<table><tbody><tr><td class="nl_wrapper"><table class="nl_card"><tbody><tr><td id="published-date">April 27, 2019</td></tr><tr><td id="main-header">'The State Has Dragged Down China’s Economic Growth'</td></tr><tr><td id="main-author">By Malcolm Riddell</td></tr></tbody></table><table class="nl_card" id="19apr2701"><tbody><tr><th><a href="https://www.bloomberg.com/news/videos/2019-04-25/state-has-dragged-down-china-s-economic-growth-says-peterson-institute-s-lardy-video" target="_blank">1 'The State Has Dragged Down China’s Economic Growth': Nick Lardy</a></th></tr><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe src="https://www.bloomberg.com/multimedia/api/embed/iframe?id=7d421f29-b6dc-418e-bd93-9cb2e9c01dc6" allowscriptaccess="always" frameborder="0"></iframe></td></tr></tbody></table><p class="caption"><a href="https://www.bloomberg.com/news/videos/2019-04-25/state-has-dragged-down-china-s-economic-growth-says-peterson-institute-s-lardy-video" target="_blank">open in a new window</a></p><p class="excerpt"><strong>More insights from Nick Lardy</strong> of the Peterson Institute for International Economics (PIIE) in a <a href="https://www.bloomberg.com/news/videos/2019-04-25/state-has-dragged-down-china-s-economic-growth-says-peterson-institute-s-lardy-video" target="_blank">3m 48s interview on Bloomberg.</a></p><tr><td class="post"><h3>⚡<em>Is Xi Jinping’s emphasis on control dragging down the Chinese economy?</em></h3><p><strong>‘President Xi</strong> thinks strong state sector is an element of control.’</p><ul><li><strong>‘And he seems</strong> to be willing to pay a price in terms of slower growth in order to maintain that control.’</li></ul><p><strong>‘The State has been dragging down</strong> China's economic growth over the last few years.’</p><ul><li><strong>‘The share of credit</strong> going to state companies has gone from around 1/3 to over 80%.’</li><li><strong>‘But the state companies</strong> are so inefficient in terms of the way they use capital.'</li><li><strong>Even though</strong> they're getting a lot of capital in the form of loans they're not using it very efficiently.’</li><li><strong>‘So their contribution to growth</strong> is far less than it could be if those funds had gone to private companies.’</li></ul><p><strong>‘But private companies</strong> have gotten squeezed out.’</p><ul><li><strong>‘They has been squeezed out</strong> of credit markets both banks and non-banks and its contribution to growth has declined significantly.’</li><li><strong>‘So, that sector</strong> has been a big drag on China's growth over the last two years.’</li><li><strong>‘Now, China</strong> is trying to get more money into the private sector through a new facility that wasn’t created until of December last year.’</li></ul><h3>⚡<em>‘Would a developed bond market better allocate capital?</em></h3><ul><li><strong>‘Certainly the bond market,</strong> if it was really operating competitively, could allocate capital much more efficiently.’</li><li><strong>‘But what we've seen</strong> in recent years is that state companies have much greater access to that market.’</li><li><strong>‘Private companies</strong> for the most part have had much less access.’</li><li><strong>‘So it still seems</strong> to be like the banking system: preferential access to state-owned companies.’</li></ul><h3>⚡<em>How well has mixed-ownership reform worked to make state companies more efficient?</em></h3><p><strong>‘You can find individual examples</strong> that have been a success, but I think, as a general program, it has not worked, and it's not likely to work. A couple of things to look at.’</p><ul><li><strong>‘The state companies</strong> that are drastically underperforming – the ones that really need to be reinvigorated - are the ones private firms don't want to invest in.’</li><li><strong>‘And</strong> there are a lot of state firms that are doing very well.’</li><li><strong>‘Why should</strong> they want to sell part of their equity to private companies?'</li><li><strong>‘So it’s not quite clear</strong> to me where the fit is, that is, how private capital can really help to invigorate the state sector.’</li></ul></td></tr></tbody></table><table class="nl_card" id="19apr2702"><tbody><tr><th><a href="https://www.brookings.edu/blog/order-from-chaos/2019/04/23/around-the-halls-how-trumps-latest-iran-sanctions-decision-could-affect-markets-and-key-countries/" target="_blank">2 U.S.