Driving the Day
1. Beijing’s secret industrial policy program
You’re not supposed to know this, but…
China has a secret program to support the microchip and software industries.
That’s according to Wang Jiangping, Vice Minister of Industry and Information Technology.
Wang was speaking to CPPCC delegates at the Two sessions on Thursday, but the comments leaked to reporters (FX678):
- “Last year, the Ministry of Industry and Information Technology planned the “ZhengxinZhuhun” project under the leadership of the Party Central Committee and the State Council.”
- “The state will give strong policy and funding support, because industries such as microchips and software need to be iteratively developed.”
Wang said the ministry had kept the policy under wraps. That’s presumably because ofthe recent international backlash to the Made in China 2025 program.
- “[We] spoke very little to the outside world [about the program].”
A bit of advice: If you don’t want people to know about your secret industrial program, don’t go telling reporters about it.
Wang’s comments have alreadydisappeared from the Chinese internet.
Get smart: Given Xi’s self-reliance push in key technologies, nobody really thoughtChina would give up its industrial policies forthese sectors.
2.Data dump: trade
The trade war continues to weigh on Chinese exports.
The latest evidence: Trade data for February came out on Friday morning, and they weren’t pretty.
- Exports contracted by 20.7% y/y in February – down from 9.1% growth in January.
- Imports contracted by 5.2% y/y in February – down from a 1.5% contraction in January.
Some context:The huge slump in exports sent Chinese stock markets reeling.
More context: The numbers were affected by the timing of the Chinese New Year. Because it was earlier in February this year (compared to 2018) more importers and exporters pulled shipments into January. To adjust for that, it’s best to look at the average of the two months.
- Average Jan-Feb exports contracted by 5.8% y/y – down from a 4.4% contraction in December 2018.
- Average Jan-Feb imports contracted by 3.4% y/y – improved from the 7.6% contraction in December 2018.
So it’s clear that Chinese exports are weak and weakening further as we close out Q1 – but things aren’t quite as bad as the 20% headline contraction suggests.
Get smart 1: Looming tariffs last year led to stockpiling of Chinese goods by US customers. These export data reflect the give back from that stockpiling in H2 2018.
Get smart 2: As for imports, the ongoing contