DRIVING THE DAY
1. Xi Jinping is not about to step down
Rumors are swirling in Beijing.
Specifically, there’s been a lot of chatter in the past few days about Xi Jinping possibly stepping down. Some are saying that Xi’s political opponents are plotting his and/or his allies’ ouster. Other are saying that Xi is in poor health.
Here’s what the rumormongers cite as indications that Xi may not be long for his job:
- He did not appear on the front page of the People’s Daily twice in one week, a relatively rare occurrence.
- Xinhua ran an article on former general secretary Hua Guofeng that some interpreted as an oblique attack on Xi’s growing personality cult.
- Xi looked very tired in his meetings with the World Bank and UNESCO on Monday, apparently even slurring his words according to one observer.
Our take: We put little stock in these rumors. Official media still sings Xi’s praises, there has been no disruption to Xi’s schedule, and he is set to take off on a nine-day trip starting tomorrow – something he would not likely to do if he was in imminent political danger.
Get smart: There is always an uptick of political speculation in the run up to the annual Beidaihe meetings.
Get smarter: While rumors of a coup appear baseless, with a faltering economy Xi is at his most politically vulnerable since assuming power.
The big picture: Key man risk is already manifesting itself.
FINANCE and ECONOMICS
2. The markets are over-thinking monetary moves
The recent back-and-forth between monetary and fiscalauthorities (see Monday and Tuesday’s Tip Sheets) has markets seeking clues for the direction of policy.
The latest development to stir up expectations of monetary loosening was an injection by the central bank on Tuesday.
This particular injection was the monthly offering of fiscal deposits.
Some context: These are deposits that the Ministry of Finance holds at the central bank, which can be shifted to commercial banks when needed.
Tuesday’s injection has the market buzzing for two reasons:
- It was the largest monthly injection of the year.
- It was done at a significantly lower interest rate than the previous injection – 3.7%, down from 4.7% in June.
But both of those items are less than meets the eye.
- The RMB 150 billion injection is not a massive jump from the RMB 92 billion average in the first six months of the year.
- The 3.7% interest rate on the funds is a result of a bidding process, which is reflective of where rates are currently – not necessarily where the PBoC wants rates to be.
Markets desperately want to interpret this as an easing signal. We don’t see it that way.
21st Century Biz: 央行今天大动作！1500亿实实在在净投放，给出利率下行重要信号！真实利率已逼近3年最低
FINANCE and ECONOMICS
3. The P2P lending meltdown
Dozens of online lenders have gone bankrupt recently. More than RMB 100 billion of investors’ money vanished in the first week of July alone.
Bloomberg has some details:
- “At least 57 platforms have failed in the past two weeks, adding to 80 cases in June, the biggest monthly tally in two years, according to Shanghai-based Yingcan Group.”
Some context: These platforms are typically smallish online groups that source funds from savers (i.e., investors) and then lend the proceeds to individuals (often for property down payments) or small businesses.
The savers get a solid return of 8-10% and the borrowers get cash that would otherwise be unavailable to them.
Everyone wins…except when things go south and borrowers can’t pay.
Our key takeaways from this episode:
- This is not a “systemic” challenge to China’s credit markets – the lenders are just too small to bring down the whole system.
- It’s happening as overall lending rates for small business have risen thanks to the financial de-risking campaign.
- Regulators are not bailing these funds out – despite investor protests – because they are looking to try and break widespread moral hazard in the credit markets.
- Internet finance will see more clean-ups.
FINANCE and ECONOMICS
4. Tangshan extends production curbs
Controlling pollution is one of the government’s top three priorities for the year – one of the so-called “three critical battles.”
The past week saw two important moves to tackle the problem:
- The legislature held a special two-day session to discuss problems with implementing the Air Pollution Control Law.
- The State Council formed a new Leading Small Group for Air Pollution Prevention in the Beijing-Tianjin-Hebei Region.
That’s not all. Industrial production in China’s largest steelmaking city is being curbed (Reuters):
- “Tangshan…has extended recent emergency pollution control measures until July 21 because of a possible major smog alert, according to a document seen by Reuters and a source familiar with the matter.”
- “The measures, which include the closure of some sintering plants and output curbs on coke and cement factories, came into force on July 13 and were due to last until noon on Wednesday.”
Crazy China fact: If Tangshan were its own country, it would be the fourth-largest steel producer in the world, behind only the rest of China, Japan, and India.
What to watch: The crackdown on pollution shows no sign of slowing down. But will officials retain the same level of vigilance as the economy starts to slow?
Reuters: China’s top steel city extends pollution curbs until July 21
POLITICS and POLICY
5. Pressure on local government debt still on
As Tip Sheet readers know, the Ministry of Finance (MoF) and the central bank (PBoC) have been having a public spat over economic policy (see Monday and Tuesday’s Tip Sheets).
The PBoC has accused the MoF of failing to manage local government debt, which has created risks to financial stability.
That may be true historically, but recently the MoF has been working hard to impose more discipline on local governments.
The latest measure:
- Yesterday, the MoF announced that it had disciplined multiple municipal officials for illegal government borrowing (MoF links).
This is even more important:
- The central government just initiated an inspection into off-balance-sheet debt at all municipal-level governments and above.
The goal: Get a full-picture off-balance-sheet debts and then formulate measures to address them.
Get smart: Despite downward pressure on the economy, the central government looks unlikely to give local governments the green light to increase investment.
POLITICS and POLICY
6. Premier’s secret weapon in slicing cancer drug prices
Premier Li Keqiang is trying his hand as a film critic. Today he issued his review of the hit movie Dying to Survive.
In a nutshell, the movie is about (SupChina):
- “A health supplements peddler…who smuggles unapproved drugs from India to sell to leukemia patients for more affordable prices.
This isn’t fiction – it was inspired by real events in 2015.
The movie has stirred public discussion about how to make innovative drugs widely accessible (i.e. cheap) without undermining the incentives for drug manufacturers to invest in creating new drugs.
The premier’s comments made clear that accessibility is his biggest concern (Gov.cn):
- “Patients with serious illnesses such as cancer say ‘lifesaving medicines’ are too expensive to afford, difficult to get and they have no time to wait.”
- “Therefore, it is urgent to deal with the price reduction and supply guarantee of medicines.”
Get smart: Even before Dying to Survive, the government had made reducing the price of cancer drugs a top priority. Li is harnessing public sentiment to reinforce the government’s position ahead of negotiations with drug makers.
SupChina: ‘Dying To Survive,’ A Comedy About Illegally Importing Drugs, Might Be China’s Best Movie Of The Year
Gov.cn: Premier sends instruction on cancer drug problems
POLITICS and POLICY
7. Legislature pledges loyalty to Xi
Xi’s good friend Li Zhanshu is the head of China’s legislature.
On Monday, Li held a special study session for top legislators.
The topic: Xi Jinping Thought.
- “The meeting stressed the need of upholding the Party leadership…with an aim to build a system of distinctively Chinese socialist rule of law.”
What that means: The Party will stay above the law.
Legislators also pledged loyalty to Xi:
- “[We must] ensure that the Party Central Committee with comrade Xi Jinping as the core is the only authority and has the final say on all issues.”
Get smart: Meetings like this put pay to the rumors that Xi is losing political support (see Entry #1).