-China trade talks: How Trump’s latest Iran sanctions decision could impact a deal</a></th></tr><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="https://media-cdn.list.ly/production/705638/3454885/3454885-around-the-halls-how-trump-s-latest-iran-sanctions-decision-could-affect-markets-and-key-countries_600px.jpeg?ver=4905240057" alt="CHINADebate"></td></tr></tbody></table><p class="caption">Brookings</p><p class="excerpt"></p><tr><td class="post"><p><strong>On April 22</strong>, the Trump administration announced that all waivers for buyers of Iranian oil will end on May 2.</p><ul><li><strong>'We are going to zero,'</strong> said Secretary of State Mike Pompeo, adding that there would be no grace period for compliance.</li></ul><p><strong>The US introduced</strong> the sanctions on purchases of Iranian oil after it withdrew last year from the 2015 agreement with Iran to scale back Tehran’s nuclear program.</p><ul><li><strong>But, Washington</strong> later granted 'Significant Reduction Exceptions' waivers to China, India, Japan, South Korea, Italy, Greece, Turkey, and Taiwan that allowed them to continue their purchases.</li><li><strong>Now those countries</strong> have to stop buying Iranian oil or face sanctions themselves.</li></ul><p><strong>China filed a complaint the day after the announcement.</strong> ‘Chinese foreign ministry spokesman Geng Shuang said on Tuesday that Beijing opposed unilateral sanctions and the US’ its “long-arm jurisdiction..’<a href="https://www.scmp.com/news/china/diplomacy/article/3007365/china-protests-over-end-american-waivers-iranian-oil-imports" target="_blank"> reports</a> the South China Morning Post.</p><ul><li><strong>'We urge the US</strong> to conscientiously respect China’s interests and concerns and not to take mistaken actions that would hurt China’s interests,' said Gang.</li><li><strong>'Meanwhile China</strong> will continue to maintain the legitimate interests of our companies.'</li></ul><p><strong>Some have interpreted</strong> this to mean that China will defy the U.S. and continue to buy Iranian oil.</p><ul><li><strong>‘It is unlikely</strong> that China will zero-out imports of Iranian oil,' says Brookings' Ryan Hass in <a href="https://www.brookings.edu/blog/order-from-chaos/2019/04/23/around-the-halls-how-trumps-latest-iran-sanctions-decision-could-affect-markets-and-key-countries/" target="_blank">'How Trump’s latest Iran sanctions decision could affect markets and key countries.'</a></li><li><strong>‘China</strong> is the largest buyer of Iranian oil.’</li><li><strong>‘Iran is a key strategic node</strong> connecting Asia and the Middle East as part of China’s Belt and Road Initiative.’</li><li><strong>‘Additionally,</strong> the Chinese are allergic to the appearance of subordinating the conduct of their relations with Iran to the demands of the United States.’</li></ul><p><strong>‘From a U.S.-China standpoint,</strong> the Trump administration’s decision to forego further waivers for China to continue purchasing Iranian oil at diminishing levels will inject stress on the bilateral relationship.'</p><ul><li><strong>‘The current waiver for China</strong> to purchase Iranian oil at reduced levels will expire May 2, concurrent with expected end-game trade negotiations between United States Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He.'</li></ul><p><strong>‘If the United States</strong> sanctions Chinese financial institutions facilitating oil transactions with Iran after the waiver expires, there could be spillover effects on trade negotiations.’</p><ul><li><strong>‘Any unilateral American sanctions</strong> on Chinese financial institutions could limit Beijing’s self-perceived room for compromise on U.S. trade concerns.’</li></ul><p><strong>‘In sum</strong>, by pursuing an all-or-nothing approach with China in lieu of a steady reduction in Chinese imports of Iranian oil, and timing the decision to coincide with high-stakes trade negotiations, Washington could find itself exposed to downside risks with Beijing without offsetting gains,’ concludes Ryan Hass.</p><p><strong>'This might be linked to the trade talks,</strong> but that is hard to know,' <a href="https://www.scmp.com/news/china/diplomacy/article/3007228/china-be-exposed-sanctions-us-says-it-will-end-iran-oil-import" target="_blank">says Adam M Smith</a>, partner at the law firm of Gibson Dunn & Crutcher, in the South China Morning Post.</p><ul><li><strong>'The move today</strong> definitely could serve as an irritant between Beijing and Washington because, not least of all, China needs energy.'</li><li><strong>'To make China’s importation of energy difficult,</strong> for whatever reason, could be challenging, and China does not like to be susceptible to US jurisdictions, with respect to sanctions, or on anything else for that matter.'