China Macro Reporter

<tr><td class="nl-post"><table class="intable"><tr><td class="intable-border"><h5 class="no_margin nl-sub-title"><a href="" target="_blank">‘Slow Progress in Trade Talks Is Partly a Result of China’s New Tactic to Wait’ | WSJ</a></h5><img width="100%" src="" alt="CHINADebate"><p class="caption">WSJ</p><p class="excerpt">‘Beijing wants to appear willing to negotiate but also thinks it can extract better terms by not hurrying into concessions.’</p><p><a href="" target="_blank"><strong>‘Plodding progress in trade negotiations</strong></a> between the U.S. and China this week is partly the result of a new tactic from Beijing, which increasingly thinks waiting may produce a more-favorable agreement,’ <a href="" target="_blank">reports</a>  the <em>Wall Street Journal</em>.</p><ul><li><strong>‘Beijing,</strong> while wanting to appear willing to negotiate, thinks it can extract better terms by not hurrying into concessions, according to Chinese experts and others briefed on the talks.’</li><li><strong>“China can take it easy</strong> and wait patiently,” said Mei Xinyu, a researcher at a think tank under China’s Commerce Ministry. China’s economy is recovering, he said, while the U.S.’s is likely to slow: “The impact of the trade war falls in the early stage on China’s economy but in a later stage for the U.S. economy.”</li></ul><p><strong>‘Agricultural purchases</strong> were supposed to be a goodwill measure in restarting the negotiations. Mr. Trump has said Chinese President Xi Jinping promised them when the two leaders met a month ago and agreed to resume negotiations.’</p><ul><li><strong>‘Beijing is likely holding out</strong> on buying large amounts of U.S. farm goods while waiting for concessions from the U.S. side, the people following the talks said.’</li><li><strong>‘Key among</strong> those <a href="" target="_blank">is relaxing the blacklisting </a> of Chinese telecommunications gear-maker Huawei Technologies Co., blocking its access to U.S. technology.’</li><li><strong>‘Mr. Trump</strong> had previously said U.S. companies would be <a href="" target="_blank">allowed to resume sales to Huawei</a> as part of his agreement with Mr. Xi.’</li></ul><p><strong>‘China’s greater patience</strong> over a deal contrasts with Beijing’s attitude late last year, when a precipitous slowdown in the economy unnerved Mr. Xi and his top officials, driving them to the negotiating table.’</p><ul><li><strong>‘In recent months,</strong> economists and other analysts, at the behest of the government, have been touring the provinces and poring over data to assess whether the domestic economy can withstand the protracted impact of punitive tariffs by the U.S., according to people briefed on the matter.’</li><li><strong>‘One issue being examined</strong> is the potential impact of U.S. companies moving supply chains out of China.’</li></ul><p><strong>‘Officials have said publicly</strong> that <a href="" target="_blank">they have enough policy tools to keep growth stable</a>  and achieve the government’s target of between 6% and 6.5% this year. At a key economic policy meeting Tuesday, the Communist Party’s Politburo said that authorities will boost measures to tackle “new challenges” in the economy.’</p><ul><li><strong>‘Top leaders</strong> also urged financial institutions to provide longer-term funding to manufacturers to help stabilize investment.’</li><li><strong>‘An official gauge of activity</strong> in China’s manufacturing sector picked up in July, though it remained in contractionary territory as it has been for much of the year.’</li></ul></td></tr></table><table class="intable"><tr><td class="intable-border"><h5 class="no_margin nl-sub-title"><a href="" target="_blank">‘No Urgency on Either Side to Reach China-U.S. Trade Deal’ | David Dollar, Brookings</a></h5><img width="100%" src="" alt="CHINADebate"><p class="caption">Bloomberg</p><p class="excerpt">‘Well, to be honest, I had low expectations and still they were disappointed.’</p><p><strong>Q: ‘So was this</strong> progress or not?</p><p><a href="" target="_blank"><strong>David Dollar:</strong></a><strong>  ‘Well, to be honest,</strong> I had low expectations and still they were disappointed.’</p><ul><li><strong>‘I thought there</strong> would be what I called the “mini deal” where we got more specificity about the agricultural purchases that China will resume; in return, the US would ease up on the sanctions on Huawei.’