DRIVING THE DAY
1. Xi addresses concerns about Belt and Road
On Monday, Xi Jinping spoke at a high-level symposium to review the first five years of the Belt and Road Initiative (BRI).
The big news was that Xi seemed to acknowledge some recent backlash against the initiative (SCMP):
- “’The Belt and Road Initiative is an economic cooperation initiative, not a geopolitical or military alliance,’ Xi said during the seminar.”
- “It is an open and inclusive process, and not about creating exclusive circles or a China club.”
- “[Xi’s remarks] came after new Malaysian Prime Minister Mahathir Mohamad called off a major China-backed railway project last week.”
- “The recent change in leadership in Pakistan could also see a potential pullback on agreements for the China-Pakistan Economic Corridor (CPEC), a flagship, multibillion-dollar belt and road project.”
Get smart: It’s still early days for the multi-decade BRI. Chinese officials and companies will learn from mistakes in Malaysia and elsewhere.
The bottom line: Xi is not backing off the BRI, he’s just trying to make sure it’s successful. It is still all systems go.
DRIVING THE DAY, CONT’D
2. Xi invokes imperial tribute system at BRI symposium
Monday’s BRI symposium underscored the initiative’s importance.
In addition to Xi Jinping, eight other state-level leaders attended:
- Executive Vice Premier Han Zheng
- Vice Premier Liu He
- Head of the Office of the Central Commission of Foreign Affairs Yang Jiechi
- Vice Premier Hu Chunhua
- Head of the Central Committee General Office Ding Xuexiang
- State Councilor and Foreign Minister Wang Yi
- State Councilor Xiao Jie
- NDRC Chairman He Lifeng
Xi thinks the BRI can reshape the world for decades to come:
- “Today’s world is in a period of great development and great change.”
- “We must employ strategic vision, establish a global perspective…and be conscious of this historic opportunity.”
And then Xi went all imperial:
- “Building the Belt and Road…is in keeping with the Chinese people’s caring for distant peoples, and the tianxia concept [that sees] harmony among all nations.”
Why that matters: Tianxia was central to China’s imperial tribute system that put the Middle Kingdom at the center of the world – and classified all other countries as subordinate to it.
Our thought: Invoking the ancient tribute system – even indirectly – is not going to assuage neighboring countries who are worried about the implications of China’s rise.
FINANCE and ECONOMICS
3. FSDC meets again
The Financial Stability and Development Committee (FSDC) held a meeting on Monday.
A quick refresher: The FSDC was created in July last year and is headed by Xi Jinping’s right-hand man on the economy – Vice Premier Liu He. The body is meant to coordinate various financial and economic regulators.
There were three items the agenda:
- Hearing a report on regulatory efforts to clean up internet finance
- Hearing a report on risk reduction in margin trading in the equity market
- Studying ways to deepen capital markets
Get smart: Regulators are still zeroed in on the P2P lending crisis (see August 10 Tip Sheet), which is a subset of internet finance – expect more regulatory measures to be rolled out soon.
The committee also reiteratedthat it will uphold stability.
If you think that means backsliding on financial de-risking, think again. Addressing financial risk remains key to stability, which is why (gov.cn):
- “De-leveraging and risk prevention are the top priorities of financial development for this year.”
FINANCE and ECONOMICS
4. PBoC gently guides rates up
Money market rates and bonds yields are rising– and set to accelerate.
So says a must-read piece in the 21st Century Business Herald today.
- All the key rates – from seven-day repos, to interbank deposits, to 3-month Shibor – have been moving upward since mid-August.
- What’s more, the PBoC auctioned off three-month fiscal deposits on Monday at a rate of 3.8%, up from 3.7% in the previous two months.
What it means: The fact that the rates are up on money injected directly by the PBoC suggests that the bank is purposefully guiding rates upward.
Our take: Rates came down dramatically throughout July and early August, but that was an overshoot. The PBoC is now trying to get rates back up a bit.
One additional factor driving higher rates:
- The deluge of local government bond issuance that is about to hit the market (see August 15 Tip Sheet).
- The coming issuance – which is set to be well over RMB 1 trillion – will drain liquidity as banks use funds to buy those bonds.
Get smart: The PBoC will continue to provide plenty of liquidity, but that liquidity will be more expensive than it was over the past two months.
21st Century Biz: 央行新信号！公开市场利率抬升10个基点，这是利率明显上行姿态
POLITICS and POLICY
5. Central government zeros in on local debt, again
The central government has told local authorities to get a handle on their off-balance-sheet debts (see August 16 Tip Sheet).
To guide them in this process, the general offices of the Central Committee and State Council have issued new measures meant to make local governments more accountable for implicit debts.
The rub: The documents have yet to be publicly released, so we don’t have any details of what’s in them.
Local governments have sprung into action, anyway. Here’s what some of them are doing:
- Putting limits on new debt
- Taking active measures to reduce current debt levels
- Restructuring debt to get better financing costs
- Looking for ways to raise revenue from idle or under-used assets
- Incorporating debt control into the appraisals of local officials
Get smart: That last measure is particularly important. Making officials personally accountable is the fastest way to get something done.
The big picture: The central government has stepped up fiscal support measures of late. But it is also keeping the heat on local governments to remain fiscally responsible.
What to watch: As we’ve been arguing for a while – that policy mix is not a recipe for a pickup in economic growth.
POLITICS and POLICY
6. Legislators debate revised income tax law
China’s legislature commenced its bi-monthly session on Monday. The session will run through Friday.
Legislative sessions usually don’t garner much public attention. But this one promises to be different, as lawmakers debate a revision to the Individual Income Tax Law.
Some context (SCMP):
- “The tax bill…failed to pass on its first reading in June.”
- “The initial proposal was rejected when many legislators – supported by a strong online campaign – called for a bigger reduction in the individual tax burden for most Chinese citizens.”
The public has been vocal about what it wants:
- “There were 131,207 suggested improvements to the bill posted by 67,291 internet users during the comment period from June 29 to July 28.”
- “Internet users have suggested bringing down the highest tax bracket from the current 45 per cent and allowing deductions for aged care expenses.”
Get smart: The debate over the income tax law is an important reminder that China’s policymaking process can be contentious – and include input from the public.
What to watch: The government wants the bill to pass quickly so that it can serve as a boost to consumer spending amidst the economic slowdown.