</li></ul><p><strong>'I think it’s very unusual timing</strong> in the middle of a supposed 10th round of trade negotiations,' <a href="https://www.scmp.com/news/china/diplomacy/article/3007228/china-be-exposed-sanctions-us-says-it-will-end-iran-oil-import" target="_blank">says Dennis Wilder,</a> former top CIA China analyst, former special assistant to the President George W. Bush and his senior director for Asian Affairs, now a professor at Georgetown.</p><ul><li><strong>'Does the right hand</strong> know what the left hand is doing?'</li><li><strong>'I would not want</strong> to be Lighthizer or Mnuchin going to Beijing with this.'</li></ul><p><strong>'Is the priority</strong> Iran sanctions or a trade agreement?'</p><ul><li><strong>'A trade agreement</strong> should be the priority.'</li></ul></td></tr></tbody></table><table class="nl_card" id="19apr2703"><tbody><tr><th><a href="https://piie.com/blogs/trade-investment-policy-watch/us-china-trade-disputes-wto-usually-sides-united-states" target="_blank">3 In US-China Trade Disputes, the WTO Usually Sides with the United States</a></th></tr><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="https://media-cdn.list.ly/production/705638/3454883/3454883-in-us-china-trade-disputes-the-wto-usually-sides-with-the-united-states_600px.png?ver=6224978926" alt="CHINADebate"></td></tr></tbody></table><p class="caption">PIIE</p><p class="excerpt"></p><tr><td class="post"><p><strong>You can add</strong> another win for the U.S. to the table, above.</p><ul><li><a href="https://www.cnbc.com/2019/04/19/us-wins-wto-ruling-against-china-grain-import-quotas.html" target="_blank"><strong>CNBC reports:</strong></a> 'The United States won a World Trade Organization (WTO) ruling on Thursday against China’s use of tariff-rate quotas for rice, wheat and corn, which it successfully argued limited market access for U.S. grain exports.'</li><li><strong>This 'marked</strong> the second U.S. victory in as many months.</li><li><strong>'It came amid</strong> U.S.-China trade talks and on the heels of Washington clinching a WTO ruling on China’s price support for grains in March.'</li><li><strong>[The next post explains</strong> why China won't have to comply - thanks to Trump administration inaction.]</li></ul><p><strong>In fact,</strong> 'the United States generally wins trade disputes, particularly against China, when the case is brought to the World Trade Organization (WTO),' , according to Jeffrey J. Schott and Euijin Jung of the Peterson Institute for International Affairs in <a href="https://piie.com/blogs/trade-investment-policy-watch/us-china-trade-disputes-wto-usually-sides-united-states" target="_blank">'In US-China Trade Disputes, the WTO Usually Sides with the United States.'</a></p><ul><li><strong>This conclusion</strong> from the data is at odds with what Trump has asserted in his threats to pull the United States out of the WTO.</li><li><strong>In 2018</strong>, he declared that the WTO was set up "to benefit everybody but us" and added: "We lose the lawsuits, almost all of the lawsuits in the WTO.'</li><li><strong>'The table shows</strong> that Trump’s perception was wrong, at least with respect to China: Over the last 16 years, US officials have challenged Chinese practices 23 times in the WTO; the win-loss record is 19-0, with four cases pending. In the most recent decision, the WTO panel found that China’s agricultural subsidies are inconsistent with WTO rules, upholding US claims.'</li></ul><p><strong>'While 'WTO dispute procedures</strong> work to enforce existing US rights under the world trade rules, some US-China problems fall outside the WTO rulebook.'</p><ul><li><strong>'So there is a strong need</strong> to update international trade obligations to address current disputes over investment, intellectual property rights, and other issues.'</li></ul><p><strong>But, as the next post discusses</strong>, for all its WTO trashing, it's tough to get the Trump administration's attention to reform the dispute resolution process.</p></td></tr></tbody></table><table class="nl_card" id="19apr2704"><tbody><tr><th><a href="https://www.reuters.com/article/us-usa-trade-wto-idUSKCN1QA2IW" target="_blank">4 Trump and the WTO: From trashing to crippling</a></th></tr><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="https://media-cdn.list.ly/production/705638/3458132/3458132-wto-chief-sees-no-end-in-sight-to-u-s-blockage_600px.jpeg?ver=3919024873" alt="CHINADebate"></td></tr></tbody></table><p class="caption">Reuters</p><p class="excerpt"></p><tr><td class="post"><p><strong>Despite U.S. success</strong> with WTO dispute settlement, ‘Trump officials, in keeping with their general hostility toward international organizations, regularly trash the organization,’ <a href="https://www.theatlantic.com/ideas/archive/2019/04/us-trade-hawks-exaggerate-chinas-threat/587536/" target="_blank">says NYU’s Peter Beinart in The Atlantic.