DRIVING THE DAY
1. China’s bottom line in trade negotiations
No one really knows where the US-China trade war is heading.
Both sides have been trying to make nice in recent days:
- China conditionally agreed to import USD 70 billion in US agricultural, energy and other products over the next year (WSJ).
- The US government and Chinese telecoms company ZTE signed a preliminary deal to remove US sanctions on the company (Reuters).
But neither of those moves are finalized.
In a Caijing interview, Ministry of Commerce (MofCom) advisor Tu Xinquan lays out China’s bottom lines when it comes to the negotiations (link below). China will not:
- Cut exports
- Get rid of its Made in China 2025 industrial policy
- Privatize SOEs
Get smart: That second one is key. The real driver of Sino-US economic tensions is China’s industrial policy.
Get smarter: Negotiators my work out a short-term fix. But underlying tensions are here to stay.
WSJ: China Offers to Buy Nearly $70 Billion of U.S. Products to Fend Off Trade Tariffs
Reuters: Exclusive: China’s ZTE signed preliminary agreement to lift U.S. ban: sources
FINANCE and ECONOMICS
2. Shenzhen releases housing mega-plan
As one of the hottest property markets in China, Shenzhen’s policy stance is a leading indicator of how overall real estate policy is evolving.
Yesterday, the city’s government dropped a new mega-plan for its property market for the next two decades.
- By 2035, Shenzhen wants to build 1.7 million more apartments.
- It wants 60% – or one million – of those to be publicly controlled housing, as opposed to commercially sold buildings.
- The aim is to ensure housing supply and housing security for the population.
Get smart: City governments are increasingly aggressive and interventionist when it comes to housing policy. That’s because too many people can’t find an affordable place to live.
One outcome: Local SOEs are increasingly being asked to become landlords in the rental market (Reuters).
Get smarter: Shenzhen’s plan represents a huge step back for privatization of the housing market, one of China’s most successful and impactful market-oriented reforms from the 1990s.
The Big Picture: This smacks of an effort to recreate China in Singapore’s image – mostly a market driven economy, but with a huge amount of public housing.
Southern Metropolis Daily: 重磅！深圳今后或六成是保障房 20年后“房改”重大调整！
Reuters: China pushes state banks into home rental market at their own risk
FINANCE and ECONOMICS
3. PBoC gets political
Here’s a mission statement that you don’t hear from most central banks:
- “[We must] accurately grasp the dialectical relationship between the development and application of information technology in the financial industry and the prevention and control of financial risks.”
That was the key statement from a readout of a recent central bank (PBoC) Party committee meeting.
Domestic financial news is giving a lot of play to the readout. The coverage is telling for where we stand in Chinese finance right now, in several ways:
- The Party is large and in charge, even at the central bank, one of the more technocratic government agencies.
- Regulators are trying to balance promoting innovation and controlling risks.
- Cybersecurity is a key concern. Security, information management, and critical information infrastructure were all discussed.
- Technology is key. Officials see it as a solution to the banking system’s major deficiencies. The central bank also wants the banks to use more domestic core technologies.
- The Party is cautious. It still doesn’t quite trust financial technology – because it’s not sure how to control it.
The Big Picture: That’s a pretty good encapsulation of China’s political economy these days.
FINANCE and ECONOMICS
4. Loan rates for companies are soaring
Interest rates for non-financial corporations are on the rise. And companies are saying that it is starting to bite.
For smaller companies, loan rates are hitting as high as 20%. Lots of those entities are struggling to find funds at all (see link below).
Reporters from the 21st Century Business Herald found that even some listed companies are having trouble finding liquidity and are therefore struggling to execute investment plans.
It could get worse. No one expects the situation to get better in the second half of 2018.
Why this is interesting: This is happening even as observable market rates – i.e. bond yields and money market rates – have been low in the first half of 2018.
Some context: Most companies still rely on bank lending rather than direct financing from equity and bond markets.
This is a clear sign that financial de-risking – which saw funding for banks get tighter throughout 2017 – is forcing banks to pass on that higher cost of funding.
What to watch: The initial round of financial de-risking did not have an adverse effect on growth. But now that banks have largely unwound their more speculative assets, further de-risking – or outright deleveraging – is starting to drag on the economy.
21st Cent Biz: 企业民间融资成本飙升至20%，资方不碰“网红票”
POLITICS and POLICY
5. Li Zhanshu wants blue skies
National People’s Congress Chairman Li Zhanshu has been racking up the air miles.
Less than two weeks ago he was in Henan, inspecting implementation of the Air Pollution Control Law (see May 30 Tip Sheet).
Now, he just got back from Inner Mongolia, where he spent four days inspecting….wait for it…
wait for it…
Implementation of the Air Pollution Control Law!
The details of Li’s trip (Xinhua):
- “Li visited the cities of Hohhot, Baotou and Ordos and inspected electricity, iron and steel, coal, chemical, and new-energy vehicle companies.”
- “Ecological and environmental problems are in fact the problems of economic development patterns.”
Get smart: Statements like that might seem obvious and inconsequential. But they are important indications that top leaders are serious about changing patterns of economic development.
Get smarter: It’s no coincidence that Li is putting so much time and effort into overseeing the Air Pollution Control Law. Fighting air pollution is one of the “Three Critical Battles” that define the policy agenda for 2018.
Go deeper: Check out Trivium’s explanation of the Three Critical Battles on our website (link below).
POLITICS and POLICY
6. Managing the Party-state re-org
China announced a MASSIVE government restructuring at the Two Session in March. Many dozens of government agencies are being created, dissolved, and reorganized.
To try to limit the disruption, the State Council just released new guidelines governing the restructuring (Gov.cn):
- “According to the decision, new institutions should take up their functions and duties stated in the State institutional reform plan after finishing setting up.”
- “If the institutions have not been established, original institutions should continue their duties under the current administrative laws.”
Get smart: No matter how many guidelines the State Council publishes, this re-org is going to be messy.
We’ve already heard of several instances of teething problems at some newly-established agencies. Expect the next year (at least!) to be one of relative regulatory uncertainty.
Gov.cn: State Council to regulate function adjustment in institutional reform
POLITICS and POLICY
7. Hunan tries to tame its LGFVs
Hunan wants to get its government debt under control (see February 14 Tip Sheet).
What they are doing: Going after local government financing vehicles (LGFV).
Some context: LGFVs are the entities that help sub-provincial governments raise off-balance-sheet financing.
So what is new?
- Hunan is putting limits on the number of LGFVs that are allowed to operate in the province.
- By 2019, they will allow no more than three at the city-level, and no more than two at the county level.
That’s not a game changer.
What does matter: LGFVs will no longer be able to roll over their debt. Where they are not able to repay their debts, local government are being asked to stump up the cash, either by using existing funds, selling assets, or issuing bonds.
What to watch: The Hunan government is saying that they want LGFVs to behave as market entities going forward. They will be responsible for their own finances, and local governments will be forbidden from interfering their operations.
Get smart: The plan for LGFVs sounds a lot like SOE reform plans – that have gone nowhere. Plus previous attempts to rein in LGFVs have been unsuccessful.
So don’t hold your breath, but we’ll be watching to see if Hunan gets it right this time.
21st Cent Biz: 湖南拟清理规范政府融资平台：平台数量将被限制