</li><li><strong>‘I thought</strong> they could get the details down for that mini-deal. It sounds like they didn't.’</li><li><strong>‘The White House</strong> is saying that China has agreed in general to resume the agricultural purchases.’</li></ul><p><strong>‘The main thing</strong> is after a short meeting, they agreed to reconvene in September.’</p><ul><li><strong>‘No one</strong> feels any great urgency about reaching a deal here.’</li></ul><p><strong>Q: ‘That’s the question</strong> about the sense of urgency. Let's look at it from the Chinese side first, and we had manufacturing PMIs out overnight, still below 50, which is contracting, not expanding - up a bit from where they had been, but still below 50. Does president Xi feel pressure from that at all?’</p><p><strong>Dollar: ‘I don't think so.’ </strong></p><ul><li><strong>‘As you say,</strong> the manufacturing PMI ticked up a little bit, still below 50, but it's stabilized. It's rising.’</li><li><strong>‘The services,</strong> PMI is still well above 50.’</li><li><strong>‘Their economy grew at 6.2%</strong> in the second quarter, so they're growing about three times faster than the United States.’</li><li><strong>‘I think the storyline</strong> that their economies in terrible shape, that's really exaggerated.’</li><li><strong>‘There certainly</strong> are some concerns there, but I think President Xi feels he's got the domestic tools he needs to deal with that.’</li><li><strong>‘I don't see the</strong> Chinese feel any great urgency to make a deal.’</li></ul><p><strong>Q: ‘One of the things</strong> that was different about these negotiations was the negotiating team for the Chinese - they added their Commerce Minister, who is thought to be something of a hard liner or a hawk. We talked with Michael Pillsbury of the Hudson Institute yesterday, and he said, actually, that isn’t a good sign. This is what he said.’</p><ul><li><strong>Pillsbury:</strong> “Now that the Chinese team has got some real hawks on it, we have a better chance of coming to a deal that will stick and that will work without violation or cheating.”</li><li><strong>‘Is that right,</strong> David? Do you read it the same way? This is good news because that sort of protects President Xi’s right flank.’</li></ul><p><strong>Dollar: ‘I see it</strong> cutting both ways.’</p><ul><li><strong>‘Zhong Shan,</strong> the Minister of Commerce, he's certainly a staunch defender of China's trade rights. I don't see him signing up to anything that gives away a lot from the Chinese side.’</li><li><strong>‘But I think Michael Pillsbury is</strong> correct that if the two sides can reach a practical compromise, Minister Zhong Shan is in a good position to sell that to the Politburo.’</li><li><strong>‘I still think Liu He,</strong> who's the deputy prime minister, who's responsible for all this still has huge influence in China.’</li><li><strong>‘Certainly the two of them</strong> could sell it if there's a practical compromise.’</li></ul></td></tr></table></td></tr>


<tr><td class="nl-post"><table class="intable"><tr><td class="intable-border"><h5 class="no_margin nl-sub-title"><a href="" target="_blank">‘Wall Street will be the next US-China battleground’ | Fraser Howie</a></h5><img width="100%" src="" alt="CHINADebate"><p class="caption">Asia Nikkei</p><p class="excerpt">‘The escalation from import tariffs to capital markets means that the U.S. and China are now engaged in the early stages of an economic war.’</p><p><strong>‘The U.S.</strong> now considers China more a strategic adversary than a partner,’ <a href="" target="_blank">write</a><a href="" target="_blank"><strong>Fraser Howie</strong></a>, co-author of "Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise" and <strong>Roger Garside</strong>, a former British diplomat.</p><ul><li><strong>‘This shift in view</strong> showed up first in trade policy.’</li><li><strong>‘Now a new front</strong> has begun to open in the capital markets.’</li></ul><p><strong>‘Senator Marco Rubio</strong> fired the first major salvo last month by introducing legislation that would increase oversight of Chinese companies listed on American stock exchanges, delisting those that fail to comply with the new requirements.’</p><ul><li><strong>‘Chinese companies</strong> have been tapping the U.S. capital markets since the early 1990s.’