Driving the Day
1.Party lays out priorities for rural policy
On Tuesday, the Central Committee and State Council released 2019 Document No. 1.
So what’s the plan for this year?
These are the overarching goals (Xinhua):
- “win the tough battle against poverty”
- “deepen agricultural supply-side structural reform”
- “give full play to the key role of rural primary-level Party organizations”
- “push forward rural revitalization in all respects”
There is a clear focus on povery alleviation.
- “Focus will be put on providing assistance to areas of extreme poverty, via favorable policies ranging from major projects, poor resident relocation, finance and nurturing of talent.”
Don’t forget – Xi Jinping has promised to eradicate poverty by 2020.
This also caught our eye:
- The government plans to increase the amount of soybean planted.
- It also wants to “diversify importing channels” for agricultural commodities.
Our thought: The government wants to decrease dependence on American soy.
And it wouldn’t be a Chinese policy if they didn’t promise some infrastructure:
- “The country will take measures to improve rural infrastructure including roads, grids and logistics network, as well as enhance pollution treatment and environmental protection.”
What to watch: The government continues to push for the consolidation of small plots into large farms. For that to happen on a large scale, we will need to see more aggressive land use rights reforms.
2.Pan Gongsheng on perpetual bonds
On Tuesday, the State Council Information Office held a press conference featuring several financial officials.
The key topic was the ongoing efforts to improve monetary policy transmission by allowing banks to issue perpetual bonds.
Some context:This morning, the central bank (PBoC) conducted its first ever central bank bill swap (CBS) in the amount of RMB 1.5 billion. CBSallows certain banks to borrow central bank bills, using perpetual bonds as collateral (see January 25 Tip Sheet).
PBoC Vice Governor Pan Gongsheng explained, once again, why banks need capital (SCIO):
- “Some banks are facing capital constraints, plus regulatory standards are being tightened, and as shadow banking business returns [onto banks’ balance sheets, they] need to supplement capital.”
Pan underscored that perpetual bonds have worked well for supplementing bank capital in other countries.
But because they are new to China, they will require policy support to get off the ground – hence the creation of the new CBS.
Pan once again made it clear that the CBS does not amount to QE because it:
- Doesn’t involve base money creation
- Doesn’t involve a transfers of credit risk to the central bank
Head of the Monetary Policy Department at the central bank, Sun Guofeng, explained that the overall size of the perpetual bond market will start out small – and will be driven by investor demand.
Get smart: It’s yet another reminder from regulators – QE is not in the cards.
3.From perpetual bonds to perpetual trade talks
Working-level trade talks kicked off once again on Tuesday in DC.
The heavy-hitters will join the table again on Thursday.
Bloomberg reports one sticking point is China’s currency:
- “The U.S. is asking China to keep the value of the yuan stable as part of trade negotiations between the world’s two largest economies.”
- “While the precise wording remains unresolved, a pledge of yuan stability has been discussed in multiple rounds of talks in recent months and both sides have tentatively agreed it will be part of the framework of any final deal.”
- “A key enforcement tool would be U.S. tariffs.”
- “The Trump administration has been clear in its talks with Beijing that any attempt to depreciate the yuan — a strategy aimed at offsetting existing U.S. duties on Chinese imports — would be met with more or higher American tariffs, according to two of the people briefed on the discussions.”
Our take: The currency piece makes no sense. First, US negotiators are asking China to become more interventionist in their currency markets – to stop market-driven depreciation that US actions have caused.
Second, deprecation that is met with additional tariffs will only lead to additional deprecation.
Important context:China’s current account surplus in 2018 plunged 70% year-on-year to a record low of $49.1 billion, according to the country’s foreign exchange regulator.
The bottom line: We’re not sure what China can genuinely agree to here.
Related: On Tuesday, US President Trump again signaled that he is open to extending the March 1 deadline for the trade negotiations (Reuters).
4.JD.com cuts jobs as economy slows
One of China’s largest tech companies is about to slash its workforce (Reuters):
- “JD.com Inc, one of China’s largest e-commerce sites, will lay off 10 percent of its senior executives this year, Chinese online media outlet Sina Tech reported on Tuesday, citing unnamed sources.”
- “The cuts were announced at the company’s annual party last week, the report said, adding that JD.com, which has nearly 100 senior executives, had confirmed the planned layoffs.”
