DRIVING THE DAY
1. Xi’s new red expert Party
We are now only eight days away from the opening of the 19th Party Congress.
These quinquennial events are always a big deal, but the excitement surrounding this year’s congress is cranked up to eleven.
One big reason: There will be a high degree of turnover, which means lots of personnel changes are coming. Cheng Li from the Brookings Institution breaks it down (BBC):
- “Of the 376 members of the 18th Central Committee, 38 (about 10%) have already been purged on corruption charges and other transgressions.”
- “In addition, about 200 members (53% of the committee) have either retired or will soon retire and, so will not be considered for the 19th Central Committee.”
- “So the turnover rate between the 18th and 19th Central Committees could be as high as 70%, making it the largest turnover since the 9th Party Congress in 1969 at the peak of the Cultural Revolution.”
Get smart: In Xi’s China, loyalty to the big man is important. But it’s far from the sole criterion for promotion. Xi wants loyalty and competence. We expect the new crop of leaders to be red and expert.
FINANCE & ECONOMICS
2. China’s economy is about to get a lot bigger
Get excited. China’s stats guys are changing the way they account for R&D spending in GDP calculations.
Sound like a snooze fest? It kind of is, but it’s still hugely important.
Some context: The NBS first started counting R&D spending last year. But there was a flaw in the methodology that they are now trying to fix. The change comes on the heels of another tweak the NBS made over the summer to better count “new economy” industries like healthcare.
Get smart: This change should not have too much of an effect on headline GDP growth rates, especially since the numbers for last year will also be adjusted. But GDP levels should be higher.
Get smarter: These kinds of technical adjustments are meant to get China’s GDP accounting closer to international standards.
But the optics aren’t great. The new methodology will first be used for the Q3 GDP print, which will come out on October 19 – the day after the 19th Party Congress starts.
That will make the change look politicized – but Tip Sheet readers will know better.
- 21st Cent Biz: 前三季度地区研发支出或将纳入GDP 各地GDP总量和增速将有所调整
FINANCE & ECONOMICS
3. The property chill
In yesterday’s Tip Sheet, we pointed out the solid growth of consumption during the Golden Week holiday.
But there was one thing consumers decidedly did not buy last week – homes.
Property transactions fell off a cliff. That is especially notable because October is usually the hottest month for property purchases in China (SCMP):
- “New homes sales slumped as much as 78 per cent and 64 per cent in Shanghai and Beijing respectively during the holidays, compared with a year earlier.”
- “Southern city Guangzhou also saw a 78 per cent decline in sales volume, while Shenzhen, the country’s innovation hub, fell 13 per cent.”
Some context: It has now been a full year since various city governments started imposing curbs on property transactions. Last month saw yet another round of tightening. They might finally be starting to work.
Expectations really matter here. Once the public starts to think that prices will fall, it becomes a self-fulfilling prophecy.
The upshot: Real estate has been an economic tailwind in 2017, but will become a headwind in 2018.
- The Paper: 央媒：住房投机面临“釜底抽薪”，楼市“金九银十”恐难至
- SCMP: Golden Week loses its shine for Chinese property market, as home sales slump
FINANCE & ECONOMICS
4. FX reserves and a currency window
China’s foreign exchange reserves inched up again in September, marking the eighth consecutive monthly increase.
They rose by USD 17 billion, bringing the total to USD 3.109 trillion.
Get smart: There is an increasing sense among policymakers and market participants in China that the window of China currency strength – and reserves accumulation – is closing. That’s why more and more voices are calling for greater flexibility of the exchange rate to be pushed through right now.
Get smarter: No big change will happen this month thanks to the Party congress.
But in the following months (say, November to July 2018) we expect incremental, but accelerated, adjustments to the exchange rate management system.
- 21st Cent Biz: 企业结汇潮涌 外汇储备八连涨
- Reuters: China September forex reserves rise for eighth straight month in boost to President Xi
FINANCE & ECONOMICS
5. Zhou Xiaochuan trumpets financial market opening…again
China’s long-serving central bank governor, Zhou Xiaochuan, is banging the financial opening drum as often and as loud as possible before he retires in the coming months.
The latest iteration was in an interview with Caijing, meant to mark the one-year anniversary of China’s SDR inclusion (link below). The quick-and-dirty version:
- Zhou advocates opportunistic reform – i.e. getting things done whenever there’s a window.
- He used the SDR as an example. Zhou says he didn’t think the RMB was ready to be included in the SDR. But neighboring countries wanted to settle trade and investment in RMB after the global financial crisis, which created a window.
- Zhou’s three keys for opening: freer trade and investment, a market-driven exchange rate and reduction of FX controls to gradually achieve full convertibility of the currency
- The money quote: “the exchange rate mechanism and the FX management system determine the extent of an economy’s openness.”
What to watch: Once he’s gone, who will be the public voice for more market-driven opening in China?
- Caijing: 周小川谈人民币入篮SDR：对外开放进程的历史性进展
POLITICS & POLICY
6. Party rules published
Xi Jinping has sought to remake the Party in his first five years as general secretary. A big part of that process has been accomplished through revising or rewriting internal Party regulations.
For cadres that can’t keep up, the CCP General Office has compiled CCP regulations and published them as a book (Xinhua):
- “The book… contains 260 CPC regulations and regulatory documents introduced between October 1949 and December 2016.”
- “This is the first time the CPC has comprehensively and systematically compiled its regulatory documents for the public since the founding of the People’s Republic of China.”
- “The book will help CPC members to study and observe the regulations, and allow the public to understand the new governance concepts, thoughts and strategies of the CPC Central Committee.”
Get smart: Contrary to conventional wisdom, Xi Jinping is a rulemaker not a rulebreaker.
POLITICS & POLICY
7. The public health revamp continues
The State Council got back to work on Monday, holding a meeting on public hospital reform.
Here’s the short-hand version of reform goals for the various parties:
- Hospital revenues should increasingly be generated from services not drug markups
- Doctor pay should be linked to the quality of service
- Patients should see lower out-of-pocket healthcare costs and easier reimbursements
- Government should ensure the public gets high-quality healthcare service but control overall costs
These reforms are important because the vast majority of healthcare still takes place in public hospitals.
The paradox: The goals are sensible for each individual part of the medical system but contradictory in the aggregate.
Get smart: The fundamental question is who will pay for these changes. The government can’t afford it. Nor can it ask the public to pay more. Hospitals won’t eat the costs either, as they are being asked to become more efficient.
That pretty much just leaves private healthcare companies and commercial insurers to figure it out.