Source: TRIVIUM.COM, Daily Newsletter
HEARD IN BEIJING
“Stable employment, stable finance, stable foreign trade, stable foreign investment, stable investment, and stable expectations.”
- Politburo Readout
Some context: The above quote is what the Politburo wants for the economy in the second half of 2018. Can you guess the theme? It’s clear that top leadership is worried about the effects of the trade war. But they aren’t panicking – keeping things stable is a far cry from outright juicing growth. More in the Tip Sheet below.
THE TIP SHEET
DRIVING THE DAY
1. The Politburo finally weighs in on the economy
The Politburo held its monthly meeting on Tuesday and published a readout of the discussion late in the day.
Some context: The July meeting is always important because it reviews economic performance in the first half of the year and articulates the economic policy stance for the second half.
More context: This year, the meeting was more highly anticipated than usual, thanks to an uncertain economic trajectory and the budding trade war with the US.
The key to yesterday’s readout was the heavy emphasis on stability – for employment, for investment, for FDI, for foreign trade, for financial markets, and for expectations. That heavy emphasis marks an important shift.
But, but, but…don’t get carried away. A policy mix designed to ensure economic stability is not a truly stimulative policy mix. For the policy details, see the next entry.
The bottom line: China’s leaders are spooked by the trade war and unhappy with the pace of growth in public investment. In both cases, they want to limit the downside risk for the economy. But they are not looking to accelerate economic growth through massive credit expansion.
DRIVING THE DAY
2. Key economic policies for H2
The Politburo readout indicated that China’s leadership want to:
“take targeted measures to address the economy’s main contradictions” (our emphasis).
That signals a shift of emphasis but not an outright shift in the direction of policy.
Here’s the quick version of the key policy adjustments:
Fiscal policy will be more proactive– local government investment has fallen too far, too fast, so more funding will be made availableMonetary policy will remain “prudent,” and liquidity will remain “reasonably ample” – the goal is to unlock enough liquidity to ease the pain on small banks and try to get money flowing to private businesses, but not to markedly accelerate lending growthSupply Side Structural Reform will see a new emphasis –.fixing the economy’s “weak links” via infrastructure investment in rural areasPolicymakers will focus on the “structural impediments” to long-term, sustainable capacity reductionRegulators are to remain “resolute” in their efforts to deleverage, although the pace of deleveraging is set to be recalibratedProperty control measures will be ratcheted up further – these should depress property investment
Get smart: Policymakers will ease up on the pace de-risking, but they won’t backtrack. It’s an effort to steady the economic ship – not boost the engines.
DRIVING THE DAY
3. Xi looks to further tighten his grip over cadres
Tuesday’s Politburo meeting wasn’t only about the economy.
Top leaders also reviewed a new draft of Party rules on disciplinary punishments.
Some context: This marks the second revision of the rules in just three years.
The readout implied that Xi is still not happy with the state of Party discipline. It said that things need to change:
“Socialism with Chinese characteristics has entered a new era.”“The Party requires a new atmosphere and new conduct.”“It is necessary that we rely on strict and impartial discipline.”Most important – cadres need to get their politics right:“Amongst Party discipline, political discipline is most important, most fundamental, and most critical.”Going forward, the Party is going to be watching officials ever more closely:“[We] must…strengthen our everyday oversight and supervision, catch the early [violations] and catch the small [violations], and nip things in the bud.”
Get smart: Xi’s number one priority since he came into power has been cleaning up the Party. Those efforts don’t look set to stop any time soon.
What to watch: As officials are watched ever more closely, will there be a backlash?
People's Daily: 中共中央政治局召开会议 习近平主持会议
POLITICS & POLICY
4. Xi's message to PLA – make war, not money
Efforts to clean up the military have been part and parcel of Xi’s larger Party-building effort.
After Tuesday’s Politburo meeting, Xi held a study session with Politburo members to review progress in the campaign to extricate the armed forces from all business activities.
Some context (Xinhua):
"The military's paid services generally refer to those provided by the armed forces such as kindergarten education, publishing services, and real estate rentals to the civilian sector.”Some more context: In March 2016, Xi said that the armed forces had to stop engaging in commercial activity within three years. The military then set up a leading small group to oversee the process. As of last month, the armed forces say they have already extricated themselves from over 100,000 of around 106,000 commercial programs (second Xinhua link).
