Finance and Economics
1. January lending data does not signal easing
We continue to digest the January credit data.
Much reportinghas focused on the fact thatbanks lent a record RMB 3.23 trillion in the month. That’s been taken as proofthatloosening measures enacted over the past two quarters are starting to kick in.
We aren’t so sure.
First, we are focused – as always – on the growth of outstanding loans, rather than the monthly flow of new loans.
- The growth rate of bank loans accelerated to 13.6 % y/y, from 13.2 % in December – that’s not a massive acceleration.
Second, we don’t think the acceleration marks a new trend…yet.
The PBoC held a press conference late on Fridayto explain the numbers. Director of the Monetary Policy DepartmentSun Guofengindicated that the lending increase was due in part toseasonal factors. Banks are generally keen to pump out loans early in the year.
Get smart: That impulse was hampered in January 2018, given the intensity of the de-risking campaign at that time. That’s one reason fory/y loan growth in January 2019.
What’s more, an earlier Chinese New Year holiday in 2019 alsocaused banks to loan more, earlier.
2.More on the January credit data
The January loan numbers are particularly important because a bottoming in credit growth will be the first sign that the economic deceleration may also soon bottom out.
So it’s worth dwelling on them.
As PBoC officials pointed out in their press conference, total credit growth was buoyed in part by a slowing pace of contraction in the shadow banking sector.
What that means: It wasn’t so much that there was a new, sustainable acceleration of bank lending so much as the contraction in the shadow banking sector eased a bit (especially for bankers’ acceptances).
Out thought:Authorities are still focused on containing risks in the shadow banking sector – so it’s not clear to us that January’s less-slow shadow bank contraction is a new trend for 2018.
What to watch:Shadow banking is a key indicator to track over the next two months. A bottoming in shadow banking contraction will happen soon, but we don’t think January was it.
3.People’s Daily on catch-up growth
Over the weekend, the People’s Daily ran an important article entitled “Accelerating the Optimization and Upgrading of the Economic Structure.”
The piece was billed as the first in a series on “Grasping the New Implications of Important Strategic Opportunities for China’s Development.”
The piece highlighted that:
- Structural adjustment is a globalphenomenon.
- Developed countries have been pushing for “re-industrialization.”
- China’s low-cost resource model has run its course, and the economy can no longer rely on external demand due to weaker global growth.
- This situation is exacerbated by the ageing workforce.
The fundamental point: China’s catch-up gains – employing cheap economic inputs and obtaining technology from other countries – have been exhausted.
That means China has to innovate internally. According to the piece, key elements of that innovation should include:
- Big data
- Cloud computing
- The Internet of Things
- New energy vehicles
- Industrial robots
- Intelligent manufacturing
China should also rely on its huge domestic market and consumer upgrading to drive demand and boost productivity.
Our take: Chinese policymakers have the diagnosis andprescription right. But whether or not they can create an economic ecosystem that nurtures innovation remains an open question.
BJ News: 人民日报头版头条：加快经济结构优化升级
4.Yang Jiechi tells US VP Pence to man up
The US is actively trying to discourage other countries from using Huawei equipment in their telecommunications infrastructure.
The latest high-profile exhortation came from US Vice President Mike Penceat the Munich Security Conference Saturday (Bloomberg and SCMP):
- “The United States is calling on all our security partners to be vigilant and to reject any enterprise that would compromise the integrity of our communications technology or national security systems.”
- “[We have been] very clear with our security partners on the threats posed by Huawei and other Chinese telecom companies.”
- “Chinese law requires them to provide Beijing’s vast security apparatus with access to any data that touches their networks or equipment.”
China’s top diplomat Yang Jiechi was having none of it. First he said that Pence doesn’t understand Chinese laws:
- “Chinese law doesn’t require companies to install backdoors or collect intelligence,’’
And then Yang upped the ante (Guancha):
- “[I] hope that certain countries can display a little more confidence in their own technology, and respect the wishes of other countries that are willing to work with Chinese companies.”