</li><li><strong>‘A listing in New York </strong>has long been seen as confirmation that a company is indeed one of China's best and brightest.’</li><li><strong>‘Yet an American listing</strong> did not necessarily assure good corporate governance. U.S. regulators have never been able to examine audit documents from Chinese companies as Beijing considers that practice a breach of its sovereignty and a risk to its state secrets.’</li><li><strong>‘The issue of inadequate disclosure</strong> by Chinese companies listed in the U.S. has been left unaddressed for too long.’</li><li><strong>‘Now higher requirements</strong> will likely be enshrined in law.’</li></ul><p><strong>‘Rubio's bill</strong> seems poised to gain momentum.’ </p><ul><li><strong>‘If indeed passed, it</strong> would represent a new front in the U.S. economic war with China and could have a dramatic impact on global investment flows.’</li><li><strong>‘Such a law</strong> would weigh heavily on China-related stocks around the globe and could even have domestic political repercussions for President Xi Jinping.’</li></ul><p><strong>‘Rubio's initiative marks</strong> the most dramatic escalation since Trump launched his trade offensive.’</p><p class="h5p">China’s Options</p><p><strong>‘While many Chinese companies</strong> might seek to shift their primary listing to Hong Kong if Rubio's bill were passed, success is not a given.’</p><ul><li><strong>‘Hong Kong</strong> would no doubt welcome a surge of such initial public offerings, but the world is a global marketplace and investors would still ask why the companies were unable to provide better disclosure in the U.S.’</li></ul><p><strong>‘Beijing could not effectively</strong> reciprocate in kind because of the comparatively tiny sums of Chinese money invested in overseas stocks due to its capital controls.’</p><ul><li><strong>‘Even if China responded</strong> by dumping U.S. Treasurys and other bonds, it would be kicking itself in the teeth as there would be nowhere else to put their money and the U.S. bond market is liquid enough to absorb even aggressive selling.’</li><li><strong>‘And, raising the stakes</strong> with restrictions on U.S. investments in listed companies in Hong Kong and China would truly be a nuclear option that the current situation does not require.’</li></ul><p class="h5p">Out Rubio-ing Rubio</p><p><strong>‘Other politicians</strong> would go further than Rubio.’</p><ul><li><strong>‘Some voices</strong> are demanding that Trump restrict U.S. pension funds and other such asset managers from investing in Chinese companies or at least blacklist state-owned ones.’</li><li><strong>‘The U.S.</strong> has the power and capacity to do this via the Department of the Treasury and the Office of Foreign Assets Control.’</li></ul><p><strong>‘If the U.S. blacklisted Chinese companies this</strong> way, billions of dollars of stocks would have to be dumped.’</p><ul><li><strong>‘U.S. investment company</strong> BlackRock alone holds around $3.3 billion of investor money in Hong Kong-listed exchange traded funds tied to domestic Chinese shares besides its China-focused mutual funds.’</li></ul><p><strong>‘Indeed,</strong> regardless of where they are listed, affected Chinese companies would no longer be able to count on U.S.-based funds as investors.’</p><ul><li><strong>‘That would be an incredible blow</strong> to China Inc., and one that China would have little in its arsenal with which to react.’</li><li><strong>‘The U.S. has many alternatives</strong> to China but China does not enjoy the same luxury of choice.’</li></ul><p><strong>‘Finally,</strong> the U.S. administration has only recently recognized that America's advantages in taking on China lie in its control over the global reserve currency and the world's greatest capital market.’</p><ul><li><strong>‘If Chinese leaders</strong> are worried by the threat to limit their nation's access to the world's largest capital market, they should ask themselves what the effect would be if their banks were denied access to the U.S. dollar clearing market too.’</li></ul><p class="h5p">Pressure on Chinese Leadership</p><p><strong>‘The Chinese leadership</strong> could also face internal pressure in the case of such dramatic capital market conflict.’</p><ul><li><strong>‘By listing</strong> their companies overseas, China's business elites, and by extension their political associates, have effectively put billions of dollars of assets beyond the country's capital controls.’