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TRIVIUM CHINA: The Tip Sheet, know china better

Monday, December 3, 2018


"The relationship is very special — the relationship that I have with President Xi."

- Donald Trump, President of the United States

Some context: Trump said that after sharing steak with Xi on Saturday. The personal rapport between the two men has put a pause on the trade war, but is unlikely to reverse the long-term downward trajectory of the bilateral relationship. More in the Tip Sheet below.

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1. Escalation of trade war postponed

After months of build up and anticipation, Xi Jinping met with Donald Trump in Buenos Aires on Saturday.

The two men – accompanied by a slew of top aides – had a working dinner.

The big outcome: The two men agreed not to escalate the trade war – for now. But there did not appear to be progress on the substantive issues at the heart of economic tensions. The New York Times sums it up well:

“The compromise… was less a breakthrough than a breakdown averted.”“The two leaders remain far apart on basic issues of market access and trade policy, and there was no sign that either planned to back down on those.”What they agreed:“Mr. Trump will postpone a plan to raise tariffs on $200 billion worth of Chinese goods to 25 percent, from 10 percent, on Jan. 1.”“The Chinese agreed to an unspecified increase in their purchases of American industrial, energy and agricultural products.”

What’s next: The two sides agreed to resume negotiations, with a deadline of 90 days for making progress. If that doesn’t happen, Trump will raise existing tariffs to 25 percent.

The bottom line: This meeting looks to have paused the negative trajectory of the bilateral relationship. But it did not reverse that trajectory.

NYT: U.S. and China Call Truce in Trade War


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2. China and US talk past each other

Looking at the readouts, it’s easy to see that China and the US are spinning outcomes of the Xi-Trump meeting in different directions.

The US perspective (WSJ):

"According to the White House, the two nations will discuss thorny issues of Chinese economic policy, including forced technology transfer, intellectual-property protection, non-tariff barriers, [and] cyberintrusions.""The two sides would “endeavor” to wrap up the talks in 90 days.""Should the talks fail…the tariffs on the $200 billion of goods would increase to 25% from the current 10%."The Chinese perspective:"Chinese Foreign Minister Wang Yi…said only that the talks would focus on removing all U.S. tariffs and Chinese retaliatory tariffs and made no mention of a deadline."Get smart: It’s not unusual for different governments to stress different aspects of a meeting for their domestic audiences. But in this case, the differences speak to a deep divide.

The gap is so large, that China won't even allow the US perspective on the agreement to be widely shared (Bloomberg 1):"A social media post by the U.S. embassy in Beijing about the trade agreement between the two nations was being partially censored on Monday."

Go deeper: The fine folks at Bloomberg have put together a very useful side-by-side (Bloomberg 2).

MFA: 国务委员兼外交部长王毅向中外媒体介绍中美元首会晤情况
White House: Statement from the Press Secretary Regarding the President’s Working Dinner with China
WSJ: U.S., China Reach a Truce on Trade
Bloomberg: China Partly Censors U.S. Embassy Statement on Trade Truce
Bloomberg: The U.S. and China’s Trade Truce Statements, Compared


3. Markets cheer détente with US

 Markets are loving the apparent trade détente (Caixin):

"China stocks rallied and the yuan strengthened Monday morning after President Xi Jinping and U.S. President Donald Trump agreed to put new tariffs on hold at the G-20 summit Saturday.""The benchmark Shanghai Composite Index was trading 2.91% higher at 2,663.45 before the lunch break Monday, while the Shenzhen Component Index was up 3.64% at 7,961. Shares in communications, electronics, food and home appliances enjoyed the biggest increase."But for businesses, we counsel caution, as things are far from settled.

US President Trump is already muddying the waters. On Monday morning, China time, he tweeted (Bloomberg):"China has agreed to 'reduce and remove' tariffs on imported American-made cars."The Chinese have yet to corroborate the claim:"Trump gave no other details in his post." "In a briefing in Beijing a few hours after the tweet, China’s foreign ministry spokesman Geng Shuang declined to comment on any car tariff changes."

Get smart: The two sides do not have the same understanding of Saturday's agreement. We are still far from a lasting deal.

Caixin: Stocks Rally After China and U.S. Agree To Delay New Tariffs
Bloomberg: Trump Says China Has Agreed to Reduce, Remove Tariffs on Cars


4. UBS is first in the door

It’s official. Swiss bank UBS will be the first foreign bank to obtain a controlling stake in an onshore securities joint venture.

The securities regulator made the announcement late on Friday.

Here’s Nikkei on the development:

"The Swiss bank, which currently owns 24.99 percent of the UBS Securities Co joint venture, had applied in May this year to the China Securities Regulatory Commission (CSRC) to raise its stake to 51 percent.""'This will be the first foreign-controlled brokerage approved by the securities regulator since the rules on foreign investment in brokerages were implemented,' the CSRC said on social media website Weibo late on Friday."Get smart: Financial opening is happening, and lots of folks are missing it. Here’s how we put it to Bloomberg today:"Pressure from the U.S. and other countries seems to be pushing China to open up quicker than policy makers probably envisioned a year ago, said Andrew Polk, co-founder of Beijing-based research firm Trivium China." “;The accelerated pace of financial opening is the one big China story that most people are missing right now,' [he said].”