Our thought: Yang’s more than a little bit right here. The US is scared of China, and worried about losing technological superiority.
The bigger picture: Sino-US technological competition will likely define the coming decades.
Bloomberg: Huawei Fight Sees EU Hit by Crossfire in Tech War’s Key Battle
SCMP: China, US trade barbs over Huawei and South China Sea at Munich conference
5.Han Zheng urges more tax cuts
On Friday, Executive Vice Premier Han Zheng paid a visit to the Ministry of Finance (MoF).
His mission: Make sure that MoF officials are clear on their work priorities for the coming year.
Han wants the ministry to do more help the economy (Gov.cn):
- “[Han] said that larger tax cuts will be helpful in improving the country’s income distribution system and the tax structure and better serve China’s current macro policy.”
- “The MOF should relieve the social insurance payment burden of firms…and create a sound policy environment for fair competition, Han said.”
Get smart: Han’s statements demonstrate the government’s unique approach to the economic slowdown. It’s all about helping out firms, not stimulating the economy through big new infrastructure projects.
Gov.cn: Vice-premier urges bolder, more effective measures implementing proactive fiscal policy
6.State Council promotes random inspections
On Friday, the State Council released new opinions on promoting random inspections by government regulators.
Here’s the skinny:
- “In principle, all administrative inspections should be conducted with randomly selected market entities and inspectors, and the inspection items, plans, and results must be released to the public in a timely manner.”
- “Problems found through complaints and data monitoring must receive targeted inspections, and results of the inspections should be shared by all departments.”
- “Provincial-level governments should build a unified supervision platform based on the National Enterprise Credit Information Publicity System and the National Credit Information Sharing Platform.”
- “Provincial-level governments should establish two databases for inspection targets and inspectors in accordance with inspections items at all levels within their jurisdiction.”
- “Local governments at or above the county level [must] create overall annual plans for inspection, which should list inspection tasks and departments involved, and strengthen the publicity of the results, while carrying out special inspections on irregularities.”
Get smart: Making inspection results public will make regulators more accountable, and could go a long way towards creating a more level playing field for all companies.
What to watch: Departments have until the end of 2020 to get all this done.
7.Xi tells everybody to follow the rules
Qiushi, the Party’s top journal, has recently published selected remarks from Xi Jinping’s speech at the first meeting of the Central Commission for Ruling the Country by Law held in August 2018.
Some context: The commission was created in March 2018 as part of the MASSIVE Party-state restructuring.
Xi’s rationale for the commission:
- “At present, legislation, law enforcement, [and] the judiciary…all have many weak links.”
- “There is an urgent need for stronger coordination from the Party center.”
Xi made clear that this is “rule by law,” not “rule of law”:
- “[We must] never follow the path of Western ‘constitutionalism’, ‘separation of powers’, and ‘judicial independence’.”
Xi knows that arbitrary law enforcement could lead to social instability:
- “The people have many complaints about haphazard law enforcement, inaction, and miscarriages of justice.”
Get smart: Xi is a systematizer. He wants there to be clear rules and for everybody to follow them. But ultimately, he is unwilling to subject the Party to those same rules.
8.China’s policymaking problem
Ever wonder why Chinese policies always seem so vague?
The central bank’s research bureau chief, Xu Zhong, explains:
- “Most of the policy documents were drafted by section chiefs.”
- “When disagreements occur, they don’t have the power to adjust positions and compromise.”
Furthermore, ministries are under immense pressure to draft documents in a timely manner:
- “However, accountability [mechanisms] force a time limit on the introduction of reform proposals.”
- “In order to complete the prescribed actions within the specified time, it is necessary to remove the divergent issues from the documents, or make them vague.”
- “But [resolving] these disagreements are precisely the key to genuinely promoting reform.”
Get smart: This is one of the biggest obstacles to effective policymaking. But without a fundamental change to China’s top-down, hierarchical system, we don’t see this changing.