Wednesday, December 5, 2018
HEARD IN BEIJING
"I am a Tariff Man."
- Donald Trump, President of the United States
Some context: Trump wrote that in a tweet yesterday. The comment helped turn what had been two good days for markets in China into a bad one on Wednesday. And we're sure it wasn't exactly a hit in Zhongnanhai either. More in the Tip Sheet below.
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THE TIP SHEET
DRIVING THE DAY
1. State Council moves to shore up employment
As the economy slows, China’s leaders are increasingly concerned about the effect on employment (see yesterday’s Tip Sheet).
So it comes as little surprise that, on Wednesday morning, the State Council released new opinions on supporting employment.
Companies that do not lay off employees, or keep layoffs to a minimum, will be allowed to forego half of their unemployment insurance obligations.Authorities will make it easier for entrepreneurs and small businesses to obtain government-guaranteed loans.The government will give living allowances to unemployed persons engaging in professional training.
But that’s not all. The central government also wants local governments to come up with their own plans to shore up employment. All local governments are required to come up with employment support plans within 30 days.
Get smart: Nothing worries China’s leaders more than mass unemployment. They are being proactive in trying to prevent that, without resorting to large-scale stimulus – for now.
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FINANCE & ECONOMICS
2. Currency whiplash
China’s currency started the week on a tear. On Monday and Tuesday, the currency appreciated more than in any other two-day span in a decade.
Bloomberg has the details:
“The currency rose 0.66 percent to 6.8403 per dollar at 5:34 p.m., taking its two-day gain to 1.7 percent, the biggest since at least 2007.”“Bonds rallied, with the yield on 10-year government debt falling to its lowest level since April 2017, amid speculation the stronger currency will give policy makers room to ease monetary policy.”
But the optimism hasn’t lasted long: As of mid-day the CNY had given back 0.5% of the appreciation – thanks to confusion from the US overnight about the exact outcomes of the Xi-Trump meeting (see entry #4).
Our take for investors: It will be exceedingly difficult to trade the CNY over this 90-day period. The currency is going to whiplash on every tweet.
Our take for companies: Ignore the markets. The two sides still have a lot of ground to cover to get to a deal. The noise to signal ratio is 10:1, so be patient.
Something to consider: If we get a trade deal and a Fed that looks to be more dovish than most thought, the CNY will strengthen in 2019.
Bloomberg: Yuan Poised for Biggest Two-Day Gain in a Decade on Trade Truce
Bloomberg: Offshore China Stocks Retreat as Trade Doubts Return; Bonds Rise
FINANCE & ECONOMICS
3. How China is changing global financial flows
Tip Sheet readers are well aware that this year has seen an accelerated pace of financial opening – and that asset managers have been jumping into China with both feet, especially in the bond market.
The FT has a great piece by James Kynge, putting the developments in context:
“This year much has changed.”“Foreign asset managers, sovereign wealth funds and central banks have increased their total holdings of Chinese domestic stocks and bonds — denominated in renminbi — to $462.2bn at the end of September, up by $122.5bn from a year ago, according to official statistics.”“For the first time, such inflows are running at about the same average monthly level as foreign direct investment, which totalled $91.8bn in the first nine months of the year.”The key change:“The inflows highlight the rebalancing of China’s economy from corporate direct investment to institutional investment,” says Miranda Carr, executive director of Haitong Securities in London.
Our take: This will be one of the defining features of global financial flows over the next decade.
Go deeper: Check out James’ full piece. It’s worth it.
POLITICS & POLICY
4. Nobody knows what will happen in the trade negotiations
After Saturday’s Xi-Trump meeting, the American side said that there would be a 90-day deadline to reach a new trade deal.
But in their immediate messaging after the meeting, the Chinese did not mention the 90-day deadline, leading to speculation that the two sides came out of the meeting with different understandings (see December 3 Tip Sheet).
On Wednesday morning, the Ministry of Commerce (MofCom) confirmed the 90-day deadline (see link).
But now Trump is muddying the waters again by floating the idea of an extension (Twitter):
“Unless extended, they will end 90 days from the date of our wonderful and very warm dinner with President Xi in Argentina.”Trump is also demanding a REAL DEAL:“We are either going to have a REAL DEAL with China, or no deal at all - at which point we will be charging major Tariffs against Chinese product being shipped into the United States.”But, according to the MofCom statement, it doesn’t sound like the Chinese are preparing any new concessions:“The Chinese side will start by implementing the concrete measures that have already been agreed.”
