DRIVING THE DAY
1. Xi Jinping goes zombie hunting
On Wednesday, Xi Jinping chaired a meeting of the Central Committee for Deepening Reform (CCCDR).
Some context: The CCCDR is the most important policymaking body in China.
As always, it was a productive meeting. They approved a total of 15 documents, five of which were about the new Hainan Free Trade Zone (see Oct 17 Tip Sheet).
To us, the most interesting document approved was a plan to help certain businesses exit the market.
According to the readout the plan will:
- “Improve the survival-of-the-fittest market mechanism.”
- “Improve the quality and efficiency of market restructuring and clearing.”
Details of exactly how they plan to weed these companies out were scant.
Why this matters: China’s economy is saddled with a lot of zombie companies – firms that aren’t productive, but just won’t die. This plan aims to be a zombie killer, which is key to restructuring the economy and improving productivity.
One problem: As anyone who has watched zombie movies knows, they aren’t easy to kill. Policymakers have had trouble getting rid of them before.
Will this plan change that?
As we always say: What the CCCDR approves today, becomes official policy tomorrow. Watch for more details on this plan to come out in the coming months.
DRIVING THE DAY, CONT’D
2. Xi takes military reform into a new phase
Xi Jinping donned his commander-in-chief hat on Tuesday – kicking off a two-day conference of the Central Military Commission on reforming various PLA policies.
Xi wants to see sweeping changes.
He asked the top brass to remake policies on:
- Force deployment
- Force development
- PLA management
His goals are simple but ambitious:
- Establish the Party’s absolute command over the military
- Build a joint-force system
- Incentivize the PLA to improve its capabilities
- Improve discipline
Get smart: One of Xi’s biggest achievements to date has been reordering long-entrenched power structures within the military.
Get smarter: He’s now looking to enter the next stage of military reform – seeking to institutionalize structural changes and fundamentally improve military capability.
FINANCE and ECONOMICS
3. A mixed bag on property in October
Momentum in China’s property sector was hard to read in October – at least that’s what the latest data suggest.
Investment in the sector decelerated last month (see yesterday’s Tip Sheet).
But data out today show that prices continued to rise – and even accelerated a smidge (Reuters):
- “Average new home prices in China’s 70 major cities rose 1.0 percent in October from a month earlier, a touch higher than the previous month’s reading of 0.9 percent, according to Reuters calculations based on an official survey on Thursday.”
That’s kind of strange. We were finally starting to see signs in recent weeks that the government’s property tightening policies were working.
But the key was where price growth occurred:
- “The prices gains were mostly driven by China’s 35 smaller cities, which posted an average price increase of 1.1 percent in October.”
Get smart: The control policies are primarily aimed at China’s largest 40 cities, where housing affordability is an increasing issue.
But a separate policy is driving price gains in smaller cities:
- “Analysts say the so-called shanty-town redevelopment project has boosted property demand as residents use any cash compensation to buy a new home when their existing one is demolished.”
Reuters: China’s home prices gather pace but speed bumps seen ahead
FINANCE AND ECONOMICS
4. Debating the budget deficit
Chinese authorities are increasingly leaning on fiscal policy to support the economy – and more may be coming.
One way to boost fiscal support is through tax cuts. The government’s efforts on that front were evident in the October fiscal data (MoF):
- Tax revenue in October fell by 5.1% y/y – the first contraction since 2017.
- Total budget revenue also dropped by 3.1% y/y
Some context: Those drops aren’t just about tax cuts, they are also about weaker economic growth – which means less business activity to tax.
There are more tax savings to come (Study Times):
- Finance Minister Liu Kun recently estimated that by the end of 2018, the government will have reduced costs for business by RMB 1.3 trillion.
- He also said the ministry is mulling more tax cuts soon.
Get smart: There is a tension here. Further tax cuts will help businesses, and potentially support growth. But they also hurt government revenues, making it harder to support the economy through increased expenditures – thanks to a fixed budget deficit.
Get smarter: Liu doesn’t have the final say here. And there is increasing debate in Beijing about whether or not to raise the budget deficit next year, from its current 3% rate.
POLITICS and POLICY
5. Government toying with new model of industrial policy
Chinese regulators are experimenting with industrial policies.
What do we mean?
The key steward of industrial policy, MIIT, recently issued a list of AI technologies that it wants to see developed. The list spanned 17 different areas, including:
- intelligent connected vehicles
- medical imaging diagnosis systems
- neural network chips
- intelligent sensors
- intelligent cyber infrastructure
For each technology, there are development goals to be reached by 2020.
That’s all standard stuff.
But then MIIT did something new. They are employing a new method to pick who gets government support:
- MIIT issued an official request for tender, asking qualified companies and research institutes to apply for the opportunity to pursue each development goal
- The government will then organize a group of experts to select no more than five entities for each technology.
- Those who win the contracts will have two years (until 2020) to develop the technology and prove to the government that they have met the goals.
- The government will then go all in – offering support to up to three companies that hit the targets for each technology.
Get smart: The key change here is that the central government is withholding support until they see some initial results.
The bottom line: China wants industrial policy to be more efficient.