FINANCE and ECONOMICS
1. Internet finance is officially a public security issue
If you want a good barometer of the state-of-play for Chinese financial regulation, look no further than the meeting that took place Monday.
Pan Gongsheng, head of the foreign exchange regulator (SAFE) and chief of the leading small group dedicated to bringing internet finance “under control” met with Vice Minister of Public Security Meng Qingfeng.
The fact that this type of meeting is taking place underscores how regulators view the recent wild growth in internet finance. It’s a public security concern.
So, what did Pan and Meng talk about?
- Sharing information
- Enhancing collaboration
- Toughening punishments
- Strengthening public education
Get smart: Internet finance is an area that ties together a lot of policy priorities – financial de-risking, cyber security, and consumer protection. It’s no surprise that the Ministry of Public Security is involved.
Get smarter: That’s bad news for the industry’s growth, but it’s probably good news for the industry’s safety.
What to watch: A tighter operating environment will hurt headline growth in the sector. But it will largely help the big players – like Alibaba and Tencent – who can shoulder increasing compliance costs.
Shanghai Securities Journal: 央行：加大互金领域重大违法犯罪打击力度
Caixin: Central Bank, Public Security Ministry Join to Fight Financial Crimes
FINANCE and ECONOMICS
2. RMB internationalization back in focus
Speaking of Pan Gongsheng and China’s foreign exchange market…
We are starting to get the sense that RMB internationalization is once again becoming a priority for Chinese FX regulators.
Recall that there was a big push for internationalization from 2010-2015, culminating in the RMB’s inclusion in the basket of currencies that make up the IMF’s Special Drawing Rights.
But since late 2015, regulators have de-emphasized the drive for internationalization. That’s because they were busy fighting against currency outflows and locking down the capital account.
Now that relative currency stability has returned, they are back to it (Bloomberg):
- “Since May, initiatives from the central bank and government have included starting full operation of a new phase of an international payment system, making it easier for overseas lenders to borrow the yuan to help facilitate foreign investments in onshore bonds and stocks, and signaling the resumption of a program for mainland investors to buy offshore assets with the yuan that’s been on ice since 2015.”
- “These days – with China’s foreign reserves rising and volatility staying low – officials have a window to refocus on President Xi Jinping’s quest for a bigger Chinese role in global finance.”
Get smart: Regulators made this push explicit in the recently released 13th Five Year Plan for a Modern Financial System.
Bloomberg: Five Things You Need to Know to Start Your Day
FINANCE AND ECONOMICS
3. Zeroing in on insurance regulations
Financial regulators will continue to zero in on the insurance industry throughout 2018.
So says the Shanghai Securities Journal (see link below).
The focus will be explicitly on solvency – with a few large firms in particular focus. What’s more, the regulators are promising that any entity found to be “playing tricks” with their solvency data will be severely punished.
Regulators are focused on the solvency ratio of the individual insurers because they see it as akin to the capital adequacy ratio of banks – i.e., it measures how much emergency cash can be used if assets start to quickly go bad.
More broadly, insurance regulators are focused on addressing:
- Corporate governance deficiencies
- Radical expansion
- Illegal operations
- Barbaric growth
- Insurers becoming too risk prone
Get smart: The insurance space was the most poorly regulated part of the financial system in recent years. The cleanup will take time. But regulators are taking what has worked in banking supervision and transplanting that onto insurance.
Shanghai Securities Journal: 保险偿付能力监管升级 企业“做手脚”将付出大代价
POLITICS and POLICY
4. Using the internet to fill gaps in public services
Li Keqiang decided to get out of town for June 4. The premier was in western China’s Ningxia Autonomous Region.
The focus of his trip: Promoting the use of the internet to deliver public services.
Li highlighted two areas in particular where the internet could play a big role.
- Education – “While visiting a middle school, he hailed online education, saying that it will provide children in poor regions with access to lessons from good teachers, and broaden their horizons.”
- Healthcare – “He also heard a report about the…service provided by a smart internet hospital in Yinchuan [that] has covered all communities and townships in its district, making remote diagnosis possible.”
Get smart: In rural areas, China’s government apparatus is comparatively small, and does a poor job of providing services. If Li’s succeeds in his mission to deliver more services online, it would give a big boost to the government’s ability to do its job at the local level.
Gov.cn: Premier wants more public services accessible via internet
POLITICS and POLICY
5. Carrying Xi’s message beyond the Party
Wang Yang, head of China’s political advisory body (CPPCC) wants to make sure that non-Party members are on board with Xi’s agenda.
That’s what he told a meeting of the country’s United Front officials on Monday.
Some context: The United Front is the mechanism through which the Communist Party works with officially sanctioned non-Party groups, such as the eight “democratic” parties and the All-China Federation of Industry of Commerce.
Wang’s message (Xinhua):
- “Wang asked the united front to ‘consolidate its common theoretical and political foundation, implement all CPC policies and guidelines and pool strength and wisdom for national rejuvenation.’”
- “Wang stressed that officials should be adept at enabling non-CPC personages to understand and recognize CPC policies and guidelines through the united front mechanism, to gather the broadest possible consensus.”
Get smart: The United Fronts system was originally designed primarily to take in information and gather input from non-Party sources. But under Xi Jinping, it is increasingly being used as a channel to disseminate the Party’s message.
POLITICS and POLICY
6. Pulling the plug on the solar sector
China’s solar (i.e. photovoltaic) industry is often trotted out as the epitome of China’s statist economy.
It grew and flourished with strong government support – and distorted the global solar industry while doing it. The resulting overcapacity also tanked the industry’s profitability.
Over the weekend, the industry took a further hit.
The industrial planner and the energy regulator (NDRC and NEA, respectively) joined the Ministry of Finance to issue a notice that will:
- Cut subsidies and curb the expansion of photovoltaic power generation capacity
- Remove the government’s role in setting the price of electricity generated by newly added photovoltaic power stations
The impact to the industry, according to an industry player (Jiemian):
- “2.5 million people will lose their jobs”
That’s likely an exaggeration, but needles to say, the industry isn’t happy.
Why is the government doing this now?
- The industry has massive overcapacity and the government can no longer afford to keep up the subsidies (NEA).
What we are hearing: For years the word has been that regulators have been delaying subsidy payments to the industry. That’s because the MoF is short billions of RMB in funding for the sector’s subsidy program.
Get smart: China’s regulators are ultimately practical. The often embrace market-oriented reform once they realize industrial planning has failed.
POLITICS and POLICY
7. Environmental regulators go after big polluters
We’ve been telling you that businesses will get no reprieve from increasingly strict enforcement of environmental protection (EP) regulations.
China Comment – a Party magazine aimed at local officials – is also spreading the word (via Xinhua):
- “Big enterprises’ privilege to emit pollution must be resolutely fixed.”
The article is clear on where the problem lies:
- “The root [cause] is indulgence and protection from some local governments.”
Some context: Local companies supply the lion’s share of local government revenue, so officials have long protected them from environmental regulators.
But that is changing because local EP officials now report to higher authorities – not to local officials (People’s Daily).
An example: City-level EP regulators and below now report to provincial authorities, instead of their local governments.
According to People’s Daily, it has been effective:
- “[Local regulators can now] step into enterprises that they couldn’t previously.”
Get smart: Top officials continue to signal that they are not concerned about denting growth with EP efforts.