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TRIVIUM CHINA: THE TIP SHEET

TRIVIUM CHINA

HEARD IN BEIJING

"It’s all about borrowing too much money, which we cannot afford and cannot repay."

- Mahathir Mohamad, Malaysian Prime Minister

Some context: That’s what the Malaysian prime minister said when cancelling two of China’s previously agreed projects in the country. He says the projects don’t make sense, but that Malaysia is still open to Chinese investment. More in the Tip Sheet below.

THE TIP SHEET

FINANCE & ECONOMICS

1.  PBoC presser is a snoozefest

The State Council Information Office hosted a rare press conference with key central bank (PBoC) officials on Tuesday.

We scoured the transcript, hoping to blow our readers’ minds with new insights about monetary policy.

But as it turns out, the officials just re-iterated what we already knew (Reuters):

“China’s central bank said on Tuesday that it will not resort to strong stimulus to support the slowing economy but will keep liquidity reasonably ample and offer more help to companies which are having trouble obtaining financing.”“Smaller companies, in particular, are having a tough time securing loans and are grappling with rising borrowing and operating costs, fueled in part by a lengthy official clampdown on riskier lending like shadow banking.”“’For companies facing temporary difficulties, we encourage financial institutions not to cut off loans,’ said Ji Zhihong, the head of the PBOC’s financial markets department, when asked about support measures for exporters impacted by rising trade protectionism."

Get smart: The PBoC is offering targeted support to lenders in an effort to get them to funnel more cash to small companies. This is not a recipe for stimulus – the Chinese economy will continue to slow in H2.
 

READ MORE
SCIO: 金融更好服务实体经济 有效缓解企业融资难融资贵吹风会 图文实录
Reuters: China says won't resort to strong stimulus but will keep liquidity ample
 

POLITICS & POLICY

2.  Malaysia calls off Chinese projects

Yesterday we told you that Malaysian officials were pleased with their prime minister’s visit to China.

But that didn’t stop him from cancelling two high-profile Chinese projects (NYT):

“In Beijing on Tuesday, Mr. Mahathir said he was halting a contract for the China Communications Construction Company to build the East Coast Rail Link, thought to have cost the government around $20 billion, along with a $2.5 billion agreement for an arm of a Chinese energy giant to construct gas pipelines.”“’It’s all about borrowing too much money, which we cannot afford and cannot repay’…Mr. Mahathir said.”But Prime Minister Mahathir was also quick to point out that Malaysia is still open to Chinese investment (Xinhua):“China is welcome to invest more in Malaysia, the Malaysian prime minister said.”For his part, Xi Jinping seemed unflapped:“Xi reiterated China's commitment to developing friendly ties with Malaysia.”“Xi called for the joint construction of the Belt and Road..[and said that] China and Malaysia should increase overall planning and alignment of development strategies.”

Get smart: Naysayers argue that failed deals like this are harbingers of the Belt and Road’s eventual failure. They’re wrong. Instead, they are mistakes from which China will learn.
 

READ MORE
NYT: ‘We Cannot Afford This’: Malaysia Pushes Back Against China’s Vision
Xinhua: Xi meets Malaysian PM, calling for better ties in new era
 

POLITICS & POLICY

3. El Salvador ditches Taiwan, recognizes Mainland
 

On Tuesday, El Salvador officially established diplomatic relations with the People’s Republic of China.

That means that El Salvador no longer recognizes Taiwan.

Foreign Minister Wang Yi was happy (Xinhua):

“History will prove that forging diplomatic relations with China is in the fundamental and long-term interests of the Salvadorean people.”Some context: This marks the fifth country to switch recognition from Taiwan to the PRC in a little over two years.

Some more context (Reuters):“Taiwan now has formal relations with only 17 countries worldwide, many of them small, less developed nations in Central America and the Pacific, including Belize and Nauru.”The Taiwanese government was not happy:“Speaking in Taipei, President Tsai Ing-wen said Taiwan would not bow to pressure, describing El Salvador’s decision as further evidence of China’s efforts to squeeze the island, which have included regular Chinese bomber patrols around Taiwan.”“’We will turn to countries with similar values to fight together against China’s increasingly out-of-control international behavior,’ Tsai said.”