</a></p><ul><li><strong>‘A 2018 report</strong> from the office of Trump’s trade representative, Robert Lighthizer, declared that “the notion that our problems with China can be solved by bringing more cases at the WTO alone is naïve at best.”’</li></ul><p><strong>‘But it’s not Xi</strong> who is crippling the WTO. It’s Trump.’</p><ul><li><strong>‘According to</strong> a November 2018 <a href="https://www.cato.org/publications/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help" target="_blank">Cato Institute report,</a> “China does a reasonably good job of complying with WTO complaints brought against it.”’</li><li><strong>‘The Trump administration,</strong> by contrast, has systematically blocked the reappointment of judges on the WTO’s dispute-settlement body and thus, according to <a href="https://www.reuters.com/article/us-usa-trade-wto/wto-chief-sees-no-end-in-sight-to-us-blockage-idUSKCN1QA2IW" target="_blank">Reuters</a>, has “plunge[d] the organization into crisis.”’</li></ul><p><strong>‘Nothing illustrates</strong> the self-destructive absurdity of Trump’s behavior better than what happened this March.’</p><ul><li><strong>‘The WTO,</strong> responding to a case brought by the Obama administration, ruled that China must reduce its agricultural subsidies.’</li><li><strong>‘China is appealing</strong> that decision to the WTO’s appellate court.’</li><li><strong>‘But because</strong> the Trump administration has blocked the appointment of new WTO judges, that court may not be able to rule, which means China won’t have to comply.’</li></ul><p><a href="https://www.reuters.com/article/us-usa-trade-wto/wto-chief-sees-no-end-in-sight-to-us-blockage-idUSKCN1QA2IW" target="_blank"><strong>Reuters reports:</strong></a> ‘World Trade Organization members are now clear what the United States’s concerns are over how the group settles disputes, but there is no sign of resolution to a crisis that threatens to paralyze the global trade body, said WTO Director-General Roberto Azevedo.’</p><ul><li><strong>‘The United States</strong> has blocked appointments at the WTO appellate body, which hears appeals in trade disputes between countries, threatening the biggest crisis in the 24-year history of the WTO.’<br></li><li><strong>‘The organization</strong> normally has seven members but currently only has three, and two of those are set to complete their mandates in December.’<br></li><li><strong>‘Azevedo said</strong> there would be a significant slowdown of cases and “eventually paralysis down the road”.’</li></ul><p><strong>‘The European Union</strong> has made proposals for WTO reform, agreeing with China, India and other countries on changes to the WTO’s dispute settlement.’</p><ul><li><strong>‘However,</strong> it has struggled to engage the United States on the topic.’</li></ul></td></tr></tbody></table><table class="nl_card" id="19apr2705"><tbody><tr><th><a href="" target="_blank">5 'China Growth Outlook': Credit Suisse</a></th></tr><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="https://media-cdn.list.ly/production/705638/3457626/3457626-china-growth-outlook-credit-suisse_600px.png?ver=9172170114" alt="CHINADebate"></td></tr></tbody></table><p class="caption">Credit Suisse</p><p class="excerpt"></p><tr><td class="post"><p>Our friends James Sweeney and Wenzhe Zhao have shared a terrific report, <a href="https://plus.credit-suisse.com/rpc4/ravDocView?docid=V7hGen2AD-WEoDhe" target="_blank">'Global Cycle Notes: Fear tariff fears.'</a></p><ul><li><strong>It covers</strong> a lot more than China (that section is here), and is <a href="https://plus.credit-suisse.com/rpc4/ravDocView?docid=V7hGen2AD-WEoDhe" target="_blank">worth a read.</a></li></ul><hr><h2>China Growth Outlook</h2><p><strong>Chinese</strong> manufacturing growth is rebounding.</p><ul><li><strong>Growth should be supported</strong> in the coming months by the restocking of intermediate inventories, improving domestic credit growth, and stabilizing global goods demand.</li></ul><p><strong>Official Chinese production data</strong> has remained typically stable.</p><ul><li><strong>But more reliable Chinese</strong> activity measures such as our bottom-up IP indicator, trade data and manufacturing PMIs suggest production growth likely plummeted to a post-2015 low in recent months.</li><li><strong>Activity collapsed</strong> as trade disputes severely hit business confidence across Asia and manufacturers sharply reduced inventories of imported intermediates.