FINANCE & ECONOMICS
1. PBoC shifts gears on the currency
After two years of fighting against currency devaluation, the central bank is now backpedaling to try and cap the currency’s strength.
The regulator has scrapped two rules that were previously put in place to keep the currency from falling (WSJ):
- “[One] move, which ends a deposit requirement on trades called currency forwards, will make it less expensive for companies and investors to buy dollars while selling the yuan.”
- “The monetary authority late Friday also removed the reserve requirement on foreign banks’ yuan deposits, which will release more yuan funds into what is known as the offshore yuan market in Hong Kong.”
Why it matters: Regulators didn’t want a sudden weakening in the currency because they were afraid of the consequent financial volatility. But neither do they want the CNY to be overly strong – that hurts exports.
Get smart: Just because the regulator is unwinding these policies now doesn’t mean it won’t put them back in place if the currency starts to plunge again. The PBoC knows it has them in its back pocket.
FINANCE & ECONOMICS
2. Upstream prices still strong
Price data for August came in over the weekend. It wasn’t too exciting:
- China’s consumer prices rose 1.8% y/y in August – up from 1.4% growth in July.
- China’s producer prices rose 6.3%y/y in August – up from 5.5% in July.
Why it matters: On the consumer side, price growth is still very much in the central bank’s comfort zone. The PBoC aims to keep official inflation below 3.5% y/y. All set there.
Why it also matters: The real action continues to be in upstream prices. Solid price growth means that industrial producers continued to see solid profit growth in August – that means more room to pay off debt.
Get smart: Many China economists have argued that upstream inflation would be fleeting, that H2 2017 would see price headwinds, and so would China’s cyclical growth momentum. But China has quietly broadened its capacity cutting program – beyond coal and steel to aluminum and other nonferrous metals. Those moves have supported price growth.
What to watch: Look for new additions to the capacity cut roster. Any commodity that the capacity cuts touch will see price jumps.
POLITICS & POLICY
3. China may kill the traditional car
China wants to move away from traditional combustion engines.
So says vice-minister of industry Xin Guobin. Xin’s remark that China is studying a timeframe for banning traditional vehicle production came over the weekend at an auto conference in Tianjin.
The reasons behind China’s desire to shift away from combustion engines toward electric vehicles are obvious. First, there is the environmental aspect. That’s a no-brainer.
But equally as important is the industrial policy angle (FT):
- “The government also sees the advent of electric vehicles as a way to leapfrog global carmakers and secure a larger chunk of the car business for Chinese carmakers, which have never been particularly strong at making combustion engines.”
Get smart: Xin’s statement makes for a good headline, but putting any such policy in place will be a very long-term prospect. Other countries are looking at the 2040 timeframe to get this done.
Get smarter: The push on electric vehicles is emblematic of China’s evolving industrial policy. Regulators increasingly look for nascent technologies where no dominant player exists, so they can compete from an equal starting point.
- Sina Auto: 工信部已启动研究制订燃油车禁售时间表
- FT: China eyes eventual ban of petrol and diesel cars
- NY Times: China’s Electric Car Push Lures Global Auto Giants, Despite Risks
POLITICS & POLICY
4. Liu Yunshan: it isn’t just the economy, stupid
“Politics” is the determining factor for cadres to get promoted in China.
That’s what Liu Yushan, the Party’s #5, told officials last week. We tipped readers off to it then, but now there’s more.
Today, the Central Party School reinforced the message by publishing more of Liu’s remarks (link below).
We were struck by this statement:
- “There still exist prominent problems . . . [with regards to] the political quality of leaders and cadres. For example, there are some who disapprove of discussing politics, and think that economics is one thing and politics is another.”
The message: Economics is political.
Some context: Pre-Xi Jinping, economic policymaking was mostly a technocratic exercise. But that is increasingly not the case.
Why it matters: The goal here is a more holistic approach to economic policy. Xi wants officials to think not just about their specific policy areas, but also how those interact with larger political goals.
The ramifications cut both ways:
- Potential positive outcome: A shift towards more inclusive growth, and away from maximizing headline growth
- Potential negative outcome: A double-down on the idea that SOEs are tools to serve the Party.
- The Study Times: 领导干部要注重提高政治能力
POLITICS & POLICY
5. MofCom is revising rules for M&A
Quiet regulatory updates can have a major impact. The latest to get our attention are the new draft rules for mergers and acquisitions. The Commerce Ministry (MofCom) filed them Friday (link below).
The changes aren’t finalized but would represent a major overhaul of the existing system.
Notably, the number of articles in the regulations more than tripled, from 17 to 54. The added language is meant to increase transparency by:
- Clarifying grey areas
- Allowing companies to consult with MofCom before filing
- Opening deliberations to the public
The new rules also give MofCom more power. The ministry can now review deals of its own volition, instead of waiting for submissions.
Why it matters: Along with its US and EU counterparts, MofCom can effectively block almost any global M&A deal, so tweaks to the procedures have ramifications for everyone.
What to watch: This year marks the 10th anniversary of China’s Anti-Monopoly Law (AML), and various regulators are updating related laws and regulations – such as the M&A rules. Most important to watch will be changes to the AML itself – the NDRC has already started to revise it.