DRIVING THE DAY
1. China’s “more proactive” fiscal policy
less than meets the eye
As Tip Sheet readers know, the Chinese economy is facing some major headwinds in H2 – and that’s not including the effects of the trade war.
So it should come as no surprise that Monday’s State Council meeting was all about supporting the economy (Gov.cn):
- “China will…adopt a combination of fiscal and financial measures in an effort to boost domestic demand and bolster support for the real economy.”
But authorities are clear – this is not a return to massive stimulus:
- “The government will…will firmly refrain from resorting to a deluge of strong stimulus policies.”
On the fiscal side, the government promised to make its “proactive” fiscal policy “more proactive.”
What that means:
- Allowing more companies to claim deductions for RandD
- “Stepping up efforts” to issue RMB 1.35 trillion in local government bonds for infrastructure projects
Get smart: These are not big measures. They should ease the burden on business but won’t be truly stimulative.
Our take: These moves look like they are as much about sentiment as they are about fundamentally improving economic conditions. The government wants to signal that it is here to help, but policymakers are loath to give up on their recent effort to become more fiscally responsible.
Gov.cn: 李克强主持召开国务院常务会议 部署更好发挥财政金融政策作用等
Gov.cn: Fiscal, financial policies to bolster real economy
DRIVING THE DAY
2. Deciphering the liquidity and credit stance
Monday’s State Council meeting wasn’t just about fiscal support measures (see previous entry).
They also outlined the following monetary measures:
- Easing restrictions on banks’ issuance of financial bonds for small firms
- Guiding financial institutions to ensure reasonable funding to local government financing vehicles
- Facilitating construction and planning [and financing] of a number of big projects
The State Council was less explicit on the evolving liquidity stance, but it did indicate that liquidity provisions are likely to continue growing (see next entry).
Get smart: Most people are interpreting the State Council’s remarks as the beginning of a serious easing cycle, but we remain cautious.
Why is that? Because the banking regulator is still dedicated to its tight macro-prudential policy. More liquidity will undoubtedly offset some of that pain, but we still don’t see this as an effort to markedly accelerate lending growth from the banks.
Critical to watch: The pace of growth for outstanding total credit will be the real tell for the impact of these support measures.
Bloomberg: China Unveils New Measures to Aid Growth Amid Trade Uncertainty
FINANCE and ECONOMICS
3. Upping liquidity provisions
The central bank announced on Monday that it had injected money into the banking system through its medium-term lending facility (MLF). That’s the second time this month.
The move came as a surprise to markets. They had expected more liquidity, just not so much, so fast.
Some context: The RMB 502 billion injection means that July saw the largest such injection since the facility was set up in 2014. That is significant.
Reuters has more:
- “The cash injection came after the central bank was reported to ensure ample liquidity by allowing commercial banks to tap its MLF loans, especially lenders that have invested in bonds rated AA+ and below.”
More context: The injection brings the outstanding amount of MLF loans up to RMB 4.42 trillion. That is a jump from RMB 4.02 trillion in June, but still down from the peak of RMB 4.92 trillion in March.
Our take: We can’t say this enough. In the current regulatory environment, more liquidity is a painkiller, not a steroid. The PBoC is not trying to pump up overall lending. It is just trying to direct more credit to the hardest hit part of the economy – small business.
POLITICS and POLICY
4. Petrochemical industry could see a shake up
Monday’s State Council meeting talked about more than just fiscal and monetary policy. It also promised to further open several key sectors.
Specifically, the meeting promised to make it easier for private companies to operate in the following highly-regulated sectors:
- Oil and gas
This could be a big deal: The meeting also approved a new plan for the petrochemical industry. No details were released, but the plan promises to prioritize environmental production, and to further open the sector to foreign investment.
Get smart: All of the above sectors have well-entrenched state-owned behemoths. It’s not clear how much opening them up to private investment will actually change how the sectors operate.
What to watch: The petrochemical industry plan should be released in the coming months, if not weeks.