</li></ul><p><strong>Slowing global business capex</strong> [capital expenditure], weaker external demand and deteriorating producer sentiment has also weighed on China's domestic demand.</p><ul><li><strong>Due to self-induced credit tightening,</strong> consumer spending growth has slowed, with particular weakness in auto purchases.</li><li><strong>Policy easing</strong> had not gained enough traction to offset these growth shocks in Q4.</li></ul><p><strong>Since early this year,</strong> trade tension has abated and US-China trade negotiations have resumed.</p><ul><li><strong>China's manufacturers</strong> have started to replenish inventories and imports have partially recovered.</li><li><strong>Global demand growth</strong> has also shown signs of stabilization in the first quarter, and we expect it to reaccelerate due to robust consumer fundamentals in developed economies.</li><li><strong>Chinese exports</strong> are likely to continue improving as a result.</li></ul><p><strong>Domestic conditions</strong> are also likely to improve.</p><ul><li><strong>Fiscal, monetary and credit easing</strong> should trickle down to the real economy through multiple channels.</li><li><strong>Financial conditions</strong> have already eased as institutional deposit (M1) growth - the most sensitive monetary aggregate to policy changes - has accelerated to the highest rate since late 2017.</li><li><strong>Overall credit growth</strong> also improved, driven by lending to households and local governments. Improving home sales should prevent housing construction from deteriorating.</li></ul><p><strong>The positive effect</strong> of current policy easing is likely to be partially offset by the ongoing moderation in manufacturing capex growth.</p><ul><li><strong>However,</strong> metal prices and bulk shipping indices suggest the demand for raw materials remains steady and further weakness is unlikely.</li></ul></td></tr></tbody></table><table class="nl_card" id="19apr2706"><tbody><tr><th><a href="" target="_blank">6 Caixin PMI has become a leading indicator of global momentum</a></th></tr><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="https://media-cdn.list.ly/production/705638/3457641/3457641-caixin-pmi-a-leading-indicator-of-global-momentum_600px.png?ver=4478040382" alt="CHINADebate"></td></tr></tbody></table><p class="caption">Credit Suisse</p><p class="excerpt"></p><tr><td class="post"><p><strong>Also from Credit Suisse's</strong> <a href="https://plus.credit-suisse.com/rpc4/ravDocView?docid=V7hGen2AD-WEoDhe" target="_blank">'Global Cycle Notes: Fear tariff fears.'</a> a discussion of how the Caixin PMI has become a leading indicator of global industrial production.</p><hr><h2>Lead Indicators</h2><p><strong>We do not over-rely</strong> on PMIs to forecast global industrial production.</p><ul><li><strong>They are just</strong> part of the broad set of information we use and lay out in these notes.</li><li><strong>However,</strong> it is worthwhile to survey the various PMIs on occasion to ask which have actually been successfully leading global growth.</li></ul><p><strong>Over time,</strong> it appears that the Chinese PMI has become better at forecasting global growth and the ISM Manufacturing Index has become worse.</p><ul><li><strong>The European PMIs</strong> have consistently been a coincident or lagging indicator.</li></ul><p><strong>Since 2010,</strong> the Caixin Chinese manufacturing PMI has improved significantly as a lead indicator, showing a higher correlation with global IP momentum one or more months later than manufacturing surveys in other regions.</p><ul><li><strong>China’s increasing correlation</strong> should come as no surprise, as its share of global industrial production has tripled from 10% to 30% since its PMI survey was introduced in 2004.</li><li><strong>It is notable</strong> that during the previous two global manufacturing slumps, the Chinese PMI bottomed and started to improve in the months before the trough in global IP momentum.</li></ul></td></tr></tbody></table></td></tr></tbody></table>

