Eye on China: Trade War Flux – India’s BRI Tryst – Xi’s Policing Vision – Pompeo Talks Tough

Eye on China is a weekly bulletin offering news and analysis related to the Middle Kingdom. This week we cover the unraveling of the Sino-US trade talks, shifts in Indian thinking on BRI, Xi’s new vision for the country’s police and much more.

Inside China

A quick look at the key stories that dominated the domestic headlines in China. Of course, it took a long time for the trade war rumblings to hit China’s state media. We’ll get to that later, however. Here’s what’s been happening inside the country in the meantime.

  • The Party’s Police: Xi Jinping spoke at a national conference on public security this week, outlining his vision for policing in the country. There are three parts to this vision – ensuring political loyalty, promoting reform and maintaining strict discipline. Xi wants the police to “closely follow the CPC Central Committee in terms of thinking, political orientation, and actions at all times…to ensure that the Party’s lines, principles, policies, and major decisions and plans are implemented to the letter.” When he talks about reform, he essentially means ways and means to improve efficiency. This, he believes, can be done using more technology, big data and some rather old school approaches, such as the Fengqiao Experience – a Mao-era campaign of mass mobilisation against so-called reactionary elements in society. This suggestion along with the objective “to proactively prevent and properly defuse various kinds of social contradictions to guarantee a society of vitality, stability and order” sounds rather disturbing.

  • Integrated Urban-Rural Development: Over the weekend, the State Council announced guidelines for integrated urban rural development. The big pledge to emerge is that “China will break barriers that restrict the free flow of resources – such as capital, talents, information – between urban and rural areas.” That will require important changes. So “China will deepen household registration reform, restrictions on urban settlement except for several mega-cities, promote coordinated development between cities and towns, as well as increase the population carrying capacity and attractiveness of mid- and small-sized cities.” But that’s just one part of it. In the rural areas, we can expect efforts to expand access and availability of finance, land reform allowing farmers to turn their land-use rights into shares in farming enterprises or cooperatives, incentives for businesses, more investment in public services and education services. The catch is that this is a long-term vision, which begins to take shape from 2022 and reaches its culmination by 2035.

  • Economic Data: Two key sets of economic data for April were released this week. The PBoC released credit data on Monday, which showed that Chinese bank lending was lower than expected. SCMP reports that banks provided 1.02 trillion yuan ($150 billion) of new yuan loans in April, lower than market expectations for 1.2 trillion yuan in loans and the 1.69 trillion yuan in new lending in March. Then on Wednesday, the General Administration of Customs put out trade data, which also showed weakness. Exports fell 2.7% in April compared with the same period in 2018, reversing from the 14.2 per cent rise in March. Imports, meanwhile, spiked by 4%. What this meant is that April’s trade surplus narrowed by $18.8 billion to $13.48 billion. Forex reserves by the end of April also declined by $3.8 billion, or 0.1%, to $ 3.094 trillion. Finally, Bloomberg reports that defaults are ramping up in China’s $13 trillion bond market. “Companies defaulted on 39.2 billion yuan ($5.8 billion) of domestic bonds in the first four months of the year, some 3.4 times the total for the same period of 2018,” the report says. It adds that, “The trend is clear: unless something changes, 2019 will be the new high.”

  • Policy Switches: Finally, we turn to the key policy statements that were announced this week. First, the NDRC and others are continuing to emphasise the need to cut steel and coal capacity. The circular issued by the bodies says that “the country should consolidate the outcomes of cutting overcapacity and step up inspection to avoid the resurgence of eliminated capacity.” Second, the State Council released a regulation to govern government investment. It says that “government investment should be channeled to the public sectors where resources cannot be effectively allocated by the market, and mainly target non-operational projects.” The sectors that are being targeted for government investment will be “social services, public infrastructure facilities, agriculture and rural sectors, ecological and environmental protection, significant technical advancement, social management and national security.” There’s also a lot of emphasis on “the need of making rational investment decisions, having standardized management, being result-oriented, staying open and transparent.” In sum, boondoggle projects under BRI are okay, but not in your counties. Third, Bloomberg reports that the China Banking and Insurance Regulatory Commission has told the country’s major lenders to classify corporate loans overdue for more than 60 days as nonperforming, down from 90 days previously. The report adds: “Chinese lenders are sitting on more than 2 trillion yuan ($295 billion) of soured loans after flooding the financial system with cheap credit for years to prop up economic growth. While more prudent NPL recognition will boost the industry’s health over the long run, it may also portend a new wave of bad loans on balance sheets and weaken some banks’ capital buffers.”

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