POLITICS and POLICY
5. Getting serious about opening up?
The State Council meeting also promised to improve the environment for foreign businesses, by promising to:
- Improve policies to encourage re-investment by foreign companies
- Accelerate the realization of already-agreed projects by foreign investors
Our take: Without specifics, it’s hard to know how much of an impact these policies will have.
But, but, but…policymakers are genuinely worried about the recent paltry growth of inbound foreign direct investment. So we’d expect to see some genuine improvements in the business environment for foreign companies.
Stay smart: Policymakers aren’t opening out of the goodness of their hearts. But they realize that the foreign business community is at its wits’ end, and genuine market openings and improvements are the only way to keep the money flowing.
POLITICS and POLICY
6. Combined banking and insurance regulator takes shape
The State Council has officially approveda reorganization plan for the newly combined banking and insurance regulator (CBIRC), according to local media.
Some context: The plan is meant to determine the specifics of the agency’s responsibilities, as well as its internal bureaucratic composition and staffing.
Get this: The staff will be downsized from over 1,000 people currently, down to 900.
Once it is fully formed, the CBIRC will have 26 departments, plus a Party committee – that is down from the combined 39 departments at the individual banking (CBRC) and insurance (CIRC) regulators before the merger.
But there’s more: The heads of various departments are likely to be completely reshuffled.
Our take: That’s probably to break up power centers within the agency to make sure regulators are truly regulating, rather than coddling the industry.
There will also be two brand new departments:
- The department for handling major risks and investigating big cases
- The department of company governance – modelled on the insurance regulator’s development and reform department
Finally, the banking regulator’s “prudential regulation department” will be dissolved, as most of its functions will be taken over by the central bank.
What to watch: This reorganization is set to be completed in the next two months.
POLITICS and POLICY
7. Xi and Kagame trade compliments
Xi continued his African tour on Monday with a trip to Rwanda.
Sino-Rwandan ties have been tight for a while, in large part due to large amounts of Chinese investment.
Xi says there is more investment on the way (Xinhua):
- “China…encourages more Chinese investment in Rwanda to help advance the African country’s industrialization and modernization.”
Xi also reiterated his pledge to strengthen Sino-African ties more broadly (see yesterday’s Tip Sheet):
- “Strengthening unity and cooperation with African countries is an important foundation for China’s foreign policy and a long-term steadfast strategic choice of Beijing, Xi said.”
Rwandan president Paul Kagame appreciates Xi’s commitment (AP):
- “Rwandan President Paul Kagame is praising China’s treatment of Africa ‘as an equal,’ calling it ‘a revolutionary posture in world affairs’ and ‘more precious than money.’”
Get smart: China has alienated much of the West over the past decade. But in a large swath of the developing world – including Africa – Chinese diplomacy has been a success.
Go deeper: Check out Lily Kuo’s excellent November 2016 piece on Chinese investment in Rwanda (link below).
Xinhua: China, Rwanda vow to write new chapter in bilateral ties
AP: Rwandan leader says China relates to Africa ‘as an equal’
Quartz: Rwanda is a landlocked country with few natural resources. So why is China investing so heavily in it?
POLITICS and POLICY
8. Xi promises accountability for the vaccine scandal
Yesterday, we told you about a vaccine scandal that rocked China over the weekend.
Xi Jinping felt that the issue was important enough to take time away from his African trip to issue instructions on the matter.
He had some tough words (Xinhua):
- “He described the illegal production of vaccines…as hideous and appalling.”
- “Relevant departments and local authorities should pay close attention and immediately probe the case to find the truth, Xi said…The investigation should be thorough, the punishment severe, the accountability held seriously, and the case’s progress should be publicized on time to address public concern.”
Get smart: By getting this out in the open and promising tough action, Xi is showing that he is on the side of the people.
The government machinery is mobilizing:
- “Acting on the leaders’ instructions, the State Council has established a task-force and sent an investigation team to the vaccine company.”
- “Also set up were special teams at both provincial and city levels in Jilin Province for the investigation…[to start] looking into all other high-risk pharmaceutical companies.”
What to watch: Now that the big man has weighed in, expect heads to roll.
Xinhua: Xi orders thorough investigation into vaccine case