<table><tbody><tr><td class="nl_wrapper"><table class="nl_card"><tbody><tr><td id="published-date">March 30, 2019</td></tr><tr><td id="main-header">'An unmistakable first-quarter recovery' for China's economy</td></tr><tr><td id="main-author">By Malcolm Riddell</td></tr><tr><td><hr></td></tr><tr><td class="post"><p>We start with a report by Leland Miller, president of China Beige Book, that China’s economy is recovering.</p><p>I’ll review anything from Leland or the CBB. Deng Xiaoping encouraged us to seek truth from facts and that is what the CBB does by tracking 3,300 Chinese firms for its analyses.</p><p>The problem: the CBB serves mainly central banks and institutional investors – we generally don’t hear much about its findings. That’s why if you have a rare sighting of Leland Miller, pay attention.</p><p>China’s bond market also caught my eye. The IMF has recently published, <em>The Future of China’s Bond Market</em>. And, it’s terrific. Top western and Chinese experts have contributed chapters. It’s about as comprehensive and thorough as you could ask for.</p><p>I came across an interview with former freetrader, Larry Kudlow, director of the National Economic Council. Mr. Kudlow now believes that tariffs can pierce intransigence. Could be, but it’s a pretty blunt weapon that can have unintended consequences.</p><p>So, as a contrast, we end with an essay by Nobel laureate, Michael Spence, about an unintended consequence. Mike explains why we are in ‘a prolonged period of radical uncertainly.’ The major source: the U.S.-China trade war. But, wait there’s more. All together, very sobering.</p></td></tr></tbody></table><table class="nl_card" id="19mar3001"><tbody><tr><th>1. An unmistakable first-quarter recovery' for China's economy</th></tr><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe src="https://www.bloomberg.com/multimedia/api/embed/iframe?id=03ce4519-08bd-43e8-b704-d84dd7f410c3" allowscriptaccess="always"></iframe></td></tr></tbody></table><p class="caption"></p><tr><td class="post"><p><strong>'China’s economy</strong> showed “an unmistakable first-quarter recovery” after a weak end to 2018, though the level of new borrowing casts doubt on the sustainability of the rebound, according to Leland Miller, president of the <a href="https://www.chinabeigebook.com/" target="_blank">China Beige Book</a>, on <a href="https://www.bloomberg.com/news/articles/2019-03-27/china-beige-book-says-first-quarter-recovery-is-unmistakable" target="_blank">Bloomberg</a>.'</p><ul><li><strong>'"The recovery extends</strong> across both sectors and geographies, with every major sector and each one of our regions showing better revenue results than Q4,” China Beige Book said in a report based on survey data from of over 3,300 Chinese firms across China.'</li></ul><p><strong>'Yet this rally</strong> didn’t appear out of nowhere, and there are at least three compelling reasons to doubt its staying power: credit, credit, and credit,'' says Leland.</p><ul><li><strong>‘Every time</strong> you see a recovery in China you know that there's going to be credit in the phrase, but, even by those standards, this is pretty extraordinary.’</li><li><strong>‘We're not only</strong> seeing some of the highest borrowing levels we've seen in the last six years, but we've seen the types of firms that are typically disadvantaged get credit.’</li><li><strong>‘Private firms</strong> that are supposedly credit starved, small- and medium-sized enterprises (SMEs) that are supposedly credit starved - they are borrowing more than State-Owned Enterprises (SOEs).’</li><li><strong>‘That's very unusual in China,</strong> but it shows there's clear policy support for these types of firms.’</li><li><strong>‘China</strong> is forcing a recovery by giving everybody a loan to everybody who wants one.’</li></ul><p><strong>'Usually,</strong> when you see an expansion of access to credit, you have easing rates - rates get cheaper and cheaper.’</p><ul><li><strong>‘This time,</strong> we see higher rates across the board.’</li><li><strong>‘An economy</strong> can withstand that for a quarter or so at the beginning of a rally.’</li><li><strong>‘But, not</strong> for two or three quarters in a row.'</li><li><strong>‘To the extent</strong> that the Chinese want to use this to continue to push momentum and it doesn't take off on its own, then you're going to see the PBOC further subsidize rates and probably subsidize them quite dramatically.’</li></ul><p><strong>‘Shadow banking</strong> is another really big headliner here.’</p><ul><li><strong>‘Our data</strong> showed that shadow finance was being cracked down 2017 and earlier.’</li><li><strong>‘Now, we saw</strong> the highest level of shadow bank usage since early 2016.’</li><li><strong>‘This is the second</strong> consecutive quarter that we've seen the shadow bank usage increase.’</li><li><strong>‘China swore</strong> this was something they wouldn’t do, and now they have.’</li><li><strong>‘Just another indication</strong> that the priority has absolutely shifted from reform and restructuring and deleveraging to growth at all costs.’</li><li><strong>‘The Beijing leadership</strong> said not too long ago that the path of reform and restructuring and deleveraging was irreversible - well, they’ve reversed it.’