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TRIVIUM CHINA: Tip sheet China, Know China Better



"Grassroots Party organizations are the foundation of the Party’s ruling edifice."


- Xi Jinping, CCP General Secretary


Some context: Xi said that in a speech on July 3, 2018, that was just quietly released. Xi wasn’t praising local officials. He meant they need to do a better job of implementing policies from the center. More in the Tip Sheet below.

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1.  Trade war ratchets up

He finally did it. On Monday, US President Donald Trump officially announced another round of tariffs on USD 200 billion worth of Chinese exports to the US.

The tax is set at 10% and will go into place on September 24. The rate is set to jump to 25% on January 1, 2019.

The Chinese, unsurprisingly, have vowed to retaliate.

The timing of the announcement is classic Trump – coming just days after the US had invited the Chinese to a new round of negotiations to ratchet down the trade war.

Interestingly, markets have largely shrugged off the announcement.China and Korean stocks were up a touch in early trading, while Japanese shares advanced more than 1%. Even Hong Kong was up a bit.

For their part, the Chinese recently stated that they would not negotiate “with a gun to their head” and had threatened to cancel the impending talks if this next round of tariffs went through.

So the ball is in China’s court: Will they go through with the promise to cancel trade talks?

For now, markets don’t seem to mind one way or the other.

NYT: Trump Hits China With Tariffs on $200 Billion in Goods, Escalating Trade War
Market Watch: Asian markets mostly shrug off latest U.S. tariffs targeting China


2.  Surprise MLF injection as holiday closes in

The central bank (PBoC) made a surprise cash injection on Monday.

The funds came via the medium-term lending facility (MLF) – to the tune of RMB 265 billion. The money was injected at a one-year duration and carried a 3.3% interest rate, unchanged from the previous injection, which took place earlier in September.

Some context: Recently, the PBoC has been injecting MLF funds on days that previous MLF injections are set to expire, but that wasn’t the case on Monday.

That was why markets were surprised by the injection.

Thanks to the added liquidity, money market rates were down early in the day, but by the end of trading on Monday, rates were back up – essentially flat from Friday’s close.

Get smart: The PBoC is exercising an abundance of caution here. Liquidity remains fairly loose but will continue to tighten into the end of the month thanks to a big uptick in local government bond issuance – which banks have to buy – and the holiday week that takes place in the first week of October.

What to watch: As we’ve said many times, the key is whether these injections lead to an acceleration of lending growth. So far, they haven’t.

Xinhua: China's central bank injects market liquidity via MLF
21st Century Biz: 央行意外放量2650亿1年期MLF 9月资金面先松后紧面临较大压力


3. WMPs back in vogue

Chinese retails investors are finding a renewed love for Wealth Management Products.

That’s despite the fact that returns on WMPs hit their lowest level in 11 months this week. Returns on products to be issued from September 15 to September 21 are yielding just 4.53% (average returns for August were 4.67%, down from 4.75% in July).

But even so, banks throughout Beijing are sold out of the products– and some are even telling potential customers that if they don’t like the returns, perhaps they should check with other banks. Such is the level of confidence that WMP salespeople have right now (see link below).

So what’s going on?

A couple of things are driving the low returns and investors’ willingness to buy anyway.

First, many of these products are tied to money market rates, so the past 10 weeks of lower rates are filtering into investment products.Secondly, the demise of online P2P investment products, which have blown up spectacularly in recent months, means that investors don’t have higher yield options to turn to.

Get smart: WMPs are much safer than they used to be, which drives yields down. It’s all thanks to financial de-risking efforts.

Securities Daily: 在售银行理财产品预期收益率均值4.53%创11个月新低


4. Foreigners jump into the A-share market

Foreign investors are increasingly betting on China’s withering stock market.

That’s right, China’s A-share market is down 24% from this year’s peak,but local media reports indicate that foreign funding has increased in recent months.

As the Shanghai Securities Journal puts it:

"Foreign capital has become an important source of incremental funding for the A-share market.""Up to September 5, net inflows [from the HK-Shanghai stock connect] have reached RMB 222.6 billion, up nearly 50% from the same period in 2017, and exceeding full-year net inflows in 2017."

What’s going on?

One factor is the recent inclusion of A-shares into the MSCI index, which has basically required some fund managers to get more exposure to China’s market, since they are benchmarked against the MSCI.

But some funds are increasingly thinking that China’s A-shares have bottomed out, and that economic support measures will boost the market.

Our take: We don’t see any upside for Chinese stocks in the rest of 2018. The economic support measures are not strong enough to change the growth trajectory, and overall sentiment remains dour on the mainland.

Get smart: To some extent, short-term sentiment doesn’t matter. Foreign participation in China’s capital markets is on a structural upswing.

Shanghai Securities Journal: 外资力量比肩险资公募 A股市场格局悄然生变


5. Western companies all in on China’s AI

Vice premier and economic czar Liu He was in Shanghai on Monday, attending the World Artificial Intelligence Conference.

China’s Next Generation AI Development Plan (AIDP), released in July 2017, aims to make China the dominant player in AI by 2030.

But on Monday, Liu struck a cooperative tone (

“China is willing to work hard with every country in the world to ensure that the development of artificial intelligence is beneficial for humankind.”Liu was echoing Xi Jinping, who sent a note to the conference (Xinhua):“China is ready to work with other countries in the field of AI to jointly promote development, safeguard security and share the results, said Xi.”Some of America’s top tech companies are certainly ready to cooperate (Xinhua 2):“Amazon Web Services (AWS), a secure cloud services platform within, announced [a forthcoming] AWS AI research institute in Shanghai.”“Microsoft announced [the establishment of] Microsoft Research Asia-Shanghai and the Microsoft-INESA AI Innovation Center in Shanghai.”

Get smart: There is a lot of money being poured into AI research in China. Foreign companies are understandably keen to benefit.

What to watch:  As the trade war heats up, will these American firms get caught in the middle?

READ MORE 习近平致信祝贺2018世界人工智能大会开幕
Xinhua: China willing to share opportunities in digital economy: Xi 
Xinhua: International tech giants to establish AI centers in Shanghai


6. Xi Jinping castigates Party members

On Monday, the Party quietly released a speech of Xi Jinping, delivered on July 3, 2018 at the National Organization Work Conference.


“Among Party members and cadres, some do not adhere to political discipline and political rules.”“[They] disobey the Center…and are two-faced.”“Some…harbor doubts about communism, and don’t believe in Marxism-Leninism, [but instead] believe in supernatural beings.”Xi is adamant that the Party must do a better job of following central directives:“The Party Center is the brain and the backbone…and must have the final say.”“Only in this way can ‘the body move the arm, and the arm move the finger.’”“The fundamental task of local Party groups is to ensure that the Center’s decisions are…implemented.”

Get smart: Six years on, Xi still does not feel that he has control of the Party. That means the disciplinary crusade is only set to continue.

What to watch: The focus on discipline is undermining morale among lower level officials. Will China’s deep state thwart Xi’s ambitions?

Qiushi: 习近平在全国组织工作会议上的讲话


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