Get briefed: If you don’t want to miss out on the latest development in your sector, sign up for our monitoring services.

Nikkei: UBS first foreign bank to gain majority stake in China venture
Bloomberg: China Embraces Financial Opening Away From Xi-Trump Glare


5. Stock index futures relaxed

Over the weekend, Chinese regulators made it slightly easier to short the stock market (Xinhua):

"The China Financial Futures Exchange (CFFEX) announced Sunday that it was further easing restrictions on domestic stock index futures trading in a 'sound and orderly' way in a bid to facilitate market functions."Some context: These instruments can be used by investors to hedge stock risk. But they can also be used to short the market – and regulators blamed them for playing a role in the 2015 stock market meltdown. That’s when they tightened the rules.

The new rules reduce the amount of collateral that traders need for such trades:"The CFFEX said it will reduce the margin requirement for Hushen 300 index futures and SSE 50 index futures to 10 percent from 15 percent and that for CSI 500 index futures to 15 percent from up to 30 percent from Monday's clearing."

Get smart: The fact that regulators are relaxing these rules shows that they are confident that the worst of this year's stock market rout is over.

Get smarter: Just because the worst is over doesn’t mean good times are set to roll – despite Monday’s post-G20 bounce.

Xinhua: China eases curbs on stock-index futures trading


6. CBIRC issues bank asset management rules

On Sunday, the banking regulator issued regulations governing the asset management activities of banks’ investment subsidiaries.

Some context: The rules come on the back of a sweeping overhaul to the WMP market that regulators released earlier this year. 

One of the big changes is that these entities can now invest in the stock market. Asia Times has the skinny:

"The new rules are basically consistent with the previous draft version, which stipulates that the minimum registered capital of wealth management subsidiaries is 1 billion yuan (US$140 million).""Meanwhile, wealth management subsidiaries are allowed to issue products which directly invest in the stock market.""The ceiling of investing in debt assets not traded in the interbank market or stock exchange market, including credit assets, trust loans and banker’s acceptance, has also been relaxed.""Wealth management subsidiaries can issue products which use no more than 35% of the net assets to invest in those debt assets, compared with the previous 4% limit."

Get smart: It’s convenient timing to allow asset managers to start investing in the stock market after a months-long rout. But regulators genuinely want to increase the proportion of professional money managers in the market – too many retail investors drive volatility.

Yicai: “信托+公募”超级牌照来了!理财子公司新规十大看点
Asia Times: CBIRC to issue new rules on wealth management subsidies


7. Meet the new market regulator -- SAMR

The temporary truce in the trade war may be getting all the media attention, but another news articles from Caixin is arguably the most important piece from this weekend – at least for anyone doing business in China.

The piece profiles the new anti-monopoly regulator, the State Administration of Market Regulation (SAMR):

As Caixin puts it:

“The country is embarking on a new experiment in its continued struggle against monopolies — the merger of its three separate antitrust law enforcement agencies into the single State Administration of Market Regulation.”The key context:“The China’s National People’s Congress approved in March a plan to combine three existing agencies — the Anti-Monopoly Bureau of the Ministry of Commerce, which regulated mergers, the Price Supervision and Anti-Monopoly Bureau of the National Development and Reform Commission, which handled price-related monopolistic behavior, and the Anti-Monopoly and Anti-Unfair Competition Bureau of the State Administration of Industry and Commerce, which dealt with non-price-related cases.”“One major challenge for the new SAMR is oversight of administrative monopolies, which are still widespread in China despite the practice being prohibited by the Anti-Monopoly Law.”

Get smart: EVERY foreign business executive in China needs to understand SAMR and what it does.

Caixin: In Depth: China’s New Antitrust Authority Finds Its Feet


8. China to write unfair competition review into Anti-monopoly Law

10 years after passage of the Anti-monopoly Law (AML), China’s antitrust regime is undergoing big changes.

In March, the government consolidated the previously three separate antitrust regulators into a single body – the SAMR (see previous entry).

Now, the SAMR is rewriting the AML itself.

One goal of the amendment:

To curb the ability of government to undermine competition through its policiesTo do that, the SAMR is writing a fair competition review mechanisminto the AML.

How the competition review mechanism works:All policymakers must review existing policies against an 18-point checklist designed by the State Council in 2016.Going forward, all new policies must go through a review to make sure that they do not distort competition.

There is an obvious weakness to this mechanism: It’s completely dependent on policymakers policing themselves.

So SAMR is also working on specific rules to impose accountability and allow third-party evaluations.

Get smart: The AML revision is all about making sure that individual firms do not benefit unduly from government policy. But it is notabout hindering industrial policy. Policymakers will still have free rein to pick and choose certain sectors for favorable treatment.

Caixin: 反垄断三合一


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