DRIVING THE DAY
1. The Chinese economy is set to pass its mid-year check up
You may not have noticed, but we are in the midst of China’s mid-year economic data dump.
Think of it as a six-month checkup for the economy.
Here are the essentials: Credit numbers came out Wednesday. Trade numbers dropped this morning, and Q2 GDP will be out on July 17.
Our key takeaways on credit:
- Credit growth is still the most important data point for understanding short-term growth prospects. It accelerated in June to 14.1%y/y – it had been 13.5% in May.
- That acceleration came despite the lowest ever growth in the money supply, which was up only 9.4%y/y. The previous all-time low was in May at 9.6%.
- We explained this last month, but slow money growth combined with accelerated credit growth is a positive development.
- It basically means that regulators are achieving their goal to slow down risky borrowing in money markets without zapping financing for bread-and-butter Chinese businesses (see Bloomberg link).
CNBC has us covered on the trade side (link below):
- “China’s June exports rose 11.3 percent, better than expected, on global demand recovery”
- “China’s June imports rose 17.2 percent, also better than expected”
What’s the theme in all of this? Better than expected.
No one wants to be a China bull these days. But the reality is that indicators keep coming in above analysts’ projections. And we think they will continue to do so in Q3.
The upshot: Many folks thought the tighter financial environment would slow credit growth, which would therefore slow economic growth. But regulators argued that the transmission channels from tighter regulation wouldn’t work that way – they were right.
What to watch for: Now that the regulators know they can tighten monetary growth without tanking credit and economic growth, look for a more ambitious plan for financial de-risking to be put forward. It may come as early as the weekend given that the National Financial Work Conference kicks off on Friday.
Bloomberg: China Shows It Can Clean Up Credit Without Killing Off Growth
CNBC: China June exports, imports higher than expected as global demand holds strong
Bloomberg: What’s on the Agenda at China’s Five-Yearly Finance Meeting: QandA
DRIVING THE DAY, CONT’D
2. Monday will fill out the H1 growth picture
And it will set the stage for policy in H2.
Here are our lingering thoughts as we await the data.
- The WSJ (link below) reiterates what we’ve been yammering on about for months – that the property restrictions simply aren’t effective. So how much growth support did the sector provide last month? On Monday, we’ll look to see if property spending may have reaccelerated in June.
- Did the macro debt picture continue to stabilize in Q2? The first quarter looked much improved: the debt load still grew, but much slower than it usually does.
Get smart: When the data comes out on Monday, financial press will focus on real GDP growth, but nominal GDP growth is what really matters. The pace of nominal economic activity is critical for understanding China’s debt-to-GDP trajectory.
Get smarter: Nominal growth got a boost from soaring commodities prices in Q1. So Q2 will be a more reliable indicator of economic momentum and debt dynamics.
FINANCE AND ECONOMICS
3. China’s economy is slowly maturing
Even though we watch it closely, we have a healthy skepticism of China’s GDP data.
That’s why it’s so important to understand how companies are faring on the ground.
AmCham Shanghai recently published its business climate survey, and it gives solid (if backward looking) insight into business conditions — and economic performance.
The top takeaway – 2016 was a good year for multinational companies:
- “Performance metrics for most companies improved in 2016…73.5% of companies reported revenue growth, recovering from the 61% recorded in 2015.”
- “More companies were profitable (77% vs 71% in 2015).”
- “The number of companies with improved operating margins rose to 55.2%, the highest level since 2010.”
Get smart: Despite these solid profits, foreign companies are still frustrated with the business environment, which is slanted against them.
Get smarter: Foreign companies are also dogged by increasingly competitive Chinese businesses. That’s bad for MNCs, but a good sign that China’s economy is maturing.
Amcham Shanghai: 2017 China Business Report
FINANCE AND ECONOMICS
4. Local governments get a new arrow in the quiver
The central government is in a pickle. It wants to impose fiscal discipline on local governments without bankrupting them.
One of the newest solutions is to allow local governments to issue special bonds to fund toll roads. A trial program launched yesterday will allow RMB 73 billion of such bonds to be issued this year.
Some context: By the end of 2016, local governments borrowed 94% of aggregate toll road financing from banks. The total size of outstanding debts was RMB 2.6 trillion.
More context: This is now the second special type of local government bond that has been trialed in the past two months. The first was for financing land reserves.
The big picture: Local government debt is one of the biggest vulnerabilities in the financial system. More direct financing will help to ameliorate risk and boost transparency. The central government is actively experimenting to get it right.
POLITICS AND POLICY
5. Local governments don’t want farmers
We told you last week that city governments are ramping up the competition for college graduates.
But they don’t want farmers.
Why? To put it bluntly — college graduates are resources; farmers are costs.
The problem: The central government wants more farmers moving to the cities. The NDRC’s 2016 Urbanization Report showed only 16 million people settled in cities in 2016. That’s not enough.
The NDRC gave three reasons for poor progress:
- Local governments only see the immediate cost to public services — not the longer-term dividends from a bigger labor force.
- Cost sharing mechanisms between central and local governments are rudimentary.
- Oh and by the way — farmers don’t want to give up their rights to rural land, anyway.
Why it matters: The central government can complain all it wants about local government intransigence. But the fact is that local governments don’t have enough money. Until the central government establishes a better revenue sharing mechanism, this problem will persist.
POLITICS AND POLICY
6. China sets up first overseas military base
China’s global footprint is expanding. From Xinhua:
- “Ships carrying Chinese military personnel departed Zhanjiang in southern China’s Guangdong Province on Tuesday to set up a support base in Djibouti.”
- “The establishment of the PLA Djibouti base . . . will ensure China’s performance of missions, such as escorting, peace-keeping and humanitarian aid in Africa.”
- “The base will also be conducive to overseas tasks including military cooperation, joint exercises, [and] evacuating and protecting overseas Chinese.”
The FT has some context:
- “The new base in Djibouti marks the first time a long-term garrison of the People’s Liberation Army has been established beyond China’s borders since their withdrawal from North Korea in 1958.”
The big picture: Xi Jinping has ushered in a sea change in China’s foreign policy. He has all but abandoned Deng’s dictum to “hide capabilities and bide time”. China is now playing a much more active role in the world, and will continue to do so. Get used to it.
POLITICS AND POLICY
7. China wants more entrepreneurs
Li Keqiang wants more innovation and entrepreneurs.
That’s why the State Council has just approved new opinions that are meant to create a more favorable environment for startups.
The opinions call for more foreign talent. They will:
- Create a one-stop registration process for businesses
- Simplify work and resident permit applications for Chinese and foreign hi-tech workers
- Allow overseas students in China who start new businesses to apply for residence permits using only their diplomas
The country is also making it easier for the state to take part in venture capital investments.
Reality check: There is no lack of venture capital in China. Getting the state more involved is as likely to hamper effective capital allocation as it is to improve it.
Some context: The policies are not always perfect, but on the whole Li’s entrepreneurship drive has to be counted as a success. 13 million new businesses were started between March 2014 and February 2017. That’s a lot.
State Council: 国务院常务会 | 李克强：把“双创”推向更大范围、更高层次、更深程度