1.Debating the stock market surge
China’s outperforming stock markets are spurring a debate among investors, who are asking – how long can the good times last?
The surge is starting to draw comparisons to the dramatic boom-bust cycle in 2015.
Of particular worry is the role of mom-and-pop investors. According to one researcher (Caixin 1):
- “It looks unlikely that either brokerages or mutual funds were behind the increase because the size of their purchases hasn’t changed much.”
- “The majority of the new capital is probably coming from the vast number of retail investors.”
The securities regulator (CSRC) is sending out warning signals about leveraged trading, which was a driver of the boom-bust in 2015 (Caixin 2):
- “’We have noticed an increase in recent reports of backdoor financing.’ the CSRC said in a notice published Monday.”
Our take: While it’s tempting to compare this surge to 2015, there are some key differences between then and now.
- One is that, while margin lending is up in absolute terms, it’s still shrinking as a percentage of market capitalization. The means leveraged trading isn’t really driving the market.
Our bottom line: It looks like the rally has some room to run.
What to watch:Newly appointed CSRC Chairman Yi Huiman is giving his debut press conference as we go to press.
Caixin: Stock Surge Sparks Comparisons With 2015’s Bubble and Crash
Caixin: As Stocks Boom, Securities Watchdog Frets
2.NDRC frets over investment
China’s main macroeconomic planner (NDRC) is worried about the outlook for investment.
That’s not good forfolks hopingforimminent stabilization – let alone a rebound – of China’s economy.
Local government bond issuance helped to support infrastructure spending over the past three months or so.
But it won’t last (Reuters):
- “Infrastructure investment plans are under pressure in China as the confidence of investors in them has dipped, the state planner said on Tuesday, adding that some provinces have seen a sharp drop in planned projects.”
- “In China, infrastructure projects are usually carried out by local and other state-controlled bodies.”
And it’s not just infrastructure. The outlook for manufacturing investment doesn’t look bright either:
- “The National Development and Reform Commission (NDRC) said in a report that manufacturing investment may also face some downward pressure in the first half of 2019, as company profits have been squeezed since late last year on sluggish demand and weak prices.”
Get smart: China’s downturn is likely to be longer and deeper than most analysts are currently projecting. That means a late 2019 bottoming in growth – at the earliest – and a global economy that underperforms expectations this year.
Reuters: China infrastructure investment under pressure, state planner says
3.Is the Hainan FTZ for real?
Calling all foreign companies – the government of Hainan is going all in to develop its FTZ (Xinhua):
- “Southern China’s island province of Hainan has launched a RMB 3 billion yuan (USD 449 million) fund for free trade zone (FTZ) construction, local authorities said Sunday.”
- “The fund, with a target scale of 50 billion yuan, will offer financial support for projects in Hainan.”
Why it matters: Unlike previous FTZ pushes, this Hainan effort looks legit. The central government is highly focused on it, and local authorities have it as priority #1 for 2019.
12 industries will be the focus, includinghealthcare, finance,logistics, and oil gas.
Get smart: Of all the provinces in China, Hainan has what looks to be the biggest appetite for bringing in foreign investment right now. That is primarily because the province is underdeveloped andin dire need of capital to kickstart its development.
Xinhua: Hainan sets up multi-billion-yuan fund for FTZ construction
The People’s Bank of China held its 2019 Financial Market Work Conferenceon February 25-26.
We expected something interesting from the readout, but instead we got the same old laundry list of priorities:
- Serve the real economy
- Develop the bond market
- Further open up the bond market
- Strengthen market supervision
- Focus on risks from internet financing
Regulators at least acknowledged that times are tough, and executing good policy is a huge challenge (The Paper):
- “The meeting pointed out that China’s economic and financial development has entered a new stage, the economy is facing downward pressure, and the task of preventing and resolving financial risks is arduous.”
- “Many contradictions and problems are still outstanding.”
Our take: The lack of any new policy ideas is concerning, especially since previous efforts haven’t done much to help overall growth or the private sector.
What to watch: We hope to get a clearer take on the policy direction next week at the Two Sessions. The current policy uncertainty is only further weighing on sentiment.
The Paper: 央行：全面深化民营企业小微企业金融服务，加大信贷投入力度
5.Get ready for the lianghui!
Everybody is preparing for the Two Sessions.
The legislature (NPC Standing Committee) is getting ready for its annual session, which begins on March 5:
- “China’s top legislature on Tuesday began a bimonthly session, with a focus on making preparations for the upcoming annual legislative session in March.”
- “During the two-day session, lawmakers are expected to review the committee’s work report in 2018 as well as drafts on the agenda and the name lists of presidium, secretary-general and non-voting delegates of the second session of the 13th NPC.”
The chairmen of the political top advisory body (CPPCC) also met on Tuesday to discuss preparations for their annual meeting, which will begin on March 3.
Why we can’t wait for this year’s session: There has been a lot of policy uncertainty over the past six months as the government tries to wrap its head around the economic slowdown, the trade war with the US, and a growing global backlash against China.
There are several competing policy impulses at the moment. Will the country open further? Or double-down on self-reliance? Will de-risking continue? Or is it time to ease credit conditions?
Hopefully we will get some clarity on these questions next week.
6.Top officials go on inspection
Ahead of the Two Sessions,top officials are in the provinces to get a first-hand look at what is going on.
Head of the Party’s discipline commission Zhao Leji is on the ground in Tianjin. While there, he gave local discipline officials their briefs:
- “He called on disciplinary inspection and supervisory agencies at all levels to…make greater efforts in ensuring the implementation of policies that benefit the people, fighting corruption in fields related to poverty alleviation and public wellbeing, and uprooting the ‘protective umbrellas’ behind organized crime.”
Meanwhile, Executive Vice Premier Han Zheng has been down in Yunnan, where he checked out a couple of local companies:
- Han visited private skincare producer Kunming Beitaini, where he asked company leaders about how government measures to support private business have been implemented. (What they said, we don’t know…)
- But Han also made a point to visit sate-owned Yunnan Baiyao in a clear signal that Beijing is still keen on state sector development, despite the recent focus on helping private companies.
Han’s Yunnan tour raises an important question: How does the government plan to simultaneously support the private sector and develop the state sector? Again, we’ll be watching the lianghui for clues.
Xinhua: Senior CPC official stresses strict Party governance
Xinhua: Chinese vice premier stresses environmental protection, support for real economy
CPC People: 韩正在云南调研：狠抓生态环境保护不松劲 支持实体经济发展不动摇
7. Searching for sustainable poverty alleviation
Over the past year, China’s legislators have traveled around the country to inspect poverty alleviation efforts. On Tuesday, they reviewed a report of their findings.
Some context: Eradicating poverty by 2020 is one of Xi Jinping’s signature initiatives. The legislature has been tasked with tracking progress.
There has been remarkable progress:
- Over 82 million people have been lifted out of poverty in last six years.
But the job isn’t done yet:
- Nearly 17 million people remain in poverty.
The big problem: How to keep people out of poverty without always relying on government assistance.
To address the problem, the government has been trying to develop industries in poor areas.
But it doesn’t always work:
- “All provinces have the same problem…[that industries developed in poor regions] face relatively large market risks.”
And some people don’t want to work:
- “Some poor people don’t have a strong desire to get rich and are too dependent on the policy of assistance.”
Get smart: There are no easy solutions to either of these problems.