DRIVING THE DAY
1. Xi Jinping and financial chaos
He might be in Germany, but Xi Jinping still has financial chaos in his crosshairs.
As we highlighted yesterday, press reports tell us that the National Financial Work Conference (NFWC) is finally happening next week.
It looks to us like Xi will be directly involved. That puts an extra level of emphasis on an already important conference.
Why do we suspect Xi’s involvement?
A key Chinese language news article reporting on the conference has been scrubbed from the web. The article was from Caixin and we linked to it yesterday, but now only an abbreviated English version (link below) remains posted.
Why pull the article?
The now-scrubbed Caixin piece contained the most important information about the conference. It will not only be led by the State Council, but it also appears to be linked with the July Politburo meeting. That mid-July Politburo meeting always evaluates the performance of the economy in the first half of the year, so the timing is right to discuss economic and financial policy more broadly.
However, the exact dates of Politburo meetings are not signaled in advance publicly, which is likely why the Caixin article had to be taken down.
Why does any of this matter? It’s a strong indication to us that Xi Jinping himself, and the Party more broadly, will be taking a role in overseeing this year’s NFWC. That is unusual given that the conference is typically the domain of the State Council.
While that may not seem surprising given the Party’s increased role in policy making under Xi Jinping, it underscores that addressing financial risk is undoubtedly still a top policy priority. The only man that matters is still focused on it.
DRIVING THE DAY, CONT’D
2. Financial risk will re-emerge in December
The NFWC is happening next week, but everyone should circle December on the calendar.
That’s because any serious adjustments to the financial regulatory architecture will not actually be implemented until after the Party Congress in the Fall.
The NFWC will agree to basic principles to adjust the regulatory system, including the establishment of a regulatory coordination agency, overseen by the PBoC. That new agency will ensure that regulators are aligned in their efforts to reduce financial risk. And it will be in lieu of the widely discussed super-regulator role for the PBoC.
What to watch for: Improving financial regulation and coordination will be a long-term positive. But when regulators start to implement those changes late in the year, the possibility for a financial misstep will be nerve-wracking.
POLITICS AND POLICY
3. Dim prospects for a diplomatic resolution to North Korea
The possibility of military conflict is increasing after North Korea’s latest missile launch. The US says it is willing to consider military options (WSJ link below). And China and Russia warned of “possible armed conflict” in a joint statement, as well (MOFA link below).
The division among the two camps is only getting deeper:
Xi and Putin signaled their reinforced alliance via two joint statements after the recent meetings in Moscow. They expressed their preference that “all parties back down and talk.” That’s the plan they will push to Trump and other key leaders at the G20 meetings.
Meanwhile, the US, with support from Japan, is seeking to apply more direct pressure on the DPRK, instead of dialogue.
What to watch: No significant policy moves will be made before Xi and Trump meet on the sidelines of the G20 over the next two days. But the prospect for those meetings to produce a viable path forward appear increasingly dim.
WSJ: U.S., Russia Spar Over Approach to North Korea Threat
POLITICS AND POLICY
4. Li Keqiang wants better logistics
Yesterday we noted the vast regional disparities in China.
One reason they exist: Local protectionism keeps China from having a unified national market.
Li Keqiang wants to change that. Wednesday’s State Council meeting marks a move in the right direction, with two important new policies:
- The government will unify licenses for logistics companies. A license from one province will now be good anywhere in the country.
- It will also make these licenses easier to obtain by putting them online.
Some context: China’s logistics costs are twice what they are in developed markets
Why it matters: An efficient logistical system is critical to the free flow of goods. Logistics can also be a substantial business cost. Getting this right is key for improving badly-needed economic efficiency.
POLITICS AND POLICY
5. Li Keqiang looks to name and shame errant officials
Li Keqiang has been on a mission to ensure the government is more disciplined, especially when it comes to the budget.
The problem: He hasn’t been super successful. That was made clear by a recent audit of last year’s revenues and expenditures.
But now, Li has devised a plan to raise accountability: Before the end of October, any government agency or department that has been lax on sticking to its budget will have to report to the State Council and offer a plan for improvement.
The innovation: These reports will also be made public.
Get smart: Public supervision is a means to show that the government is responsible to the people. But it never actually scares officials. They care more about their superiors than the public, because superiors make the promotion/demotion decisions. Li may have to go back to the drawing board.
FINANCE AND ECONOMICS
6. Boosting private investment proves difficult
The private sector’s confidence in China’s economy has been in the dumps in the first half of 2017.
That has been reflected in sluggish private investment. Growth of private investment in the first five months of the year came in at 6.1% y/y – well under the 8.6% growth for overall investment. That means the state sector continues to pick up the slack.
It all starts at the local level. So yesterday, Li Keqiang asked local governments to identify “good quality assets” – meaning facilities that can generate steady revenues. Li said governments should open those facilities and projects to private investment through public-private partnerships (PPP).
The challenge: Governments are still trying to keep high and steady yielding projects for themselves, and open PPP to more difficult projects. That’s not how it’s supposed to work.
The outlook: Private investors still see a high degree of risk in partnering with governments– a tongue lashing from Li won’t change that.
State Council: 国务院常务会 | 李克强：对在国内注册的内外资企业一视同仁
FINANCE AND ECONOMICS
7. China’s consumption paradox – strong but slowing growth
Most China watchers know that improved domestic consumption is essential if China’s economy is going to rebalance away from over-investment.
That’s why digging into MOFCOM’s recent report on the retail industry in 2016 (link below) is worth a look.
Some key takeaways:
- Total retail sales growth was robust at 10.4%
- But that represents a slowing in growthfor the sixth consecutive year
- Growth for online retail sales dipped below 30% – to 26.2% – for the first time since 2010
- Big retailers are suffering – sales growth at the biggest 100 firms averaged -0.5%
- Business are migrating online – 45% of businesses had sales presence online, up from 33% in 2015.
The key point: Consumption growth is solid, but it has slowed with the rest of the economy in recent years. To unleash China’s true consumer potential the government needs to do more to build a social safety net and reduce people’s need for precautionary savings.