</li></ul></td></tr></tbody></table><table class="nl_card" id="19mar3002"><tbody><tr><th>2. China’s Bond Market Comes of Age—Sort of</th></tr><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="https://images.wsj.net/im-63332?width=1260&aspect_ratio=1.5" alt="chinadebate"></td></tr></tbody></table><p class="excerpt">Chinese bonds are finally joining a global bond benchmark, meaning soon most bond managers will own them. The Chinese government bond market, however, isn’t quite what it appears.</p><tr><td class="post"><p><strong>China's</strong> has an almost $13 trillion onshore bond market - the third largest after the U.S. and Japan.</p><ul><li><strong>But,</strong> foreigners only have 2-8% invested.</li><li><strong>'That could change</strong> when Chinese sovereign bonds and debt go onto the Bloomberg Barclays Global Aggregate Index - a benchmark for portfolio managers worldwide - on April 1.</li><li><strong>This is the</strong> 'seal of approval for its efforts to modernize its bond market and make it easier for foreign investors to participate,' according to <a href="https://www.bloomberg.com/news/articles/2019-03-26/why-china-s-bond-market-is-about-to-get-less-exotic-quicktake" target="_blank" rel="nofollow noopener">Bloomberg</a>.</li><li><strong>'Citigroup says</strong> foreigners will buy $100 billion to $130 billion of mainland bonds this year, while Standard Chartered Plc forecasts $286 billion by 2021.'</li></ul><p><strong>Curb your enthusiasm</strong>. 'The headline numbers on foreign ownership of central-government debt look impressive,' <a href="https://www.wsj.com/articles/chinas-bond-market-comes-of-agesort-of-11553850716" target="_blank">writes</a> Nathaniel Taplin in the Wall Street Journal.</p><ul><li><strong>'But China’s</strong> total sovereign-bond market is far larger than it appears.'</li><li><strong>'The real heavyweight</strong> in the Chinese bond market is local-government debt — roughly 25% larger than central-government debt at 19 trillion yuan ($2.8 trillion) and growing far faster.'</li><li><strong>'Local governments’ net debt</strong> financing needs were more than twice the level of the central government’s last year.'</li><li><strong>'Local-government bonds</strong>, which won’t be included in the Bloomberg index, have always traded within a tight range of central-government bonds, because investors think Beijing would never allow a province or major city to go bankrupt.'</li></ul><p><strong>'Investors in Chinese treasuries</strong> should therefore be aware that they are essentially along for the ride with China’s local-government bond market. That isn’t such a comfortable place to be'.</p><ul><li><strong>'Local governments</strong> have in the past issued piles of bonds to fund bailouts of dubious local state-owned corporate debt.'</li></ul><p><strong>'Given China’s economic slowdown</strong>, that could easily happen again —and soon.'</p><ul><li><strong>'Chinese banks</strong> are still sitting on plenty of such dodgy state-owned company debt and are undercapitalized, a major reason why growth in bank lending has been so slow to recover.'</li><li><strong>'One way to fix the problem</strong> is by magically converting high-risk state-owned corporate debt into low-risk official government debt.'</li><li><strong>'Hey, presto,</strong> better bank balance sheets: But all of this would effectively be underwritten by Beijing, meaning higher sovereign-debt yields.'</li><li><strong>'So, foreigners</strong> could be exposed to the huge local-government debt market, whether or not they want to be.'</li></ul></td></tr></tbody></table><table class="nl_card" id="19mar3003"><tbody><tr><th>3. 'The Future of China's Bond Market'</th></tr><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe width="720" height="405" src="https://www.youtube.com/embed/97a4zDMTWHA?color=white"></iframe></td></tr></tbody></table><p class="caption"></p><tr><td class="post"><p><strong>For an in-depth understanding</strong> of China'a bond market, read the IMF's recently published <em>The Future of China's Bond Market</em> (below).</p><p><strong>Top western and Chinese</strong> analysts cover different aspects of the markets. Comprehensive.</p><p><strong>The Center for Strategic and International Studies</strong> (CSIS) hosted a discussion of the book. Watch the <a href="https://youtu.be/97a4zDMTWHA" target="_blank">1hr 32m CSIS overview.</a></p><table class="multi-block"><tbody><tr><td class="pdf-container"><iframe src="https://docs.google.com/viewer?url=https://www.elibrary.imf.org/doc/IMF071/25402-9781484372142/25402-9781484372142/Other_formats/Source_PDF/25402-9781484393147.pdf&amp;embedded=true" style="width:100%; height:500px;border:none;"></iframe></td></tr></tbody></table><p class="caption"><a href="https://www.elibrary.imf.org/doc/IMF071/25402-9781484372142/25402-9781484372142/Other_formats/Source_PDF/25402-9781484393147.pdf" target="_blank">open in a new window</a></p></td></tr></tbody></table><table class="nl_card" id="19mar3004"><tbody><tr><th>4. 