Driving the Day
1.State Council promises more poverty relief efforts
The State Council got back to work on Monday, holding its weekly executive meeting.
The meeting heard a report on 2018’s poverty alleviation efforts (Gov.cn):
- “According to the progress update at the meeting, 13.86 million people were lifted out of poverty in 2018.”
How did China’s officials do it? They used their favorite policy tool – infrastructure spending!
- “Some 208,000 kilometers of rural roads were built or renovated in 2018.”
- “New progress was made in upgrading the power grid in poor areas.”
- “And 94 percent of the poor villages are now covered by broadband internet services.”
What’s on tap for 2019:
- “It was decided at the meeting that efforts will be intensified this year to help extremely poor areas.”
- “Increase in the poverty alleviation fund under the central government budget will be mainly channeled to these areas.”
Get smart: Officials have two more years to eradicate poverty. Helping the last remaining cohort will be the toughest challenge yet.
Gov.cn: China to lift another 10 million people out of poverty in 2019
Driving the Day, Cont’d
2.State Council steps up support for China’s banks
China’s State Council is ready to bail out the banking system…sort of.
At Monday’s meeting, Premier Li Keqiang and his colleagues signaled that the government will do more to help banks raisecapital (Caixin):
- “At a meeting chaired by Premier Li Keqiang following the week-long holiday for Chinese New Year, the cabinet said it would make it easier for banks to raise capital by issuing preference and convertible bonds, as well as perpetual bonds.”
- “Banks should use the funds to expand lending support to private and smaller businesses, the cabinet said.”
Why it matters: China’s banks need to raise cash so they can continue to grow their loan bookswhile maintaining capital adequacy ratios. More capital also meansthey can write off dodgy assets at an accelerated pace.
Get smart: We’ve been saying this for the past year – China is in the early stages of a bank bailout. It’s slow-moving, and most banks aren’t at risk of an imminent collapse, but it’s a bailout all the same.
Top leaders are signaling that it will now happen at a more aggressive pace.
Caixin:Cabinet Encourages Banks to Supplement Capital to Boost Lending
3.PBoC gets in on rural revitalization
On Monday, the PBoC and four other ministries issued new guidelines to improve financial services that support rural revitalization.
Some context: The Rural Revitalization Strategy has been one of Xi Jinping’s marquee policy initiatives in his second term. It aims to do more than bring people out of rural poverty; italso aimsto genuinely improve rural economies over time.
The PBoC’s plan involves both short- and long-term goals.
In the short-term, the focus will be on poverty (21st Century Biz):
- “Until 2020…agricultural-related financial institutions should give priority to [offering] precise poverty alleviation credit in poor areas.”
Over the longer term, the idea is to build a more sustainable rural financing system.
Key tactics will include:
- Raising the rate of loan growth to poor rural areas
- Lowering the cost of capital – in part through increased use of the PBoC’s relending facility
- Prioritizing investment projects in the countryside through local governments’ special project bonds
- Tolerating a higher rate of NPLs at agricultural lenders
- Improving corporate governance in agricultural-related financial institutions
- Allowing rural property rights to be used as collateral – that could be a big deal
This represents a big push to get more financing to rural areas. If it works, it will remake China’s countryside.
21st Cent Biz:五部门联合发布关于金融服务乡村振兴的指导意见
Reuters:China unveils guidelines on financial services for rural rejuvenation
4.Defaults continue to mount in 2019
Bloomberg highlights the still-mounting pressure in China’s corporate bond market.
Just this month, two more dig defaults took place:
- “China Minsheng Investment Group Corp., a private investment group with interests in renewable energy and real estate, hasn’t returned money to bondholders that it had pledged to repay on Feb. 1, according to people familiar with the matter.”
- “And Wintime Energy Co., which defaulted last year, didn’t honor part of a restructured debt repayment plan last week, separate people said.”
- “Wintime Energy told investors that it’s still seeking financing to repay 20 percent of the principal on a 3.8 billion yuan delinquent bond, which was meant to be returned on Feb. 6.”
Wintime’s troubles have been mounting for a while:
- “The coal miner was China’s second-largest bond defaulter in 2018.”
Some context: 2018 was a record year for corporate defaults in China. As the economy continues to slow, 2019 is likely to set yet a new high.
Get smart: We’ve said this before, but China actually needs more defaults. It will help to discipline both companies and investors. It is already helping to re-price risk across China’sbond markets.
Source:Two Large Chinese Borrowers Miss Bond Payments, Sources Say
5.Data dump – FX reserves
China’s FX reserves data for January came out on Monday.
The details (Reuters):
- “China’s reserves rose by $15.2 billion in January – the biggest increase in a year – to $3.088 trillion, central bank data showed on Monday. That compared with a rise of $11 billion in December.”
- “Economists polled by Reuters had expected an increase of $9.3 billion.”
