HEARD IN BEIJING
"Taking a unilateralist approach will not solve any problems."
- Li Keqiang, Chinese Premier
Some context: That’s what Li said in his speech at the WEF on Wednesday. He was condemning America’s approach to the trade war. Li also touched on a lot of other economic topics that we run down in the Tip Sheet below. It's a unique take today, drilling down into what we saw as an important speech by Li, which is a rare occurrence.
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THE TIP SHEET
DRIVING THE DAY
1. Li Keqiang condemns protectionism
You may not have heard…but China is in a trade war with the US.
And it’s a war that China would rather not fight.
That’s the context in which Li Keqiang addressed assembled foreign officials and businessmenat the World Economic Forum’s summer meeting in Tianjin on Wednesday.
Li said that things don’t look good:
“Our world is faced with rising uncertainties and destabilizing factors, and a growing backlash against globalization.”And he admitted that the global trading system is not working:“Some WTO rules do need to be improved.”We’ve got to work together, Li said:“Taking a unilateralist approach will not solve any problems.”“The right approach is for all to sit down as equals to find solutions.”Li pointed out the folly of a trade war in a world of global supply chains:“40% of China’s exports in goods and two thirds of its high-tech exports came from foreign-invested enterprises.”
Get smart: Li is correct. A trade war hurts US companies just as much as it hurts Chinese companies.
Get smarter: That’s exactly the US administration’s point. They want to force US companies to unwind their global supply chains and make everything at home.
DRIVING THE DAY, CONT'D
2. Li on China's big market
Li Keqiang’s speech also summed up the prevailing thinking among policymakers when it comes to China’s overall economic competition with the US.
In short, the new, more competitive environment means leaders will face new challenges in pursuing economic development. But China is up to the challenge:
"China’s development has always been achieved through overcoming all sorts of difficulties and challenges.""There were numerous occasions when we faced severe challenges, yet each time we managed to pull through and only emerged stronger than ever before."And here are the tools that will help them:"Today’s China boasts a more solid material and technological foundation…it also enjoys huge new market demand generated by the upgrading of consumption and economic restructuring.""We have the confidence, ability and means to cope with the current difficulties and challenges.""The express train of China’s economy will not lose speed but stay on a steady course."
Get smart: That bit about China’s huge market demand is one of the keys to understanding China’s stance in the trade war and toward foreign businesses more broadly. If push comes to shove, China is willing to bet on the strength of its own market. And it knows foreign businesses want access.
DRIVING THE DAY, CONT'D
3. Premier Li talks macro
We also thought Li’s speech was a pretty good wrap up of current economic dynamics.
He emphasized some positives for business:
"Over 18,000 new companies are set up on an average day, and corporate profits of large industrial companies have maintained double-digit growth.""On the whole, the Chinese economy has stayed on the track of steady progress."But he also noted uncertainty from the trade war:"Having said that, China is confronted with a host of difficulties and challenges in economic development. Deeply integrated into the world economy, the Chinese economy is inevitably affected by notable changes in the global economic and trade context."That’s an understatement if we’ve ever heard one…
Li also clearly acknowledged China’s sputtering domestic growth drivers."The moderation of growth in domestic investment and consumption has added to the difficulties of some companies and weighed on the stable performance of the economy."
Get smart: We are old enough to remember a time when the premier’s speech at an event like this was considered to be a key policy statement. Li, however, is the weakest Chinese premier in decades, so his speeches don’t have as big an impact on markets as his predecessors’ speeches did.
DRIVING THE DAY, CONT'D
4. Li outlines the policy stance
Finally, Li touched on the macro policy stance.
His message: don’t expect big stimulus.
"China did not resort to massive stimulus in the past; there is no reason why we should do it now."Li said there might more targeted adjustments coming:"To make sure the economy operates within a proper range, we will continue to develop new and better ways of macro regulation…while giving more attention to pre-emptive measures and fine-tuning."Our take: That bit about pre-emptive policy measures is important. Chinese economic policy is at its best when regulators are on the front foot – like in the financial de-risking campaign – instead of reactively fighting fires – like with the trade war.
Right now we are somewhere in the middle between reactive and proactive when it comes to macro policy.
Finally, Li touched on the currency."The recent fluctuations in the RMB exchange rate have been seen by some as an intentional measure on the part of China. This is simply not true.""Persistent depreciation of the RMB will only do more harm than good to our country."
Get smart: Policymakers genuinely do not want a weaker RMB – that’s why they have taken more aggressive intervention measures recently, and they will continue to.
POLITICS & POLICY
5. Top leaders battle the narrative that private business is under fire
A widely-read Chinese commentary last week said that China has done enough to strengthen the private sector, and should focus more effort on strengthening the state sector.
The article’s author is basically a nobody. But that did not stop serious concern from spreading widely among the private businesses community, who thought the commentary may be some sort of trial balloon from the government.
China’s top economic officials have been quick to dismiss the commentary.
Here’s what Li Keqiang said yesterday in Tianjin (Gov.cn):
“We will deliver and step up policy measures in support of the private sector… and protect all types of property rights.”
On Tuesday, Vice Premier Liu He said the same thing on an inspection tour to Shanghai (second Gov.cn link).
Get smart: Policymakers are terrified that plummeting business sentiment will accelerate the economic slowdown.
Get smarter: The government’s pretty words are not working. Businesses want to see more concrete actions.
POLITICS & POLICY
6. Han Zheng heads to Russia
Han Zheng made his first overseas trip since becoming executive vice premier in March.
His destination: Russia.
Han went for meetings of two bilateral working groups:
The China-Russia Investment Cooperation CommitteeThe China-Russia Energy Cooperation CommitteeSome context: The two committees were established in 2014 and 2008, respectively.
Reports say that they agreed to some new bilateral investment projects. But there are no details.
It’s also not clear that there was any real progress made on a deal to pipe Russian natural gas to China.
Our thought: If anything big happened, they would have announced it.
Han also met with Russian President Vladimir Putin, where he reaffirmed that relations are GREAT, saying (Xinhua):“Bilateral ties are at their best time in history.”
Xinhua says that Putin reciprocated by calling Xi Jinping his “real good friend.”
Get smart: Last week’s war games showed that China and Russia are getting closer. But despite improving military and political relations, bilateral economic relations are still relatively weak.