DRIVING THE DAY
1. Xi hints that the Party might accept slower growth
When it comes to the economy, China’s growth target is the root of all evil. But there are signs that official thinking is starting to change.
Newly published comments by Xi Jinping himself could not be more forward thinking in this area (see link below):
- “Building a moderately prosperous society is not a“numbers game” or a“speed game”, but rather a goal to make meaningful progress.”
- “What are the problems that the people really care about? Is their food safe to eat? Does their heating work? Can the air be less polluted? Can the waters of our lakes and rivers be a little bit clearer? Can we have garbage incineration that doesn’t harm our health? Is our elderly care satisfactory? Is it possible to rent or buy a house?”
- “Compared to whether or not headline growth is a little bit higher or a little bit weaker, these are the things that people really care about. If we just satisfy the growth target, but don’t address the concerns of the people, then when it comes time to announce that we have established a moderately prosperous society, the people won’t agree.”
These are striking statements. Xi delivered them at a Politburo meeting back in November 2016, but they are only now being made public.
Why it matters: Abandoning the growth target would be the single most important signal that Xi could send on the economy. It would indicate a focus on quality of life over quantity of investment, and would be the first step in kicking China’s debt addiction.
Get smart: Xi’s statement is important. But it’s hardly the last word. The comment is buried in a book along with 140 of his statements. That means the officials who have to implement Xi’s economic policies will struggle to understand just how important this idea is, relative to their many other economic priorities.
What to watch: One key factor going forward will be how economic development is discussed in Xi’s report to the Party congress this autumn. If there is truly a step back from the growth target, we’d expect it to be signaled at that time.
FINANCE AND ECONOMICS
2. What to watch for: MSCI inclusion
Quick reminder that Tuesday is decision day for the MSCI on China. Well, technically the decision will come out at 4:30 am on Wednesday in the Mainland.
That is where market attention will be focused this week.
Last year MSCI did not include China because of three obstacles (see MSCI presentation below):
- Effective implementation of the QFII policy changes and removal of the 20% monthly repatriation limit
- Effective implementation of new trading suspension treatment
- Resolution of pre-approval requirements by the local exchanges on launching financial products
According to MSCI itself, none of those issues have been resolved. The second and third have seen steps in the right direction, but we are still far from a sustainable solution. The monthly repatriation limit is still firmly in place.
Why it matters: At this stage, inclusion would have to be based on the expectation of future regulatory reform, which is ill-advised. China’s government desperately wants the symbolic victory of being included in the index. Holding out that possibility can help MSCI apply external pressure for transparent, market-based reforms. But once Chinese equities are in, the pressure to improve will be relieved — China will already have what it wants.
MCSI: CONSULTATION ON CHINA A-SHARES POTENTIAL INCLUSION
FINANCE AND ECONOMICS
3. MSCI and China: What markets think
Tuesday’s decision still feels like a coin flip (our above comments notwithstanding). Market actors are divided.
Some investors think inclusion is inevitable at some point, so get on with it. Others are wary that China’s stock exchanges are still too volatile and poorly regulated.
No matter how tomorrow’s decision goes, the immediate effects will be limited. For one, inclusion would be phased in over several years. And two, China’s proportion in the index will be tiny to start, at only 0.5%.
Get smart: At some point, China’s A-shares will be included in all the major indices. But even once the process officially begins, it will be a slow evolution. It’s a decade-long prospect, at least, to further integrate China into global capital markets. That change will impact markets for decades.
So why rush it? Better to require China to address its capital market shortfalls first.
FINANCE AND ECONOMICS
4. Is Chongqing the blueprint for fiscal discipline?
Chongqing has rolled out a document that is meant to cut ties with local government financing vehicles (LGFVs). The idea is to cut all ties in one go.
The method: Chongqing will create a shortlist of SOEs whose sole mission is to undertake public interest projects such as infrastructure and public utilities. Financing for those projects through any LGFV will be prohibited. More importantly, the government will withdraw all assets it has previously injected into LGFVs.
Going national? Similar LGFV guidelines are in the pipeline at the central level.
Why it matters: Local government financing shortfalls are one of the perennial challenges to getting China’s debt addiction under control. If the Chongqing plan is successful, it could provide a blueprint on how to make local project financing more transparent.
The problem: Cutting ties with LGFVs does not address the fundamental challenge that requires local governments to borrow — too few revenues, too many expenditures.
FINANCE AND ECONOMICS
5. AIIB is a bit player in the Belt and Road Initiative
The AIIB is still finding its identity. But that identity will not be in financing Xi Jinping’s Belt and Road Initiative (BRI).
The bank held its annual meeting in Korea this weekend, where its president, Jin Liqun, underscored Asia’s infrastructure needs:
- “Current research suggests the gap between what is being built and what is needed to meet this demand is about $1.7 trillion”
But Jin also noted that the AIIB will only fund around 0.1% of that amount this year.
More importantly: He made clear that the AIIB is not an arm of the BRI, and the bank will make investment decisions based on financial – not political – considerations.
Get smart: The real funding for BRI comes from the policy banks China ExIm Bank and China Development Bank. People often conflate the initiatives. But the AIIB is its own beast. So far it has been successful in maintaining independence and following international best practices.
Korea Herald: [INTERVIEW] AIIB chief puts quality ahead of quantity in projects
The Standard: AIIB plows US$324m into India, Georgia, and Tajikistan building projects
POLITICS AND POLICY
6. SOEs are becoming a more powerful tool for the Party
- We should “unwaveringly resist wrongful thoughts and remarks about privatization, denationalization and subordinating the role of SOEs.”
- SOEs need to become “a most reliable force for the CCP and the country in enforcing their strategies.”
Those are the most recent thoughts on SOE reform from Xiao Yaqing, head of SASAC (the entity that oversees China’s central SOEs). He published the comments in an editorial over the weekend for the Study Times— the flagship newspaper of the Central Party School.
Meanwhile, SASAC party secretary, Hao Peng, chaired the first meeting of SASAC’s leading small group on Party-building. The group resolved to enact an “obvious strengthening” of Party-building before the 19th Party congress.
Why it matters: Make no mistake. The Party’s role in central state-owned enterprises is only going to grow. These are the guys running the ship, and they are fully dedicated to Party-led state enterprises.
POLITICS AND POLICY
7. Xi’s belief in the CCP stems from his father
On Father’s Day, the Party continued its campaign to humanize Xi Jinping by publishing a letter he wrote to his father Xi Zhongxun in 2001 (see People’s Daily link below).
The letter contains a list of things that Xi had learned from his father. A few of the more interesting ones are:
- Speak the truth and never persecute others.
- Maintain unwavering loyalty to the CCP and its cause.
- Love and serve the people.
Meanwhile, a friend of the family (see Phoenix link below) reveals that Xi Zhongxun – a veteran revolutionary and eventual vice premier – was grooming Xi to be a Party leader from an early age, regaling him with tales of the revolution and the CCP’s mission.
Get smart: Xi’s efforts to reinvigorate the Party are sincere. His dad was, by all accounts, a dedicated Party member who was in the CCP because he truly believed that it could bring wealth and prosperity to China. Xi inherited his father’s faith in the CCP and its mission.