HEARD IN BEIJING
"We will never let any person, at any time or in any form, split Taiwan off from China."
- Wu Qian, spokesman for the Ministry of Defense
Some context: That was the Chinese military’s response to America's passage of the National Defense Authorization Act. The bill calls for improving Taiwan’s defense capability. Any ramped-up action to defend Taiwan will make the trade war look like child’s play. More in the Tip Sheet below.
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THE TIP SHEET
DRIVING THE DAY
1. Sino-US tensions heating up
The Chinese government is closely tracking the latest defense legislation out of the US, which looks geared toward containing China (Reuters):
“Monday’s legislation…calls 'long-term strategic competition with China' a top priority for the United States.”“The National Defense Authorization Act…strengthens the Committee on Foreign Investment in the United States (CFIUS), which reviews proposals to determine if they threaten national security. That measure was seen as targeting China.”“[The bill says the US] should improve the defense capabilities of self-ruled Taiwan.”The Chinese government’s message to the US: Be careful.
On the FDI issue, the Ministry of Commerce had this to say (Reuters):"The U.S. side should treat Chinese investors objectively and fairly, and avoid having CFIUS become an obstacle to investment cooperation between Chinese and U.S. firms."The Ministry of Defense weighed in on Taiwan (MoD):"The Taiwan issue concerns China’s sovereignty and territorial integrity and is the most important and sensitive core issue in Sino-US relations.""We urge the US to…carefully handle Taiwan-related issues."
Get smart: Investors and businesses should be concerned about the increased tensions between the US and China surrounding investment – those issues are much more important than tariffs.
Get smarter: Tensions on Taiwan would be far, far more troubling.
Reuters: China angered at new U.S. defense act, to assess content
FINANCE & ECONOMICS
2. Top officials increasingly worried about the economy
The Ministry of Finance (MoF) is doing its part to combat the economic slowdown (Xinhua):
“China’s Ministry of Finance (MOF) unveiled a guideline on August 14 to accelerate the issuance of special-purpose bonds by local governments to stabilize investment [and] expand domestic demand.”Some context: At the beginning of the year, the government established a quota of RMB 1.35 trillion of these bonds to be issued throughout 2018. They are used to fund local infrastructure spending.
Some more context: The push to ramp up issuance of these bonds is one element of the stabilization measures outlined at the State Council meeting on July 23 (see July 24 Tip Sheet).
MoF wants the entire annual quota fulfilled by the end of October:“The ministry has urged local authorities to speed up preparations for the issuance in August and September so as to complete at least 80 percent of the annual quota by the end of next month, while the majority of the remaining 20 percent is expected to be accomplished in October.”
Get smart: This is not new spending – it’s an effort to deploy already-approved resources faster and should help to cushion the economic slowdown, but not reverse it.
Gov.cn: China accelerates special-purpose bond issuance to stabilize investment
FINANCE & ECONOMICS
3. An default in Xinjiang rocks the bond market
A state-owned investment vehicle is in trouble (WSJ):
“A unit of the Xinjiang Production & Construction Corps [XPCC]… acknowledged in a statement late Monday that it failed to pay back interest and principle for $73 million of onshore bonds.”“The XPCC unit, known as the Sixth Division of State-Owned Asset Management, warned in another statement that it might also have trouble paying a separate 500 million yuan bond due Sunday.”What the Sixth Division does:“[It manages] businesses on behalf of the state, including in agriculture and pharmaceuticals, according to a report last month by Shanghai Brilliance Credit Rating and Investors Service Co., which noted that it is dependent on government subsidies.”“The Sixth Division recently added a subsidiary for building infrastructure.”The FT explains why this is a big deal:“The default by the Sixth [Division is]…a signal to investors that even state-owned groups that are agents of fiscal policy — considered closer to Beijing than commercially operated state-owned enterprises — are not guaranteed to be bailed out by the state.”
Get smart: XPCC is a unique entity. It largely takes orders from the central government, but the Sixth Division is effectively an investment vehicle for the Xinjiang provincial government. The default sends a strong message that Beijing is willing to countenance more defaults.
WSJ: Missed Bond Payment in Xinjiang Stirs Chinese Debt Fears
The Financial Times: Chinese regional investment arm in landmark bond default
POLITICS & POLICY
4. Battle against air pollution scuppers steel merger
The government has identified tackling air pollution as one of its three top priorities for 2018 – one of the “three critical battles” (see March 5 Tip Sheet).
As the government looks to focus more on environmental protection,the calculus for local commodity producers is changing.
The latest example comes from state-owned steelmaker Shandong Steel, who announced Monday that it is cancelling plans to acquire two local firms:
“In the next three years… [one acquisition target] risks shutting down and relocating,…[and the other target] risks shutting down and relocating or [being forced] to revamp its process.”“There’s a lot of uncertainty about the future…of the underlying assets.“
Some context: The State Council released a clean air action plan in July that aims to essentially eliminate heavy industry from 28 cities in northern and eastern China.
Get smart: This is just the beginning. The government is formulating plans that will force some businesses in heavy industries to shut down or relocate from the east and north. That means mergers may give way to more straight-up closures.
The Paper: 山东钢铁重组筹划5个月终止：“蓝天保卫战”带来不确定性
POLITICS & POLICY
5. The environment regulator’s new structure
The powerful new Ministry of Ecological and Environment (MEE) is out with its organization plan.
Some context: The MEE was created in March as part of the government’s MASSIVE restructuring. It has beefed-up responsibilities – as compared to its predecessor, the Ministry of Environmental Protection (MEP):
The MEE consolidates the environmental supervision responsibilities previously held by other government agencies – including the National Development and Reform Commission, State Oceanic Administration, Ministry of Water Resources, Ministry of Agriculture, and others.
The MEE now has 21 departments – up from the MEP’s 17.
The most important department is the new Central Ecology and Environmental Protection Inspection Office, which will coordinate with the Party’s Organization Department and discipline commission to hold officials accountable for enforcing environmental protection regulations.
Get smart: The Organization Department has the power to kill a cadre’s career. And the discipline commission can put a cadre in jail. That means that the MEE’s new office will have some powerful tools to carry out its mandate.
POLITICS & POLICY
6. State Council makes plan for cutting red tape
Li Keqiang’s small government revolution rolls on.
On Tuesday, the General Office of the State Council released a detailed plan for administrative reforms.
Some context: The plan follows on from a national conference held at the end of June where top officials discussed how to streamline government (see June 29 Tip Sheet).
The plan is detailed: By our count, there are 87 specific tasks. For each task, specific government agencies are designated to carry them out.
In general, the plan’s 87 tasks aim at removing red tape and creating a more unified national market.
The plan reiterates previously articulated goals:
“The time for setting up an enterprise will be reduced to five days,“[Timeframes for] reviewing construction projects and customs clearance will be halved within five years.”“A unified nationwide negative list will be introduced in 2018.”“The government will further cut taxes and fees to create a better business environment and spur efficient investment.”
Get smart: The government is committed to creating a better business environment, and the slowing economy is giving added energy to these reforms.