DRIVING THE DAY
1. Xi preps the team to negotiate in Washington
Wednesday kicks off the US-China Comprehensive Economic Dialogue in Washington, DC.
In the run-up to that gathering, Xi Jinping chaired a meeting of the Central Leading Small Group for Financial and Economic Affairs (CLSGFEA).
Want to take a stab at the meeting’s topic? Outlining a fairer and more transparent business environment for foreign companies in China and further opening of the economy.
It sounds to us like a prep session for Wednesday’s dialogue – a team huddle to draw lines in the sand for negotiation and to coordinate each ministry’s strategy. And to decide what kind of sweeteners can be offered to the US side.
Per Xi’s comments to the leading group, here’s what is on offer – China will:
- “[T]ake the initiative to expand imports to balance trade”, while making import procedures easier and cheaper
- Put foreign businesses on equal footing legally; and ask first tier cities to set the example in improving the business environment
- Ensure that IPR violators feel some real pain
- Open the financial sector; but at a pace and sequence that will protect consumers, increase competition in an orderly way and prevent financial risks.
Count us skeptical. This pretty much reads as a wish list from the US business community. And the nod to the trade deficit touches on the number one economic fixation of the US administration.
To us it sounds a lot like Xi is saying, “just tell them what they want to hear.”
Why?It goes back to Xi’s unwavering goal – keep the Americans off his back until after the Party Congress.
Don’t expect much action on any of these fronts.
People’s Daily: 习近平主持召开中央财经领导小组第十六次会议强调营造稳定公平透明的营商环境加快建设开放型经济新体制
FINANCE AND ECONOMICS
2. The FSDC takes shape
Wait for it.Waiiiiit for it. Details around China’s evolving financial policy continue to trickle out in the wake of the National Financial Work Conference (NFWC) that took place over the weekend.
Specifically, the new Financial Stability and Development Committee (FSDC) that was established at the NFWC is starting to take some shape.
The announcement of the FSDC was met with initial skepticism by many China watchers. The primary line of thinking: simply layering on more toothless bureaucracy won’t fix anything.
But that attitude was largely due to a lack of initial detail, which is starting to be filled in. The PBoC has officially indicated that the office of the FSDC – although it will be led by the State Council – will be housed within the central bank, as expected (see link below).
In addition, a string of articles in the People’s Daily over the past several days have outlined the state of play. Key takeaways from the People’s Daily:
- The FSDC is not just about getting the financial regulators on the same page, but coordinating the whole shebang — monetary, fiscal and industrial policy
- The new body will remind regulators that they are meant to actually regulate – not to just nurture their corner of the financial industry; that might seem simple but it is a break from the recent past
- Various regulators are already professing fealty to the new body (see next entry)
- This coordination effort will push the banking sector, in particular, to get back to basics – taking deposits and lending to real businesses
- In terms of financial opening, the focus will be on a methodical pace and proper sequencing – so calibrate expectations accordingly.
- Authorities understand that risks have clearly accumulated, so de-risking the system will have to take place gradually.
The upshot: It’s still not the detailed road map that we’d like to see. But it’s too early to deem the NFWC or the FSDC as a nothing-burger. In fact, the new body looks poised to keep tight financial supervision at the top of the policy docket.
FINANCE AND ECONOMICS
3. The CBRC falls in line
Back to basics.
That’s the newest mantra from Guo Shuqing and the China Bank Regulatory Commission (CBRC) that he oversees. It’s a sign he is getting in line behind the new regulatory dynamics.
If you need proof that the new financial coordinating body has teeth, here’s what Guo and the Party committee of the CBRC said on Monday (via 21st Cent Biz):
- We will “resolutely obey the leadership of the State Council’s Financial Stability and Development Committee, [and] actively cooperate with the People’s Bank to strengthen macro-prudential management responsibilities.”
In case you don’t know. Guo isn’t exactly known for his deference to other regulators. So having him in line says something about the evolving power hierarchy.
Why it matters: Having China’s financial regulators genuinely on the same page is huge. It means supervision can be more effective. We’ve already seen a taste of that in the tighter financial environment that prevailed from April to June of this year – expect more starting in December.
FINANCE AND ECONOMICS
4. Regulators should be careful what they wish for
Of course, China’s regulators need to be careful what they wish for here. China’s markets are buying into the pending tighter regulation, and on Monday it wasn’t exactly pretty (SCMP):
- “In the mainland however, Chinese stocks tumbled on Monday, as top policy makers emphasised on curbing financial risks, stoking concerns about increased scrutiny of the financial system, triggering a decline of nearly 500 stocks by their daily limit of 10 per cent.”
That kind of equity market reaction might seem strange on a day that China announced that Q2 GDP growth beat expectations.
The China market reality: Equities often fall on positive economic data in China because traders start expecting less policy support for the economy. Add to that the strengthened hand of financial regulators and Chinese stock pickers weren’t too happy.
Stay tuned: China’s equity markets are still pretty casino-like, so we don’t want to overplay this signal. But domestic equity markets are showing a sense that regulators mean business. Maybe we should listen.
SCMP: China stocks fall most in seven months on “Black Monday”
POLITICS AND POLICY
5. Wang Qishan is helping Xi Jinping cement his legacy
We weren’t sure it was even possible. But Wang Qishan – the head of the Party’s disciplinary unit – has further politicized Party inspections.
“Politics” will now be required to underpin the “actual business” of each cadre in the system.
What does that mean? Cadres’ actions need to reflect the proper political thinking of one person in particular.
Want to guess who it is? That’s right – Xi Jinping.
Here’s what changed:
- The new rules have enshrined Xi’s theoretical contributions and the preservation of Xi’s authority as inspection guidelines – that means his instructions will be institutionalized beyond his tenure as general secretary…whenever that may end
- All of Xi’s remarks are now effectively considered as equal to party rules and regulations
- This all gives the discipline inspection tours a wider mandate to implement policy and enforce any order from Xi.
Get smart: This is Wang Qishan showing he is Xi Jinping’s wingman. It underscores that the discipline inspectors owe their own authority to Xi himself. And that dynamic further entrenches Xi’s power over the system as a whole.