DRIVING THE DAY
1. Xi resumes his globetrotting
Xi left Beijing today for a ten-day, five-country trip. It’s his first overseas trip in 2018.
- The United Arab Emirates (UAE)
- South Africa
Some context: This will be the first visit ever by a PRC head of state to Uganda and Mauritius. And it will be the first such visit to the UAE in 29 years.
Ahead of his visit, Xi published an article in UAE media. Not surprisingly, the Belt and Road Initiative (BRI) is a key theme:
- “Under the framework of Belt and Road cooperation, China and the UAE need to strengthen policy communication, speed up integrated development, uphold the multilateral trading system, and see that economic globalization is more open, inclusive, balanced and beneficial to all.”
- “I look forward to working with the UAE leaders to draw up a blueprint for China-UAE cooperation so as to unlock its full potentials and advance China-UAE relations at a higher level and speed and build a China-UAE community of shared future in Belt and Road cooperation.”
Get smart: Multiple Chinese-funded projects in BRI countries have been tarred by scandal of late. But don’t expect official support to waver. BRI is Xi’s baby, and he is determined to make it a success.
Xinhua : Full text of Chinese President Xi’s signed article on UAE media
FINANCE and ECONOMICS
2. Regulators’ quixotic attempt to help small businesses
Regulators are increasingly worried about the tight financing environment for small businesses resulting from the financial de-risking campaign.
The latest effort to address the issue was a high-level meeting held on Tuesday. Head of the banking and insurance regulator, Guo Shuqing, spoke with top officials at the state-owned banks, some joint-stock banks, and some large city-level banks.
Guo’s (paraphrased) message (21st Cent Biz):
- We are serious. You banks need to do more to get funds to small businesses and lower their borrowing costs.
- And while you’re at it, stop doing so much mortgage lending.
Guo’s message was the latest in a string of moves to get banks to funnel cash to places that have been collateral damage of financial de-risking (see June 21 Tip Sheet).
Get smart: This is a steep uphill battle. The reality is that Chinese banks are not good at getting funds to small companies because they have not historically been incentivized to do so.
The big problem: Regulators want to improve credit allocation. But doing so by fiat won’t work. What they need to do is liberalize credit markets.
21st Century Biz: 银保监会：大中型银行要加大信贷投放力度 降低对抵押担保和外部评估依赖
FINANCE and ECONOMICS
3. Race to the bottom for PBoC Collateral
The central bank (PBoC) is telling banks to buy more low-quality corporate bonds.
Specifically, the PBoC is giving window guidance to buy more corporate bonds rated AA+ and below (see link).
The reason: The sharp rise in defaults of low-rated corporate bonds has choked off liquidity in that part of the market.
This is how bad it is:
- 300 bond issuances have been scrapped or delayed this year.
- Net financing through low-rated corporate bonds is negative this year.
The PBoC’s offer: Banks can post lower-rated bonds as collateral for central bank loans through the medium-term lending facility (MLF) at a 2:1 ratio. So they get twice the amount of loans that they can receive by posting higher-rated collateral.
But banks are lukewarm for three reasons:
- The risk of bond defaults is still with banks.
- Capital constraints remain.
- They need to pay the MLF money back to the central bank.
Get smart: This is part of a larger push to get money to private businesses, which issue many of the lower-rated bonds.
Get smarter: This is concerning long-term because it means the central bank could effectively be taking on more default risk over time.
21st Century Biz:独家丨央行窗口指导银行增配低评级信用债投资
POLITICS AND POLICY
4. Government accelerates property tax legislation
The government can’t seem to get a grip on the property market. A raft of purchase restrictions just aren’t working (see June 15 Tip Sheet).
This is giving more impetus to getting a Property Tax Law passed, judging by comments made Monday by an official from the stats bureau (SCIO):
- “The central government will accelerate advancing a property tax and relevant policy measures.”
What we are hearing:
- Top leaders want this done by mid-2019.
- The national legislature has just finished collecting suggestions from the provinces.
- The initial rate would be relatively low.
Get smart: Even if the legislation gets passed next year, it won’t take effect immediately. There will still be some practical issues around collection that will need to be worked out.
Get smarter: If expectations of a tax become entrenched, it could dampen speculation in the property market.
POLITICS and POLICY
5. Li Keqiang’s small government agenda
Wednesday’s State Council meeting focused on a familiar topic – improving the business environment.
Premier Li Keqiang understands that that means giving the market a larger say in determining economic outcomes:
- “Our efforts in streamlining administration, delegating powers and improving government services boil down to…allowing the market to play a decisive role in allocating resources.”
So what will the government do? Measures announced at the meeting include:
- “17 administrative permits will… [be abolished, including] project approval for foreign businesses to invest in road transport.”
- “Customs clearance and quarantine will be further integrated by the end of 2018.”
- “Procedures for import and export registration will be streamlined.”
- “Time required for enterprise tax payments will be reduced.”
- “A new negative list for businesses will be issued, and any restrictions hampering a level playing field for businesses will be abandoned.”
Get smart: Look for Li and other liberalizers to use slowing economic growth to try and accelerate these and similar reforms.
Gov.cn: China vows to further improve business environment
POLITICS and POLICY
6. Anti-corruption campaign going strong
The anti-corruption campaign marches on.
The Central Discipline and Inspection Commission and National Supervisory Commission disciplined 240,000 thousand officials in the first half of 2018.
- 28 senior officials (ministerial level and above)
- 1,500 mid-level officials (director-general level and above)
Some context: That’s roughly the same number as in H1 2017.
But warnings were up:
- 442,000 thousand officials were criticized or warned in H1 2018, up from 278,000 in H1 2017.
Get smart: This is about more than corruption. Discipline officials are increasingly punishing officials who do a poor job of policy implementation.