DRIVING THE DAY
1. Financial regulators open the securities market to foreigners
It was quite a weekend for financial regulation. The central bank (PBoC), FX regulator (SAFE), banking and insurance regulator (CBIRC), and securities regulator (CSRC) all issued new documents on Friday.
What grabbed the most attention in foreign media was the CSRC’s new rules allowing foreigners to take controlling stakes in securities companies (FT):
- “The new rules… raise the cap on foreign ownership on stockbroking firms from 49 per cent to 51 per cent, effective immediately.”
- “The CSRC also said that foreign fund managers were now free to apply for majority control of Chinese fund management groups, with a cap of 51 per cent ownership, up from 49 per cent previously.”
Get smart: At long last, there is real, tangible movement on financial sector opening.
Get smarter: The timing, with Trump’s team visiting, is convenient. But that is not the fundamental driver of these announcements.
What to watch: The devil will be in the details. Foreign companies still face numerous stumbling blocks, including obtaining licenses and convincing a domestic partner to sell a controlling stake. But it’s a start.
DRIVING THE DAY
2. Financial regulators zero-in on moral hazard
The second big financial document that came out on Friday was issued by a host of regulators, led by the central bank, to crackdown on non-financial firms investing in financial institutions.
Shareholding rules like this have been increasingly in focus over the past six months. Xinhua summed up the basic rationale:
- “In a word, [the message to non-financial companies is] don’t use financial institutions as your own cash machine.”
With lax regulation in recent years, companies in every industry from real estate to coal to aviation had been investing in financial firms to tap into high returns – and create their own credit lines as needed (QQ finance):
- “Those companies have left their main business to blindly expand into the financial industry [and] engage in highly leveraged investments.”
The central bank’s solution?
- “[We will put in place] differentiated supervision over different types of shareholders of financial institutions… [and] strict regulations on major shareholders, especially controlling shareholders”
Why this matters: Cross-ownership structures are a key driver of moral hazard in China. If a company owns a bank, its very hard for the bank to say “no” when that company asks for a loan.
DRIVING THE DAY
3. Financial regulators drop new asset management rules
Lots happened on the regulatory front over the weekend.
But Friday’s release of finalized rules for the asset management industry will have the biggest effect on China’s financial system.
Recall that China’s wealth management industry is worth USD 15 trillion.
A unified set of rules is aimed at stopping institutions from gaming the system (Sina):
- “The ‘Opinions’ pointed out that ‘the supporting rules should be linked to each other so as to avoid new regulatory arbitrage and unfair competition.’”
Some context: The focus in domestic media was squarely on what changed between the draft rules that were issued last year and the latest version. In all, ten items were altered, and most were small tweaks.
But this was big: The PBoC extended the deadline for financial institutions to become fully compliant with the measures. The previous deadline of June 2019 has been extended 18 months to the end of 2020.
Our take: The PBoC is right to be cautious. Many industry players are concerned about their ability to comply quickly, so it’s better to take the time to let banks get compliance right, rather than rush it.
POLITICS AND POLICY
4. Sino-Indian relations get a reset
Xi spent Friday and Saturday with Indian prime minister Narendra Modi. The two hung out in Wuhan, where they drank some tea, took a boat ride on the East Lake, and held a series of informal talks.
Some context: It’s been a tense year in bilateral relations that included a 72-day standoff between the two countries’ militaries over disputed territory in the Himalayas.
Xi framed the meeting as a “reset” of relations (Xinhua):
- “He expected their two-day informal meeting will open a new chapter in bilateral ties.”
The meeting appeared to lower tensions. Of particular note is an agreement between the two sides to have better military communication:
- “Both sides agree to properly manage and control their differences.”
- “The two militaries will strengthen confidence-building measures and enhance communication and cooperation to uphold border peace and tranquility.”
What wasn’t mentioned: Xi’s signature Belt and Road Initiative, which Modi refuses to endorse.
The upshot: The two sides still view each other as competitors. But they want to make sure that competition does not turn into conflict.
Get smart: Sino-US relations will define the first half of the twentieth century. Sino-Indian relations will define the second half.
