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TRIVIUM CHINA

DRIVING THE DAY

1.  China retaliates in the trade war

It didn’t take long for China to retaliate against the latest round of US tariffs (CNN):

"The Chinese government said Tuesday that it would impose tariffs on US goods worth $60 billion following the Trump administration's announcement that it was hitting $200 billion worth of Chinese goods with new tariffs.""China's new tariffs will be levied at rates of 5% or 10%, depending on the product.""More than 5,000 US goods will be affected, including meat, nuts, alcoholic drinks, chemicals, clothes, machinery, furniture and auto parts."The Chinese are clearly frustrated:"'The Chinese side has repeatedly emphasized that the only correct way to solve the trade dispute between China and the United States is through talk and consultation on the basis of equity, integrity and mutual respect,' [Ministry of Foreign Affairs] spokesman Geng Shuang said at a regular news briefing.""But what the US side has done doesn't show sincerity or goodwill."

But, but, but…the Chinese have not yet officially walked away from the latest round of potential trade talks. That, plus the relatively muted tariff response from China (at lower rates than expected), leaves some room for optimism.
 

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CNN: China strikes back with tariffs on $60 billion of US goods
 

DRIVING THE DAY, CONT'D

2.  China seeks to blunt impact of trade war

China may be putting up barriers on American imports, but in general it is trying to make it easier to get goods into the country.

Tuesday’s State Council meeting decided the following:

“This year will see further steps to shorten the overall time for both import and export customs clearance and reduce the number of documents required for customs clearance by another one-third.”“The cost of customs clearance will…be further cut.”“In principle, companies will be able to get the customs clearance documents processed online and go through verification at ports by November.”The list of government administrative charges at ports will be released before the end of the year [and] no charges beyond the list should be collected.”The meeting also promised to help exporters:“Export rebate policies will be further improved.”“The frequency of inspections for exports will be lowered.”“The coverage of export credit insurance will be expanded.”“Financial institutions will be encouraged to increase the use of credit loans under export credit insurance and the export tax rebate account pledged loan[s].”

Get smart: As the trade war heats up, we are going to see more concerted efforts to help companies that are negatively affected.
 

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Gov.cn: 李克强主持召开国务院常务会议 要求把已定减税降费措施切实落实到位 确保社保费现有征收政策稳定等
Gov.cn: New measures to be taken for steady growth of foreign trade
 

FINANCE & ECONOMICS

3. Liu Shijin says the economy will continue to slow

The annual China World Economic Forum meeting kicked off in Tianjin on Tuesday.

One of the speakers that has gotten the most attention from local media is Liu Shijin (Sina):

"Liu Shijin, vice chairman of the China Development Research Foundation and member of the central bank's monetary policy committee, participated in a dialogue on 'China's financial opening.'”But predictably, questions from media focused less on financial opening and more on the evolving policy stance:"In response to a question about whether monetary policy will be loosened to provide further support for economic growth, Liu said that the central bank will provide a reasonable and sufficient supply of funds for the economy."Well that’s a non-answer if we’ve ever heard one. But Liu went further, indicating that weaker growth is here to stay:"Liu pointed out that even without…the trade war, the Chinese economy has now shifted from high-speed to-medium speed.""Monetary policy should respond appropriately when an economic downturn is significant, but it can't be too loose, or it will abandon de-leveraging at the half-way point."

Get smart: Many analysts think China is in full growth-support mode. But the reality is that regulators don’t want to backslide on their initial financial de-risking successes. 
 

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Sina: 刘世锦:货币政策不能过松 使得去杠杆半途而废 
 

FINANCE & ECONOMICS

4. Debt growth slows to a crawl – but not for households

A recent paper from the Chinese Academy of Social Sciences(CASS) says that debt is still increasing in China – but barely.

According to CASS, the debt-to-GDP ratio of China’s non-financial sectors – i.e. households, corporates, and government – stood at 242.7% of GDP as of end-July 2018, up from 242.1% in December 2017.

First the good news:

The 0.6 percentage points of leverage growth in the past six months is well down from the ~15 percentage points of growth we saw each year from 2012 to 2015.That means the pace of debt accumulation has slowed dramatically.In addition, financial sector leverage has decreased – down to 64.3% of GDP at end-July from 69.7% of GDP at the end of 2017. That’s thanks to the financial de-risking campaign.Lastly, both government and corporate debt edged down in the first two quarters of 2018.But now the bad news:If every other form of debt is falling, that means that household debt continued to pick up swiftly.It grew from 49% of GDP to 51% of GDP in H2 2018.

Get smart: Regulators have stabilized the macro debt ratio, but the pace of household leverage growth is worrying. Households that over-borrow are the first to deleverage in a downturn, making economic pain deeper. Watch this space.
 

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Caijing: 二季度实体杠杆率稳定在242% 国企民企杠杆分化_经济_宏观频道首页_财经网
 

POLITICS & POLICY

5. Government and business vie over social security

There has been an outcry among businesses ever since the government announced that the State Administration of Taxation is taking over responsibility for collecting social security contributions from companies.

That’s going to substantially raise costs for many businesses as it will mean better enforcement of payment collections – not exactly what you want in the middle of an economic downturn.

Premier Li Keqiang used Tuesday’s State Council meeting to reiterate that the new policy must not increase the burden on companies:

“[Officials] must act according …[to the principle of] ‘the overall burden of businesses must not increase.’”To do that, local governments are supposed to lower required contribution fees, while increasing compliance.

But the premier was quick to say that the proposed reforms must go through.

In fact, he sounded worried that some officials might drag their feet, and said he’ll be watching:“State Council inspection teams and the National Audit Office will carry out stealthy visits to discover problems…and forbidden behavior will be severely punished.”

Get smart: If Li’s orders aren’t properly executed, then it will mean either higher costs for businesses, or less revenue for local governments, or both. Don’t expect this to go smoothly
 

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Gov.cn: 李克强:各地一律保持现有社保政策不变
 

POLITICS & POLICY

6. Xi reaffirms ties with Serbia

Xi Jinping met with Serbian President Aleksandar Vucic on Tuesday.

Xi said things are going well (Xinhua):

"Xi said the two countries have seen fruitful outcomes of pragmatic cooperation."Some context: Sino-Serbian ties have gained momentum in recent years. Li Keqiang visited the country in 2014 and Xi visited in 2016. China has made some splashy investments, including the purchase of the country’s only steel mill by Hebei Iron and Steel in 2016. The mill was on the brink of collapse but is now the country’s second-largest source of exports.

Want more proof that relations are good? Check out what the Chinese ambassador said this summer (b92):"Nobody has ever been allowed to do anything against the interests of China on Serbian soil, never! Nobody!”“The two nations love each other, and the two governments conduct a friendly policy."And now, Xi wants more (Xinhua):"'China and Serbia should join hands in the Belt and Road construction and synergize their development strategies to deepen bilateral cooperation and better benefit the two peoples,' Xi said.”

Get smart: China has made a concerted effort in recent years to build strong relations with Central and Eastern European countries. It's paying off. 
 

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Xinhua: Xi meets Serbian president
b92: "For China, Kosovo is Serbia, and so it shall remain"
 

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