This is all about getting back to basics:“Completely putting an end to the military’s paid services has great meaning for the Party’s goal of… [building] a strong army.”
What to watch: The meeting promised to get rid of all paid services by the end of the year.
CPC People: 习近平：坚定决心意志增强工作合力 坚决做好全面停止军队有偿服务工作
Xinhua: Xi requires resolute ending of military's paid services
POLITICS & POLICY
5. Apple caught in middle of trade war
It’s been clear for a year now – one of China’s key weapons in the US-China trade war will be to mess with US companies operating on the mainland.
Now we know the first victim (WSJ):
“In a barrage that began last week, China’s state-controlled news agency Xinhua and at least four state-supported media outlets have published criticism of Apple for not doing enough to filter banned content on its iMessage service.”“State broadcaster CCTV joined in Tuesday on another front, saying Apple’s app store allowed illegal gambling apps disguised as official lottery apps.”“On Monday, China’s Ministry of Industry and Information Technology and other top government agencies said they would impose new requirements requiring mobile-phone makers to include spam-filtering features.”
Get smart: This is a classic tactic. Official Chinese media calls out a foreign company for a semi-legitimate reason. That gives regulators plausible deniability to claim the moves are not about the trade war.
Get smarter: Apple has long seemed like a natural candidate for Chinese retaliation. It has a huge footprint in China, making it especially vulnerable.
What to watch: This won’t end with Apple – keep an eye on state media to see who’s next.
WSJ: Apple Comes Under Media Fire in China
POLITICS & POLICY
6. A glimmer of hope for US-China trade talks
Amidst the seemingly irreversible rise of trade tensions, Bloomberg reports that US and Chinese policymakers are trying to find a way back to the negotiating table:
“Representatives of U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He are having private conversations as they look for ways to reengage in negotiations, according to the people who spoke about the deliberations on condition of anonymity.”“They...added there was agreement among the principals that more discussions need to take place.”This time around, the US might be clearer about what it needs from Beijing:“One person…said the U.S. is trying to secure certain concessions and if China agrees, it is possible the U.S. would back off additional tariffs.”One big hold up: It’s not clear that Mnuchin is really in the driver’s seat:“Complicating Mnuchin’s efforts is a harder line taken by U.S. Trade Representative Robert Lighthizer.”This won't help Mnuchin (WSJ):"Some administration advisers are urging President Trump to raise the stakes with a sharp increase in the level of tariffs proposed for $200 billion in Chinese imports targeted for punitive measures."
What to watch: The next round of tariffs from the US – worth USD 16 billion – could go into effect as soon as Wednesday. If they are delayed, it would indicate that behind-the-scenes talks are helping to lower the temperature.
But we won't be holding our breath.
POLITICS & POLICY
7. The PLA turns 91
The People’s Liberation Army (PLA) celebrates its 91st anniversary today.
The defense ministry celebrated last night:
“A reception was held by the Ministry of National Defense on Tuesday to celebrate the 91st anniversary of the founding of the People's Liberation Army (PLA).”But the Ministry of Veteran Affairs is nervous about potential protests(SCMP):“Speaking at the first ever press conference held by the Ministry of Veterans Affairs, vice-minister Fang Yongxiang said there was no place for large-scale protests that were prone to being infiltrated by ‘people with ulterior motives.’”Some context:“China’s former servicemen and women have staged numerous rallies in recent months calling for better welfare rights.”Maybe this will help: The State Council yesterday issued a new policy to increase benefits for families of soldiers and veterans. The families will also receive plaques designating them as a “Family of Honor.”
Don’t know where to hang your plaque? The new policy’s got you covered (Gov.cn):“The family can decide where it wants to place the plaque, but it is advisable to hang it on the front door.”
Get smart: It’s going to take more than plaques to assuage disgruntled veterans.
Xinhua: Defense ministry holds reception to celebrate PLA founding anniversary
SCMP: China’s military veterans warned not to spoil 91st anniversary party for People’s Liberation Army
Gov.cn: Govt to honor soldiers’ families