The move is part and parcel of the recent painthat China’s tech companies have been experiencing:
- “The layoffs come during a broader slowdown in China’s tech sector, wherein start-ups are vying for shrinking pools of venture capital and established companies are looking for new revenue opportunities as growth plateaus.”
JD.com is by no means the only one struggling:
- “Last week, Chinese ride-hailing giant Didi Chuxing said it would lay off 15 percent of its staff, with cuts coming mostly from non-core business units.”
Get smart: China’s current economic deceleration is broad-based. We’re seeing it in everything from property, to autos, to consumption, and tech.
Reuters: China’s JD.com to lay off 10 percent of senior executives this year: report
5.Know your cadre: Ren Chunsheng edition
The China Banking and Insurance Regulatory Commission (CBIRC) was created last March, when the individual banking and insurance regulators were combined as part of the widespread government restructuring.
Over the past year, officials have been busy getting everything up and running – so there have been no major personnel moves at the agency since it was formed.
Until now (Caixin):
- “An official in charge of the risk control of China’s insurance industry has been appointed chief of the country’s insurance investment fund that is tasked with financing projects serving national development strategy.”
- “Ren Chunsheng, director of the insurance funds investment supervision department of the China Banking and Insurance Regulatory Commission (CBIRC), will become the party secretary of China Insurance Investment Fund (CIIF), the CBIRC’s organization department announced on Monday.”
- “He will also be the party chief of China Insurance Investment, the general partner of the CIIF.”
Some context: The government set up CIIF in 2015 to pool money from insurers with the goal of investingin infrastructure. But most think that the fund has done a poor job.
What to watch: Headcount had been frozen at CBIRC as they sought to get the organization up and running. Ren’s is likely just the first of other personnel moves to come.
Caixin: Financial Regulator Appointed Head of Mega Insurance Investment Fund
6.SAFE merges Africa and Latin America funds
Caixin scoops that the FX regulator (SAFE) plans to combine two of its overseas investment funds:
- “The China-Africa Fund for Industrial Cooperation (CAFIC) and the China-LAC Industrial Cooperation Investment Fund will continue to operate under separate names, but their project appraisal and investment decisions will be unified under the management of a single new company to be set up by the Investment Center [of SAFE].”
- “Han Hongmei, CAFIC executive director and a former SAFE chief accountant, will become the new company’s chairwoman.”
- “CAFIC…[was launched in January 2016] with an initial cash injection of $10 billion.”
- “The China-LAC Industrial Cooperation Investment Fund started operating in June 2015 with a first-phase cash infusion of $10 billion, which was gradually increased to $30 billion.”
- “Sources familiar with the two organizations’ operations told Caixin that the government decided to combine their management with the goal of boosting the funds’ synergy to better serve Chinese companies, as most Chinese firms that invest in Africa also conduct business in Latin America and vice versa.”
Get smart: The combined size of these funds is USD 40 billion. That’s small beer compared to the money that China’s policy banks and state-owned commercial banks are investing in overseas projects.
Caixin: Exclusive: China to Combine Africa, Latin America Investment Funds
7. Local governments intough fiscal spot
The government has been loud and clear that it is planning further tax cuts this year (see January 10, February 18 and 19 Tip Sheets).
That, combined with a slowing economy, is going to put further strain on local government finances.
Most provinces have lowered their revenue targets (Caixin):
- “Of the 22 provinces [that have published targets],…. 19 provinces have lowered their revenue targets [compared to 2018].”
- “[Revenue growth targets of] 14 provinces are lower than their GDP growth targets. This is something rarely seen in recent years.”
Provincial budget reports for 2019 are upfront that this will undermine their fiscal positions.
So they are also laying out measures to deal with the shortfall. They will:
- Tap into savings
- Require SOEs to pay more dividends
- Step up tax collection and enforcement
Provincial governments are also promising to cut non-essential spending.
One option not on the table: More borrowing.
- Provincial governments will remain under pressure to resolve outstanding debt – including off-balance-sheet debt.
The central government is likely to give a helping hand. What we are hearing is that the central government is reaching out to provincial governments to discuss how to better divide spending responsibilities.
Get smart: The focus on getting government accounts in order is just one more reason why large-scale, investment-led stimulus is not on the cards.