Xinhua: Xi expects meeting with Modi to open new chapter in China-India ties
POLITICS AND POLICY
5. Legislating nationalism
China’s legislature, the National People’s Congress Standing Committee (NPCSC), held its first session of Xi’s second term at the end of last week.
The big news: They passed the Heroes and Martyrs Protection Law.
What the law does (Xinhua):
- “Activities that defame heroes and martyrs, or distort and diminish their deeds will be banned under the new law, which takes effect on May 1.”
- “The law also outlaws acts that glorify invasions, with offenders facing administrative or criminal punishments according to the severity of their actions.”
Why it matters (WSJ):
- “Opponents of the law said that…the law’s vague provisions on defamation and punishment, are likely to circumscribe debates over wide swaths of modern Chinese history.”
Get smart: The new law is a part of Xi’s larger project to promote a brand of Chinese nationalism that paints the Communist Party as the savior of the nation.
Get smarter: This is nothing new. Jiang Zemin and Hu Jintao did the same thing.
Get worried: The efforts of Jiang, Hu, and Xi have all been effective. And a nationalist China is a more prickly actor on the world stage.
NPC: 十三届全国人大常委会第二次会议在京闭幕 栗战书主持会议
Xinhua: China’s legislature ends session, unanimously passing law to honor heroes and martyrs
WSJ: China Guards Its Historical Heroes With New Law
POLITICS AND POLICY
6. Legislature punts on property tax
The NPCSC’s recent session also approved the legislative plan for the year.
The outstanding NPC Observer has the deets, suggesting that two laws will definitely pass this year:
- E-Commerce Law
- Law on the Prevention and Control of Soil Pollution
And a further 18 are scheduled for a reading, including:
- Patent Law (Revision)
- Land Management Law (Amendment)
- Farmland Occupancy Tax Law
- Vehicle Purchase Tax Law
- Rural Land Contracting Law (Amendment)
- Basic Healthcare and Health Promotion Law
- Tax Collection Administration Law (Revision)
- Resource Tax Law
- Law on the Prevention and Control of Environmental Pollution by Solid Waste (“Solid Waste Law”) (Revision) and related laws
- Foreign Investment Law
Go deeper: Check out the full list, as well as analysis, at the NPC Observer link below.
What’s not on the agenda (Xinhua):
- “The property tax law… [and] personal income tax law…have… been put on the waiting list, although drafts may still make it to the top legislature for review this year.”
Get smart: This represents a setback for the property tax, which some officials said would be on the docket for this year (see the March 8 Tip Sheet).
The upshot: A property tax is still moving forward, but is unlikely to be enacted before 2020.
POLITICS AND POLICY
7. Taiwan has one less friend
The Dominican Republic has switched its official recognition from Taiwan to the PRC. According to an official communique, signed Tuesday (Xinhua):
- “The Government of the Dominican Republic recognizes…that the Government of the People’s Republic of China is the sole legal government representing the whole of China.”
- “Hence the Government of the Dominican Republic severs ‘diplomatic relations’ with Taiwan.”
Some context: The Dominican Republic is the second country to switch recognition in less than a year. Panama did the same last summer. That brings the number of countries that recognizing Taiwan down to 19.
Taiwan says Beijing bought the switch (Reuters):
- “A Taiwan Foreign Ministry official, speaking on condition of anonymity, told Reuters that… China dangled at least… $3.1 billion… of investments, financial assistance and low-interest loans for the Dominican Republic.”
Taiwanese president Tsai Ing-wen was defiant (Twitter):
- “In light of this, I want to make clear: We will continue to safeguard our #freedom and #democracy.”
- “We will defend our own national interests. We will never bow to pressure from Beijing.”
The rub for Beijing: The reunification issue is not about who recognizes who. It’s about whether or not Taiwanese citizens want to rejoin the Mainland. Increasingly they do not.
Xinhua: China, Dominican Republic establish diplomatic ties
Twitter: Tsai Ying-wen
Reuters: Taiwan says China dangled $3 billion to grab ally Dominican Republic