Driving the Day
1.The new financial regulatory buzzword
The head of China’s banking and insurance regulator (CBIRC), Guo Shuqing, explained his take on financial supply-side reform (SSR) on the sidelines of the Two SessionsTuesday.
Some context: Financial SSR was first mentioned atthe Politburo’s February 22 study session on financial risks(see February 25 Tip Sheet).
More context: Since that meeting, it has become the clear framing device for how regulators will approach the financial sector this year.
Here’s Guo’s take(Caixin 1):
- “Appropriately solving the problem of how to provide lending, credit and financial support to small enterprises and private companies is the most important part of financial supply-side reform.”
The definition of financial supply-side reform is still a moving target.The best explanation we have seen came from Xiao Yuanqi (a senior CBIRC official), back on February 28.
For Xiao, the key elements of financial SSR include:
- Establishing a larger number of small banks
- Promoting more specialized financial institutions
- Increasing the participation of foreigners in the financial sector
- Eliminating “inefficient financial supply” – i.e. bad loans to zombie companies
Get smart: Financial SSR is the new framework for regulation in the financial sector. It hasn’t yet been fully defined, but the main thrust is to better match the supply of financial resources to key elements of the real economy.
Caixin:New Supply-Side Reform to Focus on Private Firms: Banking Regulator
2.Balancing growth and de-risking
We continue to digest the Government Work Report that Li Keqiang delivered on Tuesday.
In particular, we aretrying to figure out the economic consequences of the government’s stated goal to balance supporting growth with de-risking.
One particularly cogent commentary came from Chen Yulu – CPPCC member andvice governor of the central bank (Xinhua):
- “Structural deleveraging and steady growth are not totally opposed to each other.”
- “For example, the ultimate goal of structural deleveraging is to stabilize the financial system, while financial stability is the only way to stabilize the economy.”
- “Structural deleveraging also requires a stable macroeconomic and financial environment.”
Chen then talked about how financial SSRwill play into this process (we told you it’sthe new buzzword!).
But his fundamental point is incredibly important. Regulators are thinking more deeply than they have in the past about how financial risks and stable growth interact with each other.
That new perspective has led to a new policy mix – where fiscal policy comes to the fore and efforts to improve the business environment are also hugely important.
Get smart: This is a very different, and much more nuanced, policy response than we have seen in past downturns.
3.MoF’s new marching orders
The Ministry of Finance (MoF) is undergoing a restructuring
Last Friday, the ministry got its new marching orders, whichupdate responsibilities, organizational structure, and staffing.
Some context: This is all part of the MASSIVE Party-state restructuring that was announced exactly one year ago at the 2018 Two Sessions.
Compared to many other central government agencies, the changes atMoF are small.
That being said, two changes stand out.
First, the ministry will get more power to enforce fiscal discipline on local governments (gov.cn):
- “[MoF will] strictly control debt risk within the legal limits, put forth effort to control implicit debt risk and firmly guard the bottom line of no systemic risk.”
Get smart: This willsimply strengthenthe already increasing oversight that MoF has gained over local governments in the past year.
Second,MoF will act as the sole representative for injecting central government funds into financial institutions.
Why that matters: Previously lots of different institutions invested on behalf of the central government. Now MoF will have moreinfluenceover SOE banks and other financiers.
The bottom line: The MoF has emerged stronger from the restructuring.
4.Local governments resist painful debt restructuring
The Government Work Report made clear that efforts to reduce the macro debt load are not dead.
One big key to pushing forward structural deleveraging will be addressing SOE and local government debt.
But at least one recent case shows why this will be an uphill battle.
Markets have been buzzing about the recent bailout of a city government by a key policy bank (Bloomberg):
- “China Development Bank will start offering long-term lending to Zhenjiang, an eastern city of Jiangsu province famous for its black vinegar.”
The plan in nutshell:
- Policy banks will offer cheap loans to an asset management company that reports to the city finance bureau, which will then relend to different local government financing units, so they can pay back existing debt.
But the whole plan contradicts the finance ministry’s (MoF) key goals.
MoF’s preferred plan for the Zhenjiang:
- cut expenditures
- sell assets
- provincial governmentsupport should be a last resort
Get smart: The Ministry of Finance genuinely wants to restrain and restructure local government debt. But the process will not be straightforward, to say the least.
Get smarter:With its enhanced powers (see entry above),MoF may finally start to tame the localities.
5.Hainan to ban sales of oil-fueled autos by 2030
China has been considering banning traditional fuel vehicles for a couple of years (see November 8, 2017 Tip Sheet)
Now Hainan province has taken the leap (Xinhua):
- “According to a development plan issued by the provincial government, all vehicles added or replaced in the public service sector, including government vehicles and buses, will use clean energy as of 2020.”
- “Automobiles used for sanitation, tourist transport and urban-rural passenger transit will be replaced by clean energy vehicles by 2025.”
- “A greater proportion of newly-licensed private passenger cars will be new energy vehicles (NEVs), with a 10 percent increase every year, eventually reaching 80 percent by 2025.”
- “Hainan will ban the sale of oil-fueled automobiles throughout the province by 2030.”
This doesn’t spell the complete end of fossil fuels on the island. The government includes plug-in hybrids and extended-range electric vehicles – both of which use some fuel – in its definition of clean energy vehicles.
Get smart: There is a lot of resistance to banning traditional fuel vehicles, particularly among the state-owned automakers and oil companies.
What to watch: The central authority has just started drafting a new development plan for new energy vehicles that will run through 2035.
6.NDRC promises equal treatment to foreign investment
NDRC Chairman He Lifeng and two of his deputies gave a press conference this morning on the sidelines of the Two Sessions.
We told you yesterday that the Government Work Report didn’t specify which sectors would see further loosening of foreign investment restrictions this year.
At today’s press conference, NDRC Vice Chairman Ning Jizhe indicated that four sectors should see further opening this year:
Our take: Call us unimpressed. Honestly, it’s hard to really evaluate if any of that is meaningful without more details on what the openings will be.
This is potentially more meaningful:
- [“We will] push forward in giving equal treatment to foreign companies with respect to government procurement, standards making, industrial policies, RD policies, qualifications and licensing, registration, and IPOs.
And the government also promises preferential land-use policies and other incentives for foreign investment in these sectors:
- New energy
- Advanced manufacturing
- Electronic information
Get smart: If you are in one of the above sectors and thinking about making an investment in China – now could be an opportune time.
The bigger picture: We should see some more market openings this year. But the government still takes a hands-on approach to managing foreign investment.