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TRIVIUM CHINA

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"Protectionism is on the rise and is forcing us to take the path of self-reliance. It’s not a bad thing."

- Xi Jinping, CCP General Secretary

Some context: Xi said that during his trip to Heilongjiang this week. He’s obsessed with the idea of making China self-reliant. The trade war with the US is only helping to make his case – so he welcomes the challenge. 

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THE TIP SHEET

DRIVING THE DAY

1. Xi’s self-reliance message in Dongbei

Xi Jinping was up in Heilongjiang Province on Tuesday and Wednesday.

On his itinerary were visits to state-owned farms and equipment manufactures.

He used the visits as an opportunity to send a crystal-clear message: China should be self-reliant. 

Specific areas that Xi stressed for self-reliance included (Xinhua):

Supplies of staple foodsThe real economyManufacturingWe’ll give you one guess as to what prompted Xi to emphasize the self-reliance concept.

You guessed it. The trade war:“Internationally, advanced and critical technologies are more and more difficult to come by.”“Unilateralism and trade protectionism are on the rise.”“China ultimately has to rely on itself.”

Get smart: It’s no coincidence that Xi picked the northeast as his destination for this trip. The region was the birthplace of China's manufacturing and heavy industrial sectors, as well as a base for large-scale farms. And it happens to be dominated by SOEs.

Get used to the new self-reliance mantra. It is here to stay.

And under that umbrella, Xi and company will increasingly emphasize the importance of SOEs in securing strategic resources and other means of production.
 

READ MORE
Xinhua: 习近平:装备制造业练好“内功”才能永立不败之地
Xinhua: 习近平感慨北大荒的沧桑巨变“了不起”
 

FINANCE & ECONOMICS

2. Chinese cities react to the trade war

Chinese cities are drawing up plans to react to the deepening trade war.

That’s according to an interesting new report by 21st Century Business Herald that outlines the current dynamics in two anonymous northeastern trading cities:

 “From January to July, 222 enterprises in City S carried out trade with the United States, accounting for 35.4% of the city's foreign trade enterprises.”“The three rounds of tariff lists, [amounting to] USD 250 billion, involved 1611 enterprises in City S. Among them, 37 enterprises [accounted for] an 80% share of the total exports involved, so the impact was relatively concentrated.”In addition to the concentrated impact, the study found that higher tech companies are faring better:"Similar to City S, the report from City H showed that companies with technological advantages are hardly affected."

The local governments are snapping into action to encourage and facilitate technological upgrading by the affect companies – hoping to make them indispensable to American purchasers.

Get smart: So far, the trade war has yet to have a broad macroeconomic impact. Instead, the effects are highly concentrated, and a handful of companies are suffering disproportionately.

What to watch: That dynamic may change the longer the trade war grinds on.
 

READ MORE
21st Cent Biz: 贸易摩擦下的区域经济风险可控 产业升级提上日程
 

FINANCE & ECONOMICS

3. PBoC doesn’t follow the Fed

The big news in financial markets on Wednesday was the Federal Reserve’s decision to raise interest rates in the US for the third time this year.

In Asia, analysts were focused on whether China’s central bank (PBoC) would “follow the Fed” by making an upward adjustment to rates on its open market operations (OMO) or medium-term lending facility (MLF).

Some context: When the Fed hiked rates in late 2017 and early 2018, the PBoC reacted by adjusting its OMO and MLF rates to help relieve downward pressure on the currency.

But today, the PBoC stood pat.According to PBoC advisor Sheng Songcheng, that’s because the most recent Fed move won’t put too much pressure on the CNY – and definitely not any more pressure than it puts on other currencies.

But Sheng also pointed out that not following the Fed means that China still needs to exercise a fairly heavy hand in currency markets (BJ news):

“China still needs to give appropriate guidance, management, and even some intervention to the exchange rate.”

Get smart: The PBoC wants to take a more hands-off approach to currency management. But given the deepening trade war and divergent monetary policy, that’s not a realistic proposition right now.
 

READ MORE
Beijing News: 盛松成:美国加息对人民币汇率压力不大 我国还是需要对汇率予以适度的引导、管理甚至干预 
The Edge Markets: China leaves rates steady after Fed as two economies diverge
 

POLITICS AND POLICY

4. China wants more foreign trade and investment

While Xi Jinping was off touting self-reliance this week, Premier Li Keqiang was trying to make China more open to foreign trade and investment.

Li used the weekly State Council executive meeting to ease foreign investment restrictions (gov.cn):

“An online filing process will be introduced in regulating foreign investment.”“Unified market access criteria will be applied to both Chinese and foreign investment in areas outside of the negative list."“Large-scale foreign investments…will receive support on land- and sea-use approval procedures, an accelerated environmental impact assessment, and their logistic costs will be reduced.”But that’s not all. The State Council also made a plan to cut tariffs on imports:“Starting from Nov 1 this year, import tariffs on a total of 1,585 tax items will be slashed.”“The average tariff rate for…machinery and industrial instruments will be cut, from 12.2 percent to 8.8 percent…[for] textile and construction materials from 11.5 percent to 8.4 percent…[and for] paper and other resource-based products…from 6.6 percent to 5.4 percent.”

Get smart: More self-reliance is the goal for strategic sectors, but for everything else the government wants to open up to foreigners (except the US, that is). Both dynamics are driven by the trade war.
 

READ MORE
Gov.cn: 李克强主持召开国务院常务会议 确定推动外商投资重大项目落地、降低部分商品进口关税和加快推进通关便利化的措施等
Gov.cn: China to introduce more measures to facilitate foreign investment
 

POLITICS & POLICY

5. Five-year plan on rural revitalization

We recently highlighted the importance of the rural revitalization program. Xi Jinping is so focused on it that he has his Politburo colleagues closely studying the policy (See September 25 Tip Sheet).

On the back of that study session, the Party Central Committee and the State Council released a five-year plan for the strategy on Wednesday.

Some context: In February, the Party issued a rural revitalization strategy, which should be effective until 2050. This more recent plan is meant to refine the short-term strategy until 2022.

The key elements of the plan are to improve the two-way flow of factors – including people, land, and capital – between cities and the countryside.

But migration of people, land, and capital to rural areas doesn’t follow typical economic logic, so the government is planning on playing a big role to facilitate such movement.

Specifically, policymakers will (gov.cn):

Increase fiscal resources to support infrastructure spending in rural areasEncourage the development of rural financial services through subsidies and tax breaksEncourage more investment in modern agriculture, industrial integration, and ecological restorationProvide larger land quotas for development of the agricultural industry

Get smart: Rural revitalization is one of Xi Jinping’s babies. Get to know it.
 

READ MORE
Gov.cn:中共中央 国务院印发《乡村振兴战略规划(2018-2022年)》 
Gov.cn: 绘就乡村振兴宏伟蓝图——国家发展改革委负责人解读《乡村振兴战略规划(2018—2022年)》
Gov.cn: China releases five-year plan on rural vitalization strategy

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