SinoInsight 1
A Chinese delegation led by vice premier Liu He is in Washington from May 15-19 to talk trade. Several things have happened during this period:
- On May 15, North Korea suddenly canceled already scheduled high-level talks with South Korea and threatened to withdraw from the Trump-Kim summit on June 12 on the pretext that a joint U.S.-South Korea military drill that started on May 11 went against the spirit of the April 27 Panmunjom Declaration.
- There is plenty of speculation as to whether Trump’s top trade advisor and China hawk Peter Navarro was being excluded from the Washington talks. At the time of writing, Bloomberg has reported that he was left off the team before being put back on. Navarro is reportedly furious with Treasury Secretary Steven Mnuchin for shutting him out of one-to-one talks with Liu He.
- National Economic Council Director Larry Kudlow said that Trump would meet Liu He later today.
- Liu He appears to be willing to work out a deal where China buys more products from the U.S. to slash the trade deficit; the U.S. is asking for a reduction of $200 billion by 2020. In exchange, America may grant ZTE a reprieve from a seven-year ban and rescind the “Section 301” tariffs.
OUR TAKE
1. China cannot withstand a full-blown trade war with America. This means that Liu He has to come away with a deal during the Washington trip or face tariffs in June.
2. The Trump administration is likely well aware of China’s present economic vulnerability and America’s ability to tough out a trade war. Commerce Secretary Wilbur Ross recently said at the National Press Club that China’s proposed tariffs would have less than a three-tenths of 1 percent impact on America’s $18 trillion economy.
3. There is a chance that the Navarro-Mnuchin “disagreement” is a “good cop, bad cop” routine. Liu He could agree to favorable terms with the less hawkish Mnuchin—or deal with Navarro the hardliner. Of course, Navarro may appear to be marginalized for now if Trump is prioritizing a smaller trade deficit and Beijing’s cooperation on the North Korean issue in the interim instead of going all out on China.
4. North Korea’s latest shenanigans is timed to coincide with Liu He’s visit. Kim Jong Un is likely looking to leverage on the crucial Sino-U.S. trade talks to extract economic aid from Xi Jinping. We are not expecting Xi or Trump to cave to Kim, however. U.S. “maximum pressure” should continue, and Xi could even tighten sanctions.
SinoInsight 2
China’s finance ministry recently released data for January to April 2018:
- National general public budgetary revenue was 690.9 billion yuan, an increase of 12.9 percent from the previous year.
- Domestic value-added tax was 2,346.7 billion yuan, an 18.4 percent increase year-on-year.
- Non-tax revenue was 812.1 billion yuan, a decrease of 8.8 percent year-on-year.
- National government fund budgetary revenue was 2,055.9 billion yuan, an increase of 33.7 percent from 2017.
- Local government fund budgetary revenue was 1.9344 trillion yuan, an increase of 37 percent year-on-year.
- State-owned land transferred revenue was 1.7958 trillion yuan, a 40.7 percent increase year-on-year.
OUR TAKE
Over the first four months of the year, China’s general public budgetary revenue and government-funded budgetary revenue reached nearly 9 trillion yuan, a record high. Meanwhile, non-tax revenue declined after Beijing implemented fee reduction measures. Local governments substantially boosted their revenue by selling land leases.
We believe that a fresh round of property speculation is the reason for the increased coffers of local governments. According to the latest central bank data, household deposits fell by 1.32 trillion yuan in April, a largest-ever drop for a single month. New RMB home loans (residential loans) was 528.4 billion yuan, or 44.77 percent of the 1.18 trillion yuan in new RMB loans. This indirectly proves that the new real estate bubble is currently driving economic growth.
