SinoInsight 1
China and Japan signed a $30 billion, three-year currency swap agreement on Oct. 26 when Japanese prime minister Shinzo Abe was in Beijing. The agreement can be renewed upon the consent of both parties.
OUR TAKE We believe that the currency swap agreement is a compromise on the CCP’s part as it seeks to win over Japan in an increasingly unfriendly geopolitical environment. The agreement will allow Japanese capital to leave the mainland more easily; several prominent Japanese firms have closed factories in China and moved their production lines since the start of the year.
Meanwhile, the CCP has been imposing strict controls on foreign exchange since 2016 to make it harder for funds to leave China. In September 2016, Japan sent a 230-person delegation to China to discuss the matter of allowing Japanese companies to exit the mainland. The Japanese delegation wanted the PRC government to simplify the exit process by creating a special mechanism to allow companies withdrawing from China to exchange their renminbi for yen.
SinoInsight 2
On Oct. 31, a Politburo meeting chaired by Xi Jinping noted that “downward economic pressure has increased” on the economy and “long-term accumulated risks are exposed.” However, the Politburo did not touch on the property markets, which have recently shown signs of cooling. A Politburo meeting in July noted a need to “resolutely curb rising property prices.”
On the same day, China’s National Bureau of Statistics released data showing that the official manufacturing purchasing managers’ index and the non-manufacturing purchasing managers’ index (PMI) were 50.2 and 53.9 respectively in October. Both indexes had fallen from the previous month, and the manufacturing purchasing managers’ index had hit a new low since July 2016.
On November 1, Xi said at a symposium of private sector entrepreneurs that “the private sector is an essential component of the Chinese economy,” and “the private sector and private entrepreneurs are one of us.”
“In recent days, some people have made remarks negating and doubting the private economy. For example, some argued that the private economy has completed its mission and will fade out … some wrongly argued that setting up party cells and labor unions in private businesses is intended to control private enterprises … all these statements are completely wrong and do not conform to the party’s policies,” Xi said.
On the same day, President Donald Trump tweeted: “Just had a long and very good conversation with President Xi Jinping of China. We talked about many subjects, with a heavy emphasis on Trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina. Also had good discussion on North Korea!”
OUR TAKE
1. The recent Politburo meeting is the first time that the CCP has openly acknowledged that China’s economy is deteriorating since the start of the Sino-U.S. trade war. The acknowledgment is a strong signal that China’s economic outlook is very pessimistic, and affirms our analysis over the past couple of months.
President Trump has said on television interviews that he plans to impose additional tariffs on Chinese goods if the U.S. does not make a “great deal” with China. According to some news reports, Trump plans to announce an additional $267 billion in December if his G-20 meeting with Xi Jinping does not turn out well. Given the 60-day review period, the tariffs will land during the Lunar New Year period, and would likely place the CCP regime under immense pressure. Market confidence would also be dealt a serious blow.
2. In our analysis of the CCP’s coming Fourth Plenum and Xi’s “southern tour,” we noted that Beijing is more likely to make concessions to the U.S. to “delay the escalation of tensions” between both countries. We also noted that Xi and his allies will “continue signaling reform in the lead up to the Fourth Plenum.”
Since making our analysis, Xi has chaired the Politburo meeting and declared private entrepreneurs to be “one of us” at the recent symposium. His “long and very good conversation” with Trump seems to have locked in their meeting at the G-20, which was until then touch and go.
We believe that there is a good chance that Xi will make concessions to the U.S. in exchange for a slowing down of the trade war. However, Trump will unlikely abandon his pressure campaign against the PRC.
