DRIVING THE DAY
1. Management consultancy comes to the CCP
At nearly 90 million strong, the CCP is by far and away the largest organization in the world. And in Xi Jinping’s eyes it’s a bit of a mess.
That’s why Xi has devoted the majority of his energy to Party-building. It’s all about making the Party more efficient and effective.
In fact, Xi has taken a three-pronged approach straight out of the McKinsey playbook (see link below):
- Improve the structure. He has created a number of new leading small groups to enhance policy coordination. He has also enhanced the role of Party committees in virtually every organization in the country.
- Improve the process. He has formulated or amended over 40% of the Party’s rules, which has helped to institutionalize procedural norms. The newest (see link), looks to establish a “relatively complete” Party regulatory system by 2021.
- Improve the people. He has rejigged official KPIs and made it easier to promote and demote officials.
It’s the largest institutional restructuring in world history.
So is it working? Results are mixed. It’s difficult to evaluate an undertaking of this size and complexity in two sentences, but we will try.
The good: Appointments are now based more on performance than seniority, so stronger performers are rising through the ranks.
The bad: All the new rules and structures have led to increased bureaucracy, dinting efficiency.
The outlook: This first term was all about restructuring the system. The test of its efficacy will come in the second term.
McKinsey: Getting organizational redesign right
Xinhua: CPC calls to set up “relatively complete” regulatory system by 2021
FINANCE AND ECONOMICS
2. Express deliveries are the most under-appreciated data point in China
Ever want to know just how many packages all those “kuai di” drivers are delivering?
Well, lucky for you, the post office has just released an in-depth study of the industry’s development in 2016. It shows that deliveries grew by over 50% last year. Total deliveries topped 31 billion in 2016. No wonder those guys are in a hurry.
Growth through the first five months this year was 30.3% y/y. That’s impressive, but well down from 56.7% growth in the first five months of 2016.
Why it matters: Express deliveries are highly correlated with online purchases. That means they are a good back-of-the-envelope measure for overall consumption. The latest release indicates that fundamental consumption growth is still solid. But it also suggests growth is much less frothy than last year. That reality bears monitoring in an economy that is generally expected to slow in the next two quarters.
FINANCE AND ECONOMICS
3. China’s digital currency revolution
China’s central bank is getting serious about implementing a cryptocurrency. The monetary authority is currently conducting trials with several banks to understand how the currency might work in practice.
There are some huge, straightforward benefits to the implementation of such a system (MIT Tech Review):
- “A digital currency would give the Chinese government greater oversight of digital transactions… And by making transactions more traceable, this could also help reduce corruption.”
- It could “offer real-time economic insights, which would be enormously valuable to policymakers.”
- And finally, it might facilitate cross-border transactions, as well as the use of the renminbi outside of China because the currency would be so easy to obtain.”
Why it matters: We’d actually put money (pun intended) on China becoming the first country to institute a national cryptocurrency. Not only does it reduce costs, but it would give authorities that much more insight into and control over transactions. Counterfeiting of the CNY is a huge problem and it is nigh impossible to control the physical flow of money in such a large country where cash is still king despite the mobile payments revolution. A digital currency would go a long way to solving those issues.
The irony: The initial idea around cryptocurrencies was that they would take national governments out of currency policy. But China’s goal in creating such a program would be the exact opposite.
MIT Technology Review: China’s Central Bank Has Begun Cautiously Testing a Digital Currency
FINANCE AND ECONOMICS
4. Guo Shuqing isn’t backing off
CBRC head Guo Shuqing understands that his efforts to impose tighter regulatory standards on the banking system fit into a larger policy framework. They call it Supply Side Structural Reform (SSSR).
His comments from Friday exhorted banks to deepen SSSR. And they provide important context for his financial tightening program.
Here are some of Guo’s priorities for the banks:
- Aiding in industrial restructuring
- Removing bad bank assets
- Establishing market principles for debt-equity swaps
- Avoiding property market bubbles
- Keeping costs for business down
Why it matters: Guo’s comments suggest an increased amount of regulatory coordination. He is demanding that banks more actively cooperate with government and regulatory institutions at various levels.
The bigger picture: Anyone who is expecting a major policy shift after the 19th Party Congress should stop crossing their fingers. SSSR is THE economic policy framework now, and it will still be in six months.
POLITICS AND POLICY
5. Latest local government debt audit: Western China is the fiscal laggard
The first step is to admit you have a problem. The second is to try to understand the scale. The National Audit Office (NAO) is trying to do the latter for local government debt.
The NAO just released the preliminary results of its most recent audit. The key findings:
- The stickiest problems lie with grass-roots governments and provinces in Western China
- 16 provinces (out of 31) really drove debt expansion in the past three years; by the end of 2016, they had increased direct fiscal liabilities by 87% compared to levels in March 2013 (the last audit)
- Fiscal debt in western provinces more than doubled over that timeframe
Why it matters: Local governments drive China’s debt addiction. We sense that there is more urgency by central authorities to address the addiction right now, but it is going to require a focused and sustained effort to shut down illicit funding channels.
POLITICS AND POLICY
6. China Inc. aims to dominate AI
Boosting technological capability is THE KEY for China to realize its economic potential over the next decade.
That’s why Premier Li, acting very much the CEO of China Inc., chaired a meeting with leading scientists and scholars to determine which technologies the government should support. Here’s the list:
- artificial intelligence
- quantum science
- gene editing
- new materials
- new energy
Get smart: China is already leading the globe in some these technologies (see NYT, Verge, WSJ links below). That’s in large part due to political will and strong government support.
Why it matters: Continued success in technological breakthroughs will strengthen the Party’s belief in state capitalism, and limit the appetite for liberalizing reform.
Gov.cn: Premier Li emphasizes innovation for future development
The Verge: Chinese scientists have built the first quantum satellite network
NY Times: Is China Outsmarting America in A.I.?
WSJ: China Pushes Ahead With Human Gene-Editing Trials
POLITICS AND POLICY
7. Li Keqiang will signal economic priorities Tuesday
Premier Li is off to Dalian.
That’s where he’ll address the World Economic Forum at its “Summer Davos” meeting tomorrow at 10:40 am.
Why it matters: Every year, there are only a handful of occasions when the Premier gives speeches. This is one of them, so it’s an important opportunity to gauge the direction of policy.
What to watch:
- The growth target. Keeping or ditching the target is one of the hottest economic debates right now. Look for hints of Li’s position on the matter.
- The currency and the capital account. Decades of gradual liberalization have come to a halt in recent years. Watch to see if Li commits to restarting reforms.
- The financial sector. There’s a growing commitment to deal with bad debt. But those debts are really just symptoms of a deeper problem. A real game changer would involve adjusting the incentive structure that leads to bad investments.