SinoInsight 1
On Sept. 4, Chinese premier Li Keqiang chaired an executive meeting of the State Council. Key points from the meeting include:
- Officials must do well the “six stables” (六穩), or stable employment, stable financing, stable foreign trade, stable foreign investment, stable investment, and stable expectations (穩就業、穩金融、穩外貿、穩外資、穩投資、穩預期);
- Higher vocational institutes will enroll 1 million people;
- Use the cash surplus from a 100 billion yuan unemployment insurance fund to conduct large-scale vocational skills training;
- The meeting emphasized the implementation of measures for tax and fee reduction;
- Local government special bonds allocated for the year must all be issued before the end of September, and all funds have to be allocated to the projects before the end of October;
- Policy tools like universal reserve requirement ratio reduction and targeted RRR reduction must be used in a timely manner;
- Accelerate the issuance of local government special bonds and release the new bond limit for financing major construction projects in 2020;
- About 20 percent of local government special bonds will be allocated for funding major infrastructure construction projects.
On Sept. 5, the Financial Stability and Development Committee under the State Council held a national video conference on the financial situation and the exchange of work experience. Chinese vice premier Liu He delivered a speech at the meeting with the following key points:
- Officials should recognize that the economic and financial sectors domestically and internationally are facing a “new situation” and that “downward pressure” on the Chinese economy has increased;
- Financial institutions must service the real economy and guard against risks;
- Elevate consciousness of risk prevention and maintain the bottomline of not allowing regional financial risks to occur;
- Prevent the occurrence of “mass incidence” (social unrest, petitioning, etc.).
OUR TAKE
1. The recent State Council executive meeting and the FSDC meeting indicate that China’s economic deterioration and unemployment situation is very severe. The meetings also indicate that Party central is having a problem with local governments implementing its orders.
Party central’s problem with local governments can also be seen from the State Council dispatching 16 inspection teams to 16 provinces starting from Sept. 2. The inspection teams are tasked with supervising local governments and their assess whether or not they have met the goals set forth in the Central Economic Work Conference and Li Keqiang’s government work report. This is the sixth major inspection conducted by the State Council since the 19th Party Congress in 2017.
2. The CCP has limited means to deal with an economic and unemployment crisis. For now, Party central is revisiting the old strategy of boosting liquidity and accelerating the issue of local government debt to invest in infrastructure projects.
However, economic data from the first half of 2019 has shown that financial stimulus and debt issuance are not driving the real economy, but have instead boosted the financial economy and blown up the real estate bubble.
3. We remain very pessimistic about the prospects of the Chinese economy. China faces substantial financial and property bubble risks.
SinoInsight 2
On Sept. 5, China and the United States announced that trade representatives from both sides will hold a high-level meeting in Washington in early October. Global stocks rose at the news, with the Shanghai Composite Index rising 0.9 percent and the Dow Jones Industrial Average gaining 1.2 percent.
Earlier in the week, Bloomberg News reported that Chinese and U.S. officials were struggling to agree on a schedule for the coming round of high-level trade talks.
OUR TAKE
1. We believe that the Sino-U.S. trade talks were delayed from September to October because neither side has good solutions to breaking the current stalemate with their respective hardline positions. Neither the U.S. nor the PRC seems optimistic about reaching a trade deal, but neither side wants to fire the first shot and break off negotiations. Thus, the next-best option for both sides is dragging out the trade talks.
2. For the U.S., the delay in the trade talks means more time for the American real economy to grow and more time to allow companies to move their supply chains out of China and back to the States or to Southeast Asian countries. The Trump administration could also be hoping that their leverage in the trade talks will increase as the Chinese economy steadily worsens.
On the flipside, President Donald Trump’s window of opportunity to resolve the CCP threat with minimal pain, sacrifice, and cost before the 2020 presidential election is now tiny. And unless the Trump administration utilizes novel strategies, America will have to make huge and costly sacrifices in an “all-in” confrontation with the CCP. Trump could be unwilling to push the PRC too hard at this stage because the cost of “all-in” confrontation could harm his 2020 re-election bid.
For the CCP, the delay in the trade talks is a double-edged sword. On one hand, the U.S. is less likely to escalate the trade war beyond a point as long as there is hope of a trade deal. Also, the CCP gains leverage over the Trump administration if negotiations are dragged out until close to the presidential election in November 2020. On the other hand, the trade war is bad for the Chinese economy and heightens China’s economic and financial risks. The continually weakening Chinese economy erodes the CCP’s political legitimacy and will contribute to the intensification of the “you die, I live” factional struggle at the elite ranks of the Party.
See our 2019 special report for more on how the Sino-U.S. showdown will shape out this year and for analysis of each side’s strategic advantages and weaknesses.
3. From our research, the Xi Jinping-Jiang Zemin factional struggle, while very intense, appears to be in a stalemate with neither side having a significant advantage to overcome the other. The factional struggle will result in Beijing’s orders being unable to leave the Zhongnanhai compound (政令不出中南海), and affect PRC messaging on the trade war, Hong Kong, and other hot-button issues. We expect to see an increase in mixed signals stemming from the PRC.
Businesses, investors, and governments must track the factional struggle and understand CCP characteristics and operations to get a handle on what is going on with China, avoid risks, and seize opportunities.