</li><li><strong>‘This has undoubtedly</strong> provided vast opportunities for payoffs and favors, free from local oversight and surveillance.’</li></ul><p><strong>‘If the most extreme sanctions</strong> were to gain traction, those who gained most from China's economic rise would suddenly find their assets effectively frozen offshore or remitted back onshore.’</p><ul><li><strong>‘It surely would play badly</strong> for President Xi Jinping if the Chinese elites were thus left substantially poorer and very much shackled within the nation's financial system.’</li><li><strong>‘The links between billions of dollars in</strong> offshore assets, self-made tycoons, bosses of state-owned enterprises and the nation's political leaders are deliberately opaque.’</li><li><strong>‘But it would be naive to</strong> think that a hard blow to the pocketbooks of China's elites would not echo around the courtyards of the Zhongnanhai leadership compound in Beijing.’</li><li><strong>‘Xi might then find himself forced</strong> to compromise far quicker than he would like and by those he needs to keep closest at hand.’</li></ul></td></tr></table></td></tr>


<tr><td class="nl-post"><table class="intable"><tr><td class="intable-border"><h5 class="no_margin nl-sub-title"><a href="" target="_blank">Hong Kong’s Waning Importance for China’s Economy | Bloomberg</a></h5><img width="100%" src="" alt="CHINADebate"><p class="caption">Bloomberg</p><p>'Hong Kong’s relevance as China’s gateway to global markets is diminishing,' <a href="" target="_blank">according</a> to <em>Bloomberg</em>. </p><ul><li>'Still, it retains a distinctive role as staging post for outbound investment, and source of equity and bond finance.' </li></ul></td></tr></table><table class="intable"><tr><td class="intable-border"><h5 class="no_margin nl-sub-title"><a href="" target="_blank">VIDEO | AmCham Urges Hong Kong Action to Quell Growing Business Concerns | Bloomberg</a></h5><img width="100%" src="" alt="CHINADebate"><p class="caption">Bloomberg</p><p>‘<a href="" target="_blank"><strong>Tara Joseph</strong></a>,  president of AmCham Hong Kong, discusses the Hong Kong protests and how they’re impacting business’ in a <em>Bloomberg</em><a href="" target="_blank">video interview</a>.</p><p><strong>‘AmCham said members</strong> reported that some overseas customers have said Hong Kong “has become less safe and a riskier place in which to conduct business,” and that the primary winner of the decline in its reputation was rival Asian financial center Singapore’.</p><ul><li><strong>“While members</strong> made clear Hong Kong’s many unique competitive advantages remain largely intact, they voiced concern that a failure to address the instability and worsening perceptions toward the city now may lead to irreparable damage over the long term,” AmCham’s statement said.’</li></ul></td></tr></table><table class="intable"><tr><td class="intable-border"><h5 class="no_margin nl-sub-title"><a href="" target="_blank">VIDEO | ‘Chinese army's Hong Kong garrison releases video showing anti-riot drills, featuring tanks’ | SCMP</a></h5><img width="100%" src="" alt="CHINADebate"><p class="caption">SCMP</p><p><strong>‘China's army in Hong Kong</strong> has released a three-minute video showing troops carrying out "anti-riot" exercises, in what is being seen as a thinly veiled warning to pro-democracy protesters,’ <a href="" target="_blank">reports</a>  the BBC.</p><ul><li><a href="" target="_blank"><strong>Reuters:</strong></a><strong>  ‘In one sequence</strong> in the PLA video, titled “anti-riot drill footage”, ranks of troops advance with shields and truncheons on protesters, firing rifles into the air.’<ul><li><strong>‘Tear gas and water cannons</strong> rained down on protesters, as armored personnel carriers with battering rams raced forward, and troops laid barbed wire coils on the ground.’</li><li><strong>“All consequences are at your own risk,”</strong> one soldier shouted in Cantonese, the main Chinese dialect in Hong Kong, during the video clip.’</li></ul></li></ul><p><strong>Here is the </strong><a href="" target="_blank"><strong>video report</strong></a>  from the <em>South China Morning Post.</em></p><ul><li><strong>And</strong> here’s <a href="" target="_blank">the full 3m video</a>.