DRIVING THE DAY
1. Zhou’s Parting Shot?
The need for more competition in the financial sector is as great as ever. China should not be afraid to pursue it.
That was Zhou Xiaochuan’s message this morning.
Zhou is the long-serving governor of China’s central bank and has been one of the most high profile proponents of marketizing reforms for many years. He was speaking in Shanghai, at the opening of the annual Lujiazui Financial Forum.
Zhou’s remarks are particularly poignant given the shift toward more economic control and intervention that has taken place in recent years. They were even more striking given that the theme of this year’s forum was financial reform in the context of “stable development”.
Zhou hit the reform theme hard. He also argued that China should welcome foreign financial institutions at home — and not be afraid to go toe-to-toe with them.
Going deep: Zhou reminded his listeners of the commitments the Party made toward more market-oriented resource allocation at the 2013 Third Plenum. But he went deeper, stretching all the way back to the Third Plenum of 1993, where the Party first described the financial system as the “lifeline of the national economy.”
Zhou’s real message: We committed to financial opening 25 years ago. We’ve made a lot of progress, but the job is not done. The financial system faces different circumstances from 25 years ago, but we should not be afraid to open up and compete.
Why it matters: It was a strong message. And it came as Zhou prepares to step down from his 15-year tenure as the head of China’s monetary authority. In some ways it felt like his parting shot.
What to watch for: We’ve got the lowdown on the most likely candidate to replace Zhou. Give us a shout, and we’ll tell you about it.
A hint: It’s not who you think it is. (That’s what we call a teaser).
21st Cent Biz: 周小川：金融业的竞争性属性已十分清晰
FINANCE AND ECONOMICS
2. Better living, through communication
One of Zhou’s most lasting legacies will be the central bank’s much improved communication in recent years.
That improved messaging has been on display over the past several weeks. On Monday, the PBoC released a statement explaining why it had come to the market with a relatively large one-day net cash injection of RMB 110 billion. Turns out, the bank was largely offsetting liquidity demand from government bond issuance.
The message: don’t read too much into this, our stance hasn’t changed. And that is just one example of several from the past few weeks.
Why it matters: Better communication from monetary authorities helps the market understand and respond to policy actions. It also keeps markets from overreacting when cash gets a bit tight. There is still much to be desired from the PBoC on the communication front, but they are moving in the right direction.
The immediate consequences: Markets in China are starting to acclimate to the tighter regulatory environment. They are getting the PBoC’s messages.
FINANCE AND ECONOMICS
3. Disentangling local governments and asset managers
Turns out banks are not the only institutions required to undergo a thorough self-examination right now. Asset managers are being required to do so as well. Strangely, though, it is the Ministry of Finance that is requiring these inspections.
The reason: They want to stop the funny business that local governments have been pursuing to finance themselves.
Inspections are meant to focus on three areas:
- Does an asset manager provide financing for a local government?
- If so, is there a requirement that the local government be provided with a guarantee in any form?
- Has the local government promised to refund capital from PPP investments?
The juice: Local governments have essentially started borrowing through PPP investment projects since other borrowing avenues have been closed down. It’s the typical chicanery, but this time the Ministry of Finance seems to have sniffed it out quickly. The central government is trying to impose some discipline on the provinces, and it is getting better at it.
POLITICS AND POLICY
4. Correcting records, literally
The knives are out for local officials who juke economic stats. Violators will be disciplined. And where it occurs, promotion will be vetoed for local cadres-in-charge.
That’s according to the new implementing rules for the Statistics Law that Premier Li just signed into existence. The previous version was 30 years old, so it was time for an update.
Call a spade a spade: This law is a direct response to rampant stats fraud among local governments in China. We all know it’s happening. And top leadership is starting to get sick of it.
So what? Getting the right data is essential to prescribing the right macroeconomic policies. Xi himself has been stressing that: “We must ensure accurate and complete statistics in a timely fashion.”
It’ll be an uphill battle. But they are hitting cadres where it hurts, and that might change the calculus.
State Council Order: 中华人民共和国统计法实施条例
State Council: 李克强签署国务院令公布《中华人民共和国统计法实施条例》
People’s Daily: 努力开创依法统计依法治统新局面
NYT: China Steps Up Rules Against Falsifying Economic Data
POLITICS AND POLICY
5. Xi Jinping wants a big state economy
China’s economic debates center around the meaning of the “socialist market economy”. Liberals emphasize the “market”. Conservatives emphasize the “socialist”.
In case there was any question, previously unpublished statements from Xi Jinping show that he is definitely in the conservative camp.
Xi at the November 2015 Politburo study session:
- “As we develop the market economy under the leadership of the Chinese Communist Party and precondition of the socialist system, we must never forget the ‘socialist’ modifier”
- “We want to preserve our superior system, and effectively prevent the abuses of the capitalist market economy”
- “We want both an ‘effective market’ and a ‘proactive government'”
The bottom line: Xi may be willing to reconsider the growth target (see yesterday’s Tip Sheet). But these comments show broad-based liberal reforms are not happening.
POLITICS AND POLICY
6. China’s universities get a refresher in ideology
Xi sees himself in an ideological struggle with the West and “universal values”. We pointed that out last week.
That’s why he’s attempting to instill greater ideological conformity across Chinese society, including in universities.
Recent CCDI investigations at 29 universities found that 14 universities were not following the Party line closely enough (see CCDI link below).
The FT puts the recent inspections in perspective (link below):
- “Since 2012, China has tightened political control over all spheres of civil society including educational institutions”
- “Education officials have asked universities to stop using imported textbooks imbued with ‘western values’”
- “President Xi Jinping has called on Chinese universities to become ‘strongholds of the party’s leadership’ with a greater focus on ‘ideological work’”
Why it matters: It’s about 2037, not 2017. The main goal is not so much clamp down on information now. It’s to infuse socialist values more firmly into the minds of China’s next generation.
FT: China universities accused of ideological weakness
POLITICS AND POLICY
7. China looks to upgrade its industrial work force
China needs a workforce reboot.
According to the government, only 4% of China’s 200 million industrial workers are sophisticated technicians or engineers. That’s a tenth of the level in developed economies.
That’s why the Central Committee and the State Council published a plan to improve the industrial workforce yesterday (official readout below).
Why it matters: China’s demographic dividend is OVER. In fact, demography is quickly becoming a drag on the economy’s potential. If the government wants to maintain growth, it’s going to have to boost productivity by investing in human capital.
It’s a big challenge. And China’s answer to it will determine the country’s economic trajectory for better or worse.