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"After one reaches the summit, he kicks away the ladder by which he has climbed up."

- Qiushi Editorial

Context: That's how the Party's top journal Qiushimakes sense of the United States' decision to launch a trade war. The phrase is pointedly borrowed from the ideas of 19th century German Economist Friedrich List, who advocated for state-led industrial policy. In case it's not obvious, Chinese leaders see the US at the summit, having used industrial policy to get there and now trying to kick away China's ladder. More in the Tip Sheet below.

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1. Party addresses the state capitalist accusation

Senior officials increasingly believe that China is entering a new Cold War with the US – pitting the two countries’ political and economic systems against each other (See August 30 Tip Sheet).

The US says that China’s “state capitalist” system is unfair.So the Party’s top theoretical journal, Qiushi, took that complaint on in a new editorial.The editorial takes issue with the idea that the US economy is devoid of state intervention, citing US government support for the internet, biotechnology, and shale gas.

It goes on to argue that the US’s real goal is to keep China down:“The use of the so-called ‘state capitalism’ …[stirs up] public opinion to contain…developing countries, especially China.”“The fundamental reason why some Western political leaders attack Chinese state-owned enterprises is that Chinese state-owned enterprises continue to be better, stronger, and bigger.”“[China’s SOEs] are better able to serve China's development…and provide a reliable guarantee of the realization of the great rejuvenation of the Chinese nation.”“And this is what [Western critics] are extremely reluctant to see.”

Get smart: China’s top leaders have no plans to relax their control over the commanding heights of the economy. That’s why the broader US-China economic tensions are so intractable.

Qiushi: 认清“国家资本主义”问题的真相


2. Data dump – PMI

We don’t put much stock in China’s purchasing managers’ indices(PMI) these days. Ten years ago, they were closely watched because the manufacturing sector was THE driving force of the economy. That’s less true today.

But today’s release of the Caixin manufacturing PMI caught our eyewhen it clocked in at the lowest level in the past 14 months.

The index was down to 50.6 for August, down from 50.8 in July.Some context: The PMI is a diffusion index, which means it tells us the percentage of reporting companies that saw activity expand in the previous month. A reading above 50 indicates more firms are expanding than contracting, and below 50 vice versa.

As the index falls closer to 50%, that is a bad sign for the sector. 

One big driver of the weakness is the trade war, and its negative effect on exports (Reuters):“New export orders – an indicator of future activity — have contracted for the longest stretch since the first half of 2016, the Caixin PMI showed.”

Get smart: China’s slowdown is mostly domestically driven, but the trade war isn’t helping. We expect Chinese growth numbers to keep disappointing.

Reuters: China August manufacturing growth slows to 14-month low: Caixin PMI


3. New e-commerce law drops

China’s fast-growing and under-regulated e-commerce space will face stricter regulation – courtesy of the new e-commerce law, which the national legislature finally approved on Friday.

Some context: The law is so critical that it went through an unusual lengthy process to get finalized (see June 25 Tip Sheet).

More context: In 2017, China’s e-commerce market topped RMB 29 trillion – that’s 15% of all retail sales – and it employed almost 43 million people.

The final version of the law toughens up some requirements for the sector, stating:

Regulators will treat online and offline markets equally.They will hold e-commerce platforms, like Taobao, strictly accountable for IPR infringement, including the selling of fake products.They will explicitly ban China’s big internet companies from undertaking monopolistic behaviors.

But some measures were watered down.

One previous draft said that platform would face “joint liability” if a customer is harmed by a product or service sold on the site. That language was changed to the squishier “relevant liability.”

Get smart: The legislature is trying to play catch up with an e-commerce industry that has been growing like wildfire. Compliance costs will continue to increase and China’s biggest platforms will have to do the heavy lifting.

NPC: 中华人民共和国电子商务法
Xinhua: China adopts e-commerce law to improve market regulation


4. Xi puts time into building Africa ties

The Forum on China-Africa Cooperation (FOCAC) kicked off today in Beijing. Xi addressed more than two dozen African leaders, and invited them all to join in building the Belt and Road.

The speech came after a busy weekend for Xi, in which he held bilateral meetings with numerous heads of state and government in town for the forum.