</li></ul></td></tr></table><table class="intable"><tr><td class="intable-border"><h5 class="no_margin nl-sub-title"><a href="" target="_blank">‘China’s garrison in Hong Kong is not symbolic’ | FT</a></h5><img width="100%" src="" alt="CHINADebate"><p class="caption">FT</p><p class="excerpt">‘The Chinese garrison in Hong Kong, rather like the British garrison here before 1997, is not meant to be token, ceremonial or symbolic.’</p><p><a href="" target="_blank"><em>Letter to the FT</em></a><em>  from </em><a href="" target="_blank"><strong><em>CY Leung</em></strong></a><em>,  former Hong Kong Chief Executive</em><br /><strong>‘Let me add</strong> just one point to your report, <a href="" target="_blank">“Beijing warns it can send army into Hong Kong”</a>  (July 24).’</p><ul><li><strong>‘The arrangement</strong> for the Chinese garrison in Hong Kong is found not only in the Hong Kong Garrison Law as you reported.’</li><li><strong>‘It is stipulated</strong> also in Article 14 of the Hong Kong Basic Law.’</li></ul><p><strong>‘In passing</strong> I should also mention that the Chinese garrison in Hong Kong, rather like the British garrison here before 1997, is not meant to be token, ceremonial or symbolic.’</p></td></tr></table></td></tr>


<tr><td class="nl-post"><table class="intable"><tr><td class="intable-border"><h5 class="no_margin nl-sub-title"><a href="" target="_blank">‘America Is Losing the Battle of the Arctic to China & Russia’ | Hal Brands, SAIS</a></h5><img width="100%" src="" alt="CHINADebate"><p class="caption">Bloomberg</p><p class="excerpt">‘Climate change is transforming the region, and thereby opening new shipping lanes and facilitating exploitation of undersea resources.’</p><p><strong>‘There's no mystery</strong> why the Arctic is getting so much attention,’ <a href="" target="_blank">writes</a><a href="" target="_blank"><strong>Hal Brands</strong></a>  of the School of Advanced International Studies and AEI.</p><ul><li><strong>‘Climate change</strong> is transforming the region, and thereby opening new shipping lanes and facilitating exploitation of undersea resources.’</li><li><strong>‘The Northern Sea Route,</strong> which runs along Russia’s northern coast, slashes shipping times between East Asian and European ports compared to existing routes through the Strait of Malacca.’</li><li><strong>‘And by some estimates,</strong> the Arctic contains 30 percent of the world's natural gas and over $1 trillion in strategically important rare-earth minerals.’</li></ul><p><strong>‘At the same time,</strong> the Arctic is becoming a contested zone.’</p><ul><li><strong>‘Russia is enhancing</strong> its power-projection capabilities and asserting control over key sea routes.’</li><li><strong>‘China, a self-proclaimed “near-Arctic” power,</strong> is starting to develop a military presence and linking its activities there to its globe-spanning Belt and Road Initiative.’</li><li><strong>‘As the frictions</strong> between the major powers intensify around the world, they will increasingly spill over into the Arctic.’ </li></ul></td></tr></table></td></tr>


<tr><td class="nl-post"><table class="intable"><tr><td class="intable-border"><h5 class="no_margin nl-sub-title"><a href="" target="_blank">‘China's Economy Weakened Further in July, Early Indicators Show’</a></h5><img width="100%" src="" alt="CHINADebate"><p class="caption">Bloomberg </p><p class="excerpt">‘China’s second-half economic outlook continues to be clouded by great uncertainty over trade relations with the U.S.’</p><p><strong>“China’s second-half economic</strong> outlook continues to be clouded by great uncertainty over trade relations with the U.S., which in turn constrains its policy responses,” Liu Li-gang, chief China economist at Citigroup Inc. in Hong Kong, <a href="" target="_blank">reports</a><em>Bloomberg</em>.</p><ul><li><strong>“Policy easing will continue,</strong> but any stimulus will be restrained to leave fiscal head-room if U.S.-China trade tensions re-escalate.”</li></ul></td></tr></table></td></tr>