The FX regulators says the increase was largely due to valuation effects:
- “The relatively modest rise in China’s reserves in January was due to an appreciation of non-dollar currencies and increases of the prices of financial assets it holds, the foreign exchange regulator said in a statement.”
Get smart: A weak US dollar in January, helped to buoy both the CNY, and China’s non-USD foreign holdings. Money wasn’t exactly pouring in to the country last month, but at least it wasn’t pouring out.
Reuters:UPDATE 1-China Jan FX reserves rise more than expected to $3.088 trln
6.Foreigners get in on Chinese stocks
One area where China did see pretty solid inflows last monthwas to its equity markets.
Foreign money managers heard dovish signals from the US Federal Reserve in December and January. That helped to boost risk sentiment, as investors are newly hopefully that the Fed won’t tighten too quickly.
So money managersfelt comfortable purchasing riskieremerging market assets. China was a big beneficiary.
The FT has the details:
- “Foreign investors poured a record $9bn into Chinese equities in January, the largest single-month inflow on record, betting the mainland market hasbottomed out after a disastrous 2018.”
- “A more positive outlook for US-China trade talks is also brightening sentiment, with many investors taking the view that negotiations are likely to produce at least a deal to forestall an immediate increase in tariffs.”
It also helps that Chinese stocks are dirt cheap after an equity rout last year:
- “Low valuations were one of the most obvious reasons for the foreign inflows. The CSI 300’s trailing-12-month price/earnings ratio was 11.1 on February 1, down from 14.7 at the beginning of January.”
Get smart: After a disastrous 2018, Chinese stocks look set up for a solid 2019, despite the slowing domestic economy.
7.Updating propaganda for the social media age
Xi Jinping recently told propaganda officials to up their social media game (see January 28 Tip Sheet).
Now, new media specialists are in high demand (SCMP):
- “Xi’s demand to ensure ‘the voice of the party can reach all kinds of user terminals directly’, has prompted propaganda chiefs to hunt down new media specialists from all over the nation.”
SCMP details how the official WeChat account (长安剑) of the Party’s Central Politics and Law Commission works:
- “This new media operation is run by a small central team of fewer than 10 people, all of whom were born in the 1980s or 1990s.”
- “The selection process for this core team…includes screening candidates for political loyalty.”
- “They also need a background in law enforcement.”
- “Those who make the grade will be sent to Beijing for six months of intensive training before returning home to lead provincial and municipal new media teams.”
The new media teams have more leeway than most apparatchiks:
- “Unlike the traditional top-down structure of propaganda departments, the new media team had more editorial freedom.”
Get smart: Official propaganda isn’t particularly good – whether on WeChat or in print. But it’s relatively effective because it tends to drown out all other voices.
8.State Council targets high-priced cancer drugs
The high price of cancer drugs has become an increasingly high-profile public issue.
It’s so much in the public consciousness that the 2018 film Dying to Survive – about smuggling low-cost cancer drugs into the country – became a blockbuster hit.
To be fair, the government hasn’t been sitting on its hands (Gov.cn 1):
- “Starting on May 1 last year, import tariffs were lifted on all common drugs, including cancer drugs [and] cancer alkaloid-based drugs.”
- “[Since] 2016, the government has organized negotiations on drug prices and the medical insurance catalogue, including 17 anti-cancer medicines.”
These measures have helped to dramatically reduceprices for some cancer drugs.
Monday’s State Council meeting aimed to build on these successes (Gov.cn 2):
- “China will further shorten the time required for the registration and approval of new cancer drugs and cut prices.”
- “Experts will be gathered to select overseas new drugs to meet urgent clinical needs, while import policies will be improved for faster launch of the drugs in China.”
Get smart: Healthcare regulation is evolving rapidly, and the industry is in flux as a result.
9.National legislature focuses on rural revitalization
The national legislature’s (NPC) agricultural and rural affairs committee recently published an on-the-ground study of development in China’s rural areas, based on field trips conducted throughout 2018.
One of the biggest problems they found is the lack of key factors of production, particularly capital (Qiushi):
- “Due to the lack of effective incentive and restraint mechanisms, the willingness of financial capital and social capital to enter agricultural and rural areas is weak.”
To solve the problem, the legislature proposed to aggregate capital from several different parties:
- “[The government should institute] guidance that the majority of land sales fees should be used to support rural revitalization.”
- “[We should] allocate financial resources to key areas and…incite more social capital to invest in for-profit or quasi for-profit projects.”
The goal will be to encourage investments that aid in development:
- “Promoting the development of small farms and increasing farmers’ income [should be key] conditions for industrial and commercial enterprises to enter the countryside.”
The legislature wants to make it happen by writing more laws to support rural investment.
Get smart: China’s rural areas represent a potentially large consumer market. But businesses don’t want to invest on their own – the government is critical in designing policy to incentivize commercial entities to pitch in.