By our count, Xi met with:

7 leaders on Friday17 (!) leaders on Saturday10 leaders on SundayThat’s quite a schedule.

What’s more, six leaders have received official welcome ceremonies:President of Cote d'Ivoire Alassane OuattaraPresident of Sierra Leone Julius Maada BioPresident of Botswana Mokgweetsi MasisiPresident of Burkina Faso Roch Marc Christian KaborePresident of Ghana Nana Akufo-AddoPresident of Egypt Abdel-Fattah al-Sisi

Get smart: Xi has promised to put more resources into strengthening ties with developing countries. Events like FOCAC and all of the associated bilateral meetings go a long way towards doing just that.

 Xinhua: 习近平出席中非领导人与工商界代表高层对话会暨第六届中非企业家大会开幕式并发表主旨演讲
 Xinhua: 中非合作论坛


5. Japan ties keep improving

Africa is not the only region where China is investing diplomatic capital.

Japan is also getting some love.The past week has seen two high-level visits between the two countries:

Executive Vice Premier Han Zheng and Vice Premier Liu He separately met with Japanese Deputy Prime Minister and Finance Minister Taro Aso on Thursday.On Friday, Vice President Wang Qishan and State Councilor Wang Yi separately met with Toshihiro Nikai, secretary general of Japan’s ruling Liberal Democratic Party.Nikai came with a special message(SCMP):“We hope Vice-President Wang can visit Japan soon.”

Get smart: It is very clear that both sides are eager to improve relations.

The bigger picture: The unpredictability of the US administration under President Donald Trump has China – and everybody else in Asia – reassessing their foreign relations.

CPC People: 王岐山分别会见南苏丹总统和日本自民党代表团
CPC People: 王毅会见日本自民党干事长二阶俊博
CPC People: 刘鹤会见日本副首相麻生太郎
CPC People: 韩正会见日本副首相兼财务大臣麻生太郎
SCMP: Beijing-Tokyo ties on the mend as Japan invites Chinese president’s right-hand man Wang Qishan to visit


6. Income tax cut

The legislature’s bi-monthly session ended on Friday.

The most highly-anticipated piece of legislation from the session was a revision to the Individual Income Tax Law.

At the conclusion of the session, legislators passed a new version of the bill.

Here are the key changes. The bill (SCMP):

“Increases individual taxpayers’ annual tax-free threshold to 60,000 yuan (5,000 yuan per month) from the previous 3,500 yuan per month”“Expands the income range for the lower tax brackets”“Adds new tax deductions, including one for parental elderly care”The public reaction has been one of disappointment. Chinese citizens (like citizens everywhere) wanted taxes to be lowered further.

It looked like that might happen after the previous draft was criticized for not cutting taxes enough (see June 26 Tip Sheet).

The cut will still affect a lot of workers:“The 5,000 yuan threshold will lower the percentage of the urban labour force paying any income tax from…44 per cent to 15 per cent, [Vice Minister of Finance] Cheng [Lihua] said.”

But, but, but: The ultimate macroeconomic impact of the cut will be limited. That's because authorities are also stepping up enforcement of tax payments, which will work to offset the higher income threshold.

SCMP: China tax cut finalised but leaves many unimpressed


7. New soil pollution law holds polluters more accountable

The legislative session that ended on Friday also passed a new Soil Pollution Prevention and Control Law.

The new law requires the central government to do more to monitor soil pollution (Xinhua):

“National standards for soil pollution risk control will be set by the environmental authority of the State Council.”“Environmental and health authorities of the State Council are required to conduct screening and evaluation of toxic and harmful substances in the soil and make public a list of them.”The law will hold rural polluters more responsible:“Farmland polluters are required to make rehabilitation plans, put them on government record, and carry out the plans.”Other provisions are suggested, but not required:“A nationwide soil condition census should be conducted at least once every 10 years.”“A network of monitoring stations should be established nationwide, with data and other information collected shared among authorities in environmental, agricultural, natural resources, housing, water resources, health and forestry and grassland sectors.”“Central and provincial-level governments should establish funds to prevent and control soil pollution.”

Get smart: Soil pollution is arguably China's biggest environmental challenge. Not only is it more pervasive than air pollution, but it’s also much harder to address.

Xinhua: China Focus: China adopts new law on soil pollution prevention


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