external security assessment on a regular basis.”

Fun fact: In the policy document, the PBoC gave a formal definition of "blockchain technology" for the first time, and we couldn’t find the word “decentralized” in it. 

Get smart: The PBoC wants to have its cake and eat it too. The development of Chinese-style blockchain will be closely watched by authorities to head off any potential instability that the technology might introduce into the financial system. 
 

read more

4. Named and shamed


Way back on July 5, the China Banking and Insurance Regulatory Commission (CBIRC) published a list of 38 shareholders of banking and insurance institutions that had committed one of the following regulatory no-nos (Securities Times):

  • Invested illegally in Chinese financial institutions
  • Carried out related-party transactions
  • “Treated the institutions as ‘cash machines’ and…embezzled funds.” 

None of the shareholders are household names, but on Wednesday, Securities Times named the victims of the shareholders’ abuse, some of which have very familiar names:

  • Baoshang Bank
  • Ningbo Donghai Bank
  • Bank of Dandong
  • Chengdu Rural Commercial Bank
  • Haikou Rural Commercial Bank
  • Anbang Property & Casualty Insurance
  • Hexie Health Insurance
  • Kunlun Health Insurance
  • China Financial Leasing 

Some context: This might all seem a bit like inside baseball, but take note: weeding out deadbeat shareholders is THE key campaign that the CBIRC is currently embarked upon.
 
In recent days the CBIRC has also:

  • Taken over nine financial institutions that shared Tomorrow Group as a shareholder.
  • Fined Minsheng Bank RMB 100 million for appointing the representative of a deadbeat shareholder to its board without CBIRC approval (Caixin).

Get smart: The CBIRC wants to improve banks’ corporate governance. This flurry of activity is a clear signal that there will be serious repercussions for those that don’t fall in line.
 

read more

commodities

5. Get it while you can(ola)


Scarce supply is pushing canola oil price spreads vis-a-vis other edible oils to their highest in recorded history.
 
On Tuesday, canola oil prices on the Chinese commodity market rose to historic heights compared to other edible oils.

  • Canola oil was priced RMB 2,500 per ton more than soy oil, the largest spread since price recording began in 2012.
  • It was also priced RMB 3,196 per ton more than palm oil on the same day – the widest spread in seven years. 

Supply is low because China has political beef with two of the world’s major canola oil exporters, Canada and Australia (Reuters):

  • “Rapeseed oil prices have gained nearly a third since May 27, when the chief financial officer of Chinese telecom giant Huawei Technologies Co Ltd lost a court fight in Canada against extradition to the United States.”
  • “Rapeseed imports might continue to be affected as the tension between China and Canada has not eased, while Sino-Australia relations do not look very optimistic [either].” 

Get smart: Consumers will find substitutes as canola oil sources dry up.
 
Get smarter: Beijing’s diplomatic policy will determine edible oil futures.
 

read more

The information contained in this newsletter does not constitute investment advice.

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