Get smart: Nobody knows exactly what a REAL DEAL would look like, but if Trump means that China should abandon its industrial policy, it’s not going to happen.
POLITICS & POLICY
5. China’s growing footprint in Portugal
Xi Jinping is in Portugal for the last stop on his nine-day, four-country tour.
Portuguese President Marcelo Rebelo de Sousa made sure that Xi would feel welcome (Xinhua 1):
"The visit of President Xi will reinforce and strengthen this trust, which is not only trust, but trust and friendship.""The outcome of the visit will inevitably be very positive."Some context: When the Portuguese economy was on the brink of collapse in 2011/12, Chinese companies made BIG investments. Chinese companies now have big stakes in Portugal’s biggest energy company (EDP), power grid (REN), bank (BCP), and insurance company (Fidelidade Cia de Seguros).
And China’s Portuguese footprint is set to get bigger (SCMP):“UnionPay, …China’s dominant bank card clearing service, is expected to sign a pact with [BCP]…to issue bank and credit cards using the Chinese company’s electronic payments clearing system.”Xi also got another Belt and Road win (Xinhua 2):“The Portuguese president said that Portugal supports the BRI and is willing to become the hub in Europe of the overland and the maritime silk roads.”
Why it matters: Portugal has become an important ally within the European Union pushing back against proposals to more closely scrutinize Chinese investments.
Xinhua: Interview: Portuguese president calls ties with China "exceptional"
Xinhua: China, Portugal agree to seek more cooperation progress
Reuters: China's Xi seeks deeper cooperation with EU, Portugal
POLITICS & POLICY
6. Government steps up IPR protection
You don’t see this every day.
38 (!) Party and government agencies signed an MOU yesterday, promising to cooperate on punishing violations of intellectual property rights (IPR).
The MOU promises to go after organizations and individuals that (NDRC):
repeatedly infringe on patentsdo not comply with the government’s administrative IPR rulingsfalsify documents during patent applicationsPenalties for violators include being:cut off from government fundingbarred from government procurementrestricted in access to land and financingtemporarily banned from importing and exporting
Meanwhile, on Monday, the supreme court (SPC) finished drafting rules for its newly-established IP tribunal (see October 29 Tip Sheet). The rules will clarify the tribunal’s scope and litigation procedures.
Details on the new rules are scant.
But Yicai scoops that the tribunal’s scope is already on course to expand over the next three years.
In addition to highly technical civil and administrative intellectual property cases, which is the current remit, the tribunal will also handle cases relating to trademarks, commercial secrets, and unfair competition in the future.
Get smart: China’s IPR protection regime is still far from perfect. But the government is taking concrete steps to improve the situation.
Get smarter: Authorities are improving the system primarily to protect domestic companies' IP, but pressure from the US and other countries certainly helps, and foreign companies will benefit.
POLITICS & POLICY
7. Government to go zombie hunting
The government is stepping up its efforts to eliminate “zombie companies”.
Tip Sheet readers saw this coming (See November 15 Tip Sheet).
Yesterday, the NDRC and 10 other ministries released a document outlining their next steps.
First, governments are required to compile a list of zombie companies in their jurisdictions within three months.
What comes next depends on the type of zombie:
For companies that still have “operational value,” debtors and creditors should formulate a restructuring plan within six months.For companies with no value, a bankruptcy plan should be completed within 6-9 months.State-owned zombies are getting special attention (NDRC):“For state-owned ‘zombie enterprises’…debt disposal plans should be formulated and completed within set time limits.”The document makes it explicitthat regulators do not want other government actors going in and mucking this up:“The practice of governments maintaining ‘zombie enterprises’ through financial subsidies [will be] strictly forbidden.”“No organization, enterprise or individual may obstruct or delay an enterprise or its creditors from filing a bankruptcy application.”
The clock is ticking. The government wants all of this done by the end of 2020, at least in principle.
Get smart: Central authorities are ready to cut their losses here, so bankruptcy and other restructuring activity is set to ramp up.
What to watch: This could be a chance for investors and companies to pick up assets at cheap valuations. The process is well worth monitoring.
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