<tr><td class="nl-post"><table class="intable"><tr><td class="intable-border"><h5 class="no_margin nl-sub-title"><a href="" target="_blank">‘Jack Ma’s $290 Billion Loan Machine Is Changing Chinese Banking’ | Bloomberg</a></h5><img width="100%" src="" alt="CHINADebate"><p class="caption">Bloomberg </p><p class="excerpt">‘Jack Ma’s online bank is leading a quiet revolution in the way China lends to small businesses.’</p><p><strong>‘Jack Ma’s online bank</strong> is leading a quiet revolution in the way China lends to small businesses, taking aim at a credit bottleneck that has held back Asia’s largest economy for decades,’ <a href="" target="_blank">reports</a><em>Bloomberg</em>.</p><ul><li><strong>‘Using real-time payments data</strong> and a risk-management system that analyzes more than 3,000 variables, Ma’s four-year-old MYbankhas lent 2 trillion yuan ($290 billion) to nearly 16 million small companies.’</li><li><strong>‘Borrowers apply</strong> with a few taps on a smartphone and receive cash almost instantly if they’re approved.’</li><li><strong>‘The whole process</strong> takes three minutes and involves zero human bankers.'</li><li><strong>‘The default rate so far</strong>: about 1%.’</li></ul></td></tr></table></td></tr>


<tr><td class="nl-post"><table class="intable"><tr><td class="intable-border"><h5 class="no_margin nl-sub-title"><a href="" target="_blank">‘China scrambles to stem manufacturing exodus as 50 companies leave’</a></h5><img width="100%" src="" alt="CHINADebate"><p class="caption">FT</p><p class="excerpt">‘To counter tariff blow, government eases restrictions and offers perks’</p><p><strong>‘A year into the trade war</strong> with Washington, more than 50 global companies, including Apple and Nintendo, have announced or are considering plans to move production out of China,’ <a href="" target="_blank">reports</a>   the <em>Financial Times.</em></p><ul><li><strong>‘And not just foreign companies.</strong> Chinese manufacturers, as well as those from the US, Japan and Taiwan, are part of the drain, including makers of personal computers, smartphones and other electronics.’</li><li><strong>“We need permanent measures</strong> to avoid the risk of tariffs and be eligible for US government procurement,” said Kiyofumi Kakudo, chief executive of PC maker Dynabook.’ </li></ul><p><strong>‘The trade dispute</strong> is beginning to show up in flows of goods and capital.’</p><ul><li><strong>'In the first five months</strong> of the year, exports from China to the US fell 12 per cent on the year in value terms.’</li><li><strong>‘Exports from</strong> India, Vietnam and Taiwan logged double-digit gains.’</li><li><strong>‘Exports aimed</strong> at bypassing US tariffs by disguising the origin of products may also be increasing.’</li></ul><p><strong>‘Many companies,</strong> alarmed by the prospect of a prolonged trade conflict, are hedging their bets.’</p><ul><li><strong>‘While looking</strong> for alternative production sites for US-bound goods, many will keep factories operating in China for the domestic Chinese market.’</li><li><strong>‘Thus, many manufacturers</strong> will be forced to set up dual supply chains: one for China and one for other markets, raising their costs and denting profits.’</li><li><strong>‘Other than higher costs,</strong> companies will probably face excess capacity in a decoupled world economy.’</li></ul><p><strong>“The possibility of the world market</strong> dividing into China and non-China is growing,” said Yuji Miura, a senior economist at the Japan Research Institute.’</p><ul><li><strong>“Decoupling”</strong> — that is, an unwinding of economic ties between the US and China and a division of the world economy into hostile blocs — is a real possibility.’</li></ul><p><strong>‘Much of the shift is to south-east Asia,</strong> especially Vietnam, which is becoming home to many manufacturers of electrical and electronic equipment.’</p><ul><li><strong>‘Among them</strong> is South Korea’s Samsung Electronics, which makes smartphones in the country.’</li><li><strong>‘Vietnam </strong>also offers logistic advantages because it shares a land border with China.’</li></ul><p><strong>‘Manufacturers </strong>are also moving production back home to take advantage of existing procurement networks for exports aimed at large, developed-country markets.’</p></td></tr></table></td></tr>


<tr><td class="nl-post"><p><strong>Great </strong><a href="" target="_blank"><strong>summary</strong></a> infographic of Chinese investment in the U.S. from AEI’s  <a href="" target="_blank">‘China Global Investment Tracker’</a>  created and managed by <a href="" target="_blank"><strong>Derek Scissors</strong></a>.</p><img width="100%" src="" alt="CHINADebate"><p class="caption">AEI</p></td></tr>