'The president has taught me that tariffs have an important use in trade negotiations': Larry Kudlow</th></tr><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe width="720" height="405" src="https://www.youtube.com/embed/1dLS4_UsvIU?color=white"></iframe></td></tr></tbody></table><p class="caption"></p><tr><td class="post"><p><strong>‘Well, I will tell you</strong>, as a confirmed free trader, that the president has taught me - and a lot of other people - that tariffs have an important use in trade negotiations. ,' says Larry Kudlow, the National Economic Council director, in a <a href="https://youtu.be/1dLS4_UsvIU" target="_blank">1m 40s CNBC interview</a>.</p><ul><li><strong>‘You can get</strong> through the intransigence.’</li><li><strong>‘If your goal</strong> is free fair and reciprocal trade; if you believe, as the president does, that in a pure world we should have zero tariffs and non-tariff barriers and subsidies, you’ve got to get there.’</li></ul><p><strong>‘A lot of the</strong> world's trading system is broken down.’</p><ul><li><strong>‘The WTO</strong> has not done its job.’</li><li><strong>‘China</strong> has been in non-compliance in many different areas - others believe that in Europe and Japan.’</li></ul><p><strong>‘So, tariffs play</strong> a role, and I've learned that.’</p><ul><li><strong>‘I've watched,</strong> particularly in the Chinese negotiations - that's probably the best example - the President get tough on China with tariffs.’</li><li><strong>'We hurt China</strong> economically - they're already on the downslope.’</li><li><strong>‘Here we are,</strong> deep into negotiations, that perhaps will turn out very well.’</li></ul><p><strong>What changed?</strong> ‘I am now involved in it hands on, in the real world. And, I'm not the free trade purest I once was.’</p><ul><li><strong>‘The president’s</strong> a pretty good negotiator - that's what I've learned.’</li></ul></td></tr></tbody></table><table class="nl_card" id="19mar3005"><tbody><tr><th>5. 'A prolonged period of radical uncertainty' - 'a major source is the Sino-American trade war': Michael Spence</th></tr><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="https://listly-temp.s3.amazonaws.com/684102_Michael%20Spence.png" alt="chinadebate"></td></tr></tbody></table><p class="excerpt">With new sources of uncertainty proliferating by the day, the world should brace for a broad economic slowdown or, at minimum, a lengthy period of slower growth.</p><tr><td class="post"><p><strong>‘The global economy</strong> is weakening, in no small measure because of a deep, widespread sense of uncertainty,' <a href="https://www.cfr.org/article/economic-consequences-global-uncertainty" target="_blank">writes</a> Nobel Laureate Michael Spence on the Council on Foreign Relations website.</p><p><strong>'And a major source</strong> of that uncertainty is the ongoing Sino-American “trade war,”’</p><ul><li><strong>‘The conflict</strong> has cast doubt on the future of global economic connectivity, which has led to lower investment and consumption in China and the United States, and among their respective trading partners.’</li></ul><p><strong>‘The global economy</strong> is undergoing a major transition, owing to the rise of emerging economies, especially in Asia, and the digital transformation of business models and global supply chains.’</p><p><strong>‘And while it is obvious</strong> that global-governance structures and rules need an overhaul, existing international institutions lack the power to push through such changes on their own, and the governments of the world’s leading economic powers do not seem up to the task.’</p><p><strong>'Taken together</strong>, these diverse economic and political trends may or may not lead to another global crisis or sudden stop.’</p><ul><li><strong>'Either way</strong>, they will sustain a prolonged period of radical uncertainty.’</li></ul><p><strong>‘Under such conditions</strong>, caution may seem like the best policy for companies, investors, consumers, and even governments.’</p><ul><li><strong>‘But caution carries its own costs</strong>: companies and countries that fail to invest enough in, for example, new digital technologies may well fall by the wayside.’</li><li><strong>‘And as long as</strong> the rules and institutions governing the global economy remain in doubt, continued underperformance is to be expected.’</li></ul></td></tr></tbody></table></td></tr></tbody></table>