DRIVING THE DAY
1. Know your Party congress delegates
Xi Jinping has been trying to strengthen grassroots Party organizations. As part of those efforts, he required that more grassroots members be invited to the Party congress.
Surprise, surprise – Xi’s orders were followed (Xinhua):
- “2,287 delegates have been selected to attend this year’s congress”
- “A total of 771 grassroots delegates have been selected from various social sectors, accounting for 33.7 percent of the total, up by 3.2 percentage points from five years ago.”
Get smart: Xi’s got control of the central Party apparatus – that is well recognized. But it’s local officials who actually implement policy, and it’s still an open question as to how much control Xi has over local officials.
Get smarter: Xi’s decision to include more grassroots delegates is good PR. It burnishes the Party’s image as the people’s party. But being a congress delegate is an honor, not an obligation. They don’t exercise real voting power.
One of Xi’s successes: Xi is broadly popular among the laobaixing. It’s an underappreciated source of his authority.
FINANCE & ECONOMICS
2. Solid September export data
China’s September trade data came out this morning.
Exports rose by 8.1% y/y – that’s up from 5.5% in August.
Imports rose by 18.7% y/y – that’s up from 13.3% in August.
Why it matters: Global trade growth remains strong, despite a weak blip on trade for China in August. That has been a huge boon to Chinese growth this year – in marked contrast to the past three years.
What to watch: Don’t forget that trade tensions with the US continue to simmer in the background (see entry #5). The Chinese have side-stepped those issues more effectively than many expected when Donald Trump took office back in January. But those tensions have simply been put to one side – not resolved. They will become prominent again.
FINANCE & ECONOMICS
3. Central SOE revenues are zooming
Tip Sheet readers are clicked in, so you all probably followed this on periscope. But if not, a quick reminder that China’s SOE administrator (SASAC) had its Q3 briefing yesterday.
The key messages:
- Central SOEs saw very strong revenues last quarter
- They are working on their debt challenges
On revenue (China Daily):
- “China’s centrally administered state-owned enterprises reported an 18.4-percent rise in total profits in the first nine months, the strongest growth for the same period since 2012.”
On debt (China Daily):
- “Meanwhile, the average debt-to-asset ratio of China’s central SOEs held steady at 66.5 percent as of the end of last month, 0.2 percentage points lower than the beginning of this year.”
The regulator further outlined four elements of ongoing efforts to control debt:
- Cut business costs and improve the use of existing capital
- Get more equity financing
- Recapitalize SOEs
- Establish caps on companies’ total debt size and debt/asset ratio
Get smart: SOE reform and a legitimate macro deleveraging effort have been lacking over the past five years. Expect greater efforts on both fronts beginning in 2018.
Get smarter: This will not be the post-19th Party Congress “policy pivot” that many have been projecting. It has nothing to do with markets or liberalization, but it will be labeled “reform.”
- China Daily: China’s central state firms report strong growth in first three quarters
- SCIO.Gov.cn: 国新办举行三季度央企经济运行情况发布会
FINANCE & ECONOMICS
4. FDI is still important to China
The Ministry of Commerce (MofCOM) has published the most recent FDI stats for 2016.
The ministry is touting how well FDI management has worked under Xi Jinping’s leadershp.
Recall that foreign companies account for only 3% of all businesses. But despite that:
- They are investing in China at a much faster rate than domestic entities
- Fixed-asset investment by foreign companies grew by 15.6% in 2016. That’s 7.5 percentage points higher than the national average.
Foreign companies also:
- Provide 9.9% of jobs
- Pay 18.3% of corporate taxes
- Contribute 25.2% of industrial business revenues
- Contribute 43.7% of China’s exports
One reality to keep in mind: The Chinese government cares about FDI given its clear significance to economic growth. That’s one reason regulators were panicking earlier this year, and began to push the narrative the China will accelerate its opening.
Get smart: This reality can be leveraged as an opportunity for MNCs to push for a better business environment. But it will require some level of coordination – the Chinese government uses the divide-and-conquer strategy to great effect.
- MofCOM: 商务部召开例行新闻发布会（2017年10月12日）
FINANCE & ECONOMICS
5. MofCOM takes silence on IPR as complacency
The US administration held hearings this week to discuss various Chinese trade and investment practices, including forced technology transfer.
The US business community has mixed feelings about the whole thing. As the Wall Street Journal puts it, companies both cheer and fear the probe:
- “U.S. business groups have long raised concerns about China’s methods for acquiring intellectual property and have been generally supportive of the probe.”
- “But few companies want to go public with those concerns, for fear of retaliation from Beijing.”
China’s Ministry of Commerce (MofCOM) is satisfied with that (link below):
- “[At the hearing,] not many companies really questioned China’s protection of IPR. Some companies and industry organizations even appealed to the US government to act cautiously to avoid damaging China-US commercial relations.”
Get smart: On trade with China, the US side has a multitude of actors with a multitude of different strategies. That’s in stark contrast to the Chinese side, where government and business act largely in concert.
Remember that divide-and-conquer strategy we mentioned?
POLITICS & POLICY
6. Local governments prep tighter financial supervision
Here’s a new trend to keep an eye on. Local governments are upgrading financial regulatory units.
The goal? More comprehensive oversight of the financial sector. That was one of Xi Jinping’s requirements laid out at the National Financial Work Conference earlier this year.
Some examples: Jiangsu Province and Shenzhen are set to upgrade their Financial Service Offices to become Financials Supervision and Administration Bureaus.
It’s more than just a name change (21st Cent Biz):
- “[The entities will move from only a] coordinating function to regulatory and supervisory functions.”
- “More manpower and government funding [will also be offered].”
Who will they oversee? (The Paper):
- “Companies involved in microfinance, loan guarantees, financial leasing, asset management and pawn shops.”
Get smart: Xi has made it clear that he wants all financial activities to be better regulated – including those that fall outside the scope of traditional regulators (i.e. PBoC, CSRC, CBRC and CIRC). It’s starting at the local level, where much of the informal activity takes place.
The upshot: It’s one more reason why this time could finally be different when it comes to the intensity and effectiveness of financial supervision.
- The Paper: 地方金融办升级：加挂金融监管局牌子，强化属地风险处置责任
- 21st Cent Biz: 地方金融办变“局”进行时
- CE Weekly: 江苏两办发文 省政府金融工作办公室变身“省地方金融监督管理局”
POLITICS & POLICY
7. New point man for Taiwan
Liu Jieyi has been appointed deputy head of the Taiwan Affairs Office (TAO).
Get smart: Liu looks certain to take over the TAO. The current TAO head, Zhang Zhijun is near retirement age and is not a delegate to the 19th Party Congress – a sure sign that he is set to step down.
A little about Liu:
- He served as China’s Permanent Representative to the United Nations since 2013.
- Prior to that he was deputy head of the Party’s International Department (2009-2013)
- He’s 60 years old, meaning he’s likely to be the point man on Taiwan for the next five years
What to watch: Keep an eye on the way that Taiwan is discussed in next week’s Party congress report. Xi could signal a more assertive stance towards reunification. That will increase geopolitical risk.
Do you know more? We reckon some Tip Sheet readers have interacted with Liu. If you’ve got any insight into him or thoughts on his appointment, get in touch!
- People.cn: 刘结一任中共中央台办、国务院台办副主任(正部长级)