Get smart: It’s hard for any government to justify recognizing Taiwan at the expense of the Mainland – especially when the Mainland is willing to offer material support. No one should be surprised if more countries de-recognize Taiwan.
 

READ MORE
Xinhua: China Focus: People's Republic of China, Republic of El Salvador establish diplomatic ties
Reuters: Taiwan says China 'out of control' as it loses El Salvador to Beijing
 

POLITICS & POLICY

4. Xi is core to everything

The Journal’s Chun Han Wong has a great piece that illustrates the politics of Xi’s China:

“When a museum paying tribute to China’s economic reforms opened here [Shenzhen] in December, visitors were welcomed by a panoramic sculpture depicting a local visit by Deng Xiaoping.”But then something happened:“In early June, the museum was closed for what it called ‘upgrading.’”“When it reopened in August, the sculpture was gone, replaced by video screens showing local development and a beige wall adorned with a quote from President Xi Jinping.” This is part of a larger trend:“Much of the state-backed fanfare [for Reform and Opening] has focused…on Mr. Xi, playing up his economic credentials while diluting Deng’s prominence in party lore.”Not everybody is on board:“Zhao Yanqing, a retired Shenzhen resident in her mid-50s, criticized the replacement of the Deng sculpture.”“They should respect history,’ said Ms. Zhao, who previously visited in May.”“I feel that we’re reviving the cult of personality from Chairman Mao’s time.”“This is too dangerous.”

Our thought: Stories like this are like a Rorschach test. Either it’s proof of Xi’s power, or it's evidence that he has gone too far and is set for a fall. It’s all in the eye of the beholder.
 

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WSJ: China’s Museums Rewrite History to Boost Xi
 

POLITICS & POLICY

5. Party guru touts rejuvenation of the CCP

 

Xi Jinping is restructuring the Party-state. 

Senior Party theoretician Li Junru sums up the big changes:

“For the past 40 years…we were focused on [instituting] separation of powers.”“The new governance system…puts political power, the market, and society under the CCP’s leadership.”Li takes issue with those say that the recent moves are a repudiation of Deng Xiaoping’s legacy.“Deng Xiaoping made it clear that reforming party and state leadership system was not to weaken party’s leadership…but to reinforce it.”

Li’s point: Both Deng and Xi were seeking to strengthen the Party. In Deng’s time that, somewhat paradoxically, meant giving the state more autonomy vis-à-vis the Party. But in Xi’s time, it means clawing some of that autonomy back.

Get Smart: Much coverage of Chinese politics of late has focused on discontent with Xi Jinping. But it’s useful to remember that there are many in the elite – like Li – who support Xi and his political program.
 

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CPC: 从“全面领导”看中国共产党领导力
 

POLITICS & POLICY

6. Detailing the Chinese government’s massive venture capital funds

The Chinese government is putting its money where its mouth is when it comes to promoting entrepreneurship and new start-ups (Economic Daily).

Governments across the country set up 1,171 venture capital funds (aka government guidance funds) worth a total of RMB 5.85 trillion by the end of 2017.That’s compared to just 340 funds worth a measly RMB 270 billion in 2014.

Some context: Both central and local governments have injected fiscal money into these funds over the years. They partner with private money to invest in areas that the government wants to promote.

The funds’ portfolios include:Supporting SMEs, industrial upgrading, infrastructure spending, and public services.

Get smart: The establishment of these funds represents a sea change in China’s industrial policy – away from wholesale subsidies, to more targeted financing of individual businesses.

But, but, but... It’s not exactly smooth sailing. Many of the funds are poorly managed and lack a clear mandate for investment.
 

READ MORE
Xinhua: 国内共成立1171只政府引导基金 总目标规模达5.85万亿元

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