DRIVING THE DAY
1. Xi’s new tool to exert control
The newly established Central Audit Commission had its first meeting Wednesday.
Some context: The new commission was created as part of the MASSIVE Party-state restructuring that was announced in March.
Like every other high-level body, Xi Jinping chairs the new commission.
He’s got two deputies:
- Premier Li Keqiang
- CCDI head Zhao Leji
Why the commission was established (Gov.cn):
- “[to] expand the breadth and depth of auditing supervision”
- “[to] strengthen the ability of the Party center to audit… implementation of major policies”
Clearly, there have been some problems:
- “Every locality and every agency… must… supply… relevant materials and electronic data.”
- “And must not issue any regulations that restrict the provision of materials or electronic data to auditing agencies.”
The meeting also approved:
- An audit of the central government’s 2017 budget and expenses
- A 2018 plan to audit key ministerial level officials and central SOE executives for their stewardship of economic and natural resources
Get smart: Xi wants to have direct access to the audited books of each official, ministry, and SOE as leverage to build accountability.
What to watch: Expect the new commission to add even more firepower to the financial de-risking campaign. It will be combing through the books of local governments and SOEs.
FINANCE and ECONOMICS
2. PBoC updates some interbank rules
China’s central bank has a new headache.
Increased scrutiny over various speculative activities in the interbank market throughout the past 12 months has meant that banks are borrowing and lending less to each other. But smaller banks still need funding, so the latest tactic has been to entice interbank negotiable certificates of deposit (NCDs) from the bigger banks.
Some context: NCDs are deposits by one bank at another bank – and given the fact that such deposits carry interest, they basically act like a long-dated interbank loan.
That’s why the PBoC has updated its rules around such products (see link below).
In particular, a given bank’s interbank NCD book cannot surpass 1/3 of that bank’s total outstanding liabilities as they were calculated in September 2017.
The new rules bring NCDs in line with broader restrictions on outright interbank borrowing – which is similarly limited to 1/3 of total liabilities.
Get smart: The central bank is ahead of the curve for once. The financial cleanup that took place last year was primarily about addressing previous bad behavior. But the NCD craze is a relatively new phenomenon. The PBoC wants to regulate it before it gets out of control.
21st Century Business Herald: 2018年同业存单计划规模近15万亿 部分中小银行同存发行逆势上扬
POLITICS and POLICY
3. China aims to boost trade in services
Wednesday’s State Council meeting decided to expand pilot programs aimed at increasing trade in services:
- “A series of opening-up measures will be piloted in the 17 places covering telecommunications, tourism, engineering consulting, finance and legal services.”
- “Access mechanisms for trade in services on cross-border delivery and overseas consumption will be explored and refined.”
- “Restrictions will be gradually lifted or eased, and customs clearance and visa arrangements will be streamlined for freer flow of goods and people.”
Get smart: Like we said in yesterday’s Tip Sheet, China’s openings are primarily about improving domestic companies.
Premier Li Keqiang explained the rationale:
- “The service sector is still an area of weakness in our country’s overall development.”
Get smarter: Just because the openings are not designed with foreign companies in mind doesn’t mean foreign companies can’t benefit.
POLITICS and POLICY
4. What the FTZs can teach China
The State Council wants to introduce nationwide reforms piloted in China’s 11 free trade zones (FTZs).
What to expect (Gov.cn):
- “Wider scale in establishing partnership-type law firms jointly owned by partners from the Chinese mainland, Hong Kong, and Macao.”
- “More opening-up moves in international shipping services, management, and agencies, as well as international maritime cargo handling services, container yards, and storage yard businesses.”
- “Trade facilitation, featuring the trans-departmental one-time joint inspection, an innovative mode of streamlining railway transportation manifests, and facilitation measures for inspection and quarantine investigation of empty inbound shipping containers.”
- “All-around paperless online customs registration for enterprises and access to electronic ports.”
Get smart: Nothing revolutionary here, but it should improve customs clearance and trade facilitation.
Get smarter: The FTZs, the first of which was established in 2013, have been a huge disappointment to many businesses. That’s why expectations are low for the newly announced Hainan Free Trade Port (see April 16 Tip Sheet).
Gov.cn: Experience of pilot FTZs to be replicated nationwide
POLITICS and POLICY
5. Li Keqiang wants better milk
China’s dairy industry has been scarred since the 2008 melamine scandal, in which hundreds of thousands of children were injured as a result of purposefully adulterated infant formula.
Ever since, families that can afford it have preferred to buy formula and other dairy products from abroad.
The key number: 80% of all new dairy product consumption went to imports during the seven years following the scandal.
Premier Li Keqiang wants to change that. That’s why Wednesday’s State Council meeting focused on “revitalizing the dairy industry.”
In short, the government wants to:
- Import better breeds of cow
- Improve feed stocks
- Set higher standards and tighter supervision of quality control
Get smart: The government has been trying to push these same measures for the last 10 years. But so far, they haven’t worked.
Get smarter: The key issue is that consumers have lost confidence in the entire domestic dairy industry, thanks to the 2008 scandal. It may simply be beyond the government’s ability to salvage.
POLITICS and POLICY
6. Official media hypes US agricultural imports
Increased agricultural imports will be good for China. That’s the message that two of the most important official media outlets are peddling today – People’s Daily and Xinhua.
What are the advantages they are hyping?
- More options for consumers
- China can protect arable land from being overused
Fair enough, actually.
One aspect that is purposefully being downplayed, though, is the annoyance of domestic producers.
But the government hasn’t forgotten about them. Per China’s agricultural officials, the plan is to “import to a reasonable extent.” The details:
- “Policies will be different for different sectors and product categories.”
- “Some (imports) will increase, some will be stable, and some will be controlled.”
- “We must coordinate the relation between destocking (of some products) in the short term and preserving capacity in the long term.”
Get smart: We doubt that the Chinese government will commit to cutting the agricultural trade deficit by a specific amount. They simply don’t have that much control over the choice of individual consumers (see previous entry).
But what the government can do is to lower trade barriers by expanding quotas on certain products.
What to watch: US Secretary of Commerce Wilbur Ross lands in Beijing next week to negotiate further details for the agreement.