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TRIVIUM CHINA: THE TIP SHEET

HEARD IN BEIJING

"In the wake of the US defining China as a 'strategic competitor,' Sino-US relations will undergo a profound readjustment."

- Long Guoqiang, Vice President of the Development Research Center

Some context: Long said that in a People’s Daily op-ed on Wednesday. Chinese leaders increasingly believe that China and the US are engaged in a mulit-dimensional struggle akin to the Cold War. More in the Tip Sheet below. 

THE TIP SHEET

DRIVING THE DAY

1. China prepares for Cold War

On Wednesday, the People’s Daily ran an important op-ed by Long Guoqiang – deputy head of the State Council’s in-house think tank, the Development Research Center.

Long voiced what is quickly becoming the consensus view on American motivations for a trade war:

Long believes it's all a bid to contain China, just as the US did to the Soviet Union.Yep, that's right – Long sees this as the beginning of a new Cold War.

Long also reiterated China’s basic game plan.Don’t turn up the heat.But continue to match the US action for action. Be ready to resume negotiations any time.Meanwhile, Long suggests these domestic support measures:In the short-term, offer government assistance to companies hit by the tariffs – finding new markets for exporters and substitute sources for imports.In the long-term, avoid errors made by the Soviet Union – in other words, don’t abandon the domestic agenda.

Get smart: Long’s piece appears to reflect the thinking of top officials, so it should be closely read.

Get smarter: China's leadership no longer sees this as a trade spat, but rather as an attack on China’s basic political and economic models. That’s not a recipe for de-escalation.
 

READ MORE
People's Daily: 理性认识当前的中美贸易摩擦(人民要论)
 

FINANCE & ECONOMICS

2.  Guo Shuqing ups the ante on financial de-risking

China’s banking and insurance regulator (CBIRC) held a big meeting on Wednesday.

The key message: Financial de-risking is not over by a long shot.

The meeting was led by CBIRC Chairman Guo Shuqing, the key architect of the financial “regulatory storm” that kicked off in April 2017.

The meeting established three clear priorities – in order of importance:

Prevention and control of financial risksSupporting the real economyOpening the financial sectorOfficials then detailed how they propose to achieve those goals.

On the de-risking side, markets can expect:Tighter regulation over internet financeFaster, better recognition of bad bank assetsIncreased loan writeoffsIncreased efforts to divert lending out of the property marketFines, fines, and more fines for wrongdoers

Other priorities over the next twelve months will, of course, include boosting the Party’s presence in the financial system and executing the CBIRC’s ambitious restructuring plan.

Get smart: Guo is sending a clear signal that he is not backing off of financial de-risking. Officials will attempt to balance those efforts against weaker economic growth – but risk containment is the obvious priority.
 

READ MORE
CBIRC: 中国银保监会召开银行保险监管工作电视电话会议
 

FINANCE & ECONOMICS

3. Liquidity set to tighten into September

China’s banks and other financial institutions have had a pretty easy July and August. Cash was abundant and cheap, making it easy to lend.

But September promises to be tenser on the liquidity front,according to a solid article in the China Securities Journal.

There will be four drivers:

Large local government bond issuanceMacroprudential Assessments (MPAs) of the banksAn interest rate hike by the Federal ReserveStrong cash demand – due to quarterly tax payments and in anticipation of the week-long holiday in early October

We are already starting to see the effects of the bond issuances.Local governments have sold over RMB 800 billion so far this month – mostly in just the last two weeks.

That was the largest monthly issuance since July 2016, and it has served to push money market rates up since they bottomed out in mid-August.

Traders expect issuance to top RMB 1.2 trillion in September. Add in the regulatory pressure from MPAs, the Fed’s move, and broader cash demand, and rates will continue to drift up.

Get smart: Higher funding costs for banks will keep them from accelerating loan growth – which will further pressure the decelerating economy.
 

READ MORE
China Securities Journal: 9月面临四大考验 资金面料松紧有度
 

FINANCE & ECONOMICS

4. Government prepares natural gas for winter

With autumn right around the corner, the Chinese government is making preparations to ensure that there is enough natural gas for heating come winter.

Some context: A forced coal-to-gas switch last winter left many households without heat when natural gas supplies proved insufficient for the increased demand. It left many people freezing, disrupted business operations, and was a major embarrassment for the government.

Despite last year’s failure, the government is pushing ahead with the coal-to-gas switch (MoF):

The central government recently initiated the switch in 23 cities across five provinces.The government has learned some lessons:This time, local governments can only switch to gas when there is secure supply.The central government has been pushing the big three national oil companies to build more gas infrastructure – and make sure that all infrastructure is fully integrated. China’s gas demand is soaring:Natural gas consumption grew 17.5% y/y in H1.And natural gas imports grew by a whopping 39.3% y/y.

Get smart: Supplies of natural gas will struggle to keep up with demand without more wide-ranging reforms to the natural gas sector. We don’t see those happening fast enough, meaning that coal demand will not drop precipitously.
 

READ MORE
MoF: 关于对第二批中央财政支持北方地区冬季清洁取暖试点城市名单进行公示的通知 
MoF: 保蓝天,也要保温暖 
 

POLITICS & POLICY

5. Chinese around the world called to rejuvenate the nation

 

Xi Jinping and all six of his Politburo Standing Committee colleagues attended the National Congress of Returned Overseas Chinese and their Relatives in Beijing on Wednesday.

Head of the Party’s discipline commission, Zhao Leji, made a speech on behalf of the Party’s top leaders.

Zhao’s message:

“[Zhao] called on returned overseas Chinese, their relatives and Chinese people living overseas to keep firmly in mind the hopes of the Party and the people [and] uphold the greater national interests.”

Get smart: Xi Jinping has made special efforts to enlist the overseas Chinese community in his project to rejuvenate the Chinese nation – including by making it easier for overseas Chinese to live and work in China.

Get smarter: It’s a pretty aggressive move to ask citizens of other countries to keep in mind the hopes of the Chinese Communist Party. Xi’s exhortations are not appreciated by foreign governments, to put it mildly.
 

READ MORE
CPC: 第十次全国归侨侨眷代表大会在京开幕
Xinhua: Top leaders attend congress of returned overseas Chinese
 

POLITICS & POLICY

6. Japan ties on the upswing

Premier Li Keqiang sent a congratulatory message to a China-Japan youth conference held in Beijing on Wednesday to celebrate 40 years of diplomatic relations.

Japanese Prime Minister Shinzo Abe also sent a congratulatory note.

This is just the latest indication of warming relations between the two countries.

And that’s not all (FT):

“Taro Aso, Japan’s finance minister, will travel to Beijing for talks with his Chinese counterpart, Liu Kun, as diplomatic contacts between the two largest powers in East Asia pick up pace.”But wait – there’s even more. Taro Aso more or less confirmed that Abe is planning to visit China this year:“Alluding to an unconfirmed top-level trip, he said: ‘I hope it can also contribute to the success of prime minister [Shinzo] Abe’s visit later this year.’”

Get smart: An Abe visit is a big deal. It would be his first official visit since becoming prime minister in 2012.

The big picture: Warming Sino-Japanese ties are in large part because both countries have more contentious relations with the United States under President Trump.
 

READ MORE
CPC: 李克强和日本首相安倍晋三向“纪念中日和平友好条约缔结40周年中日大学生千人交流大会”致贺词
The Financial Times:  China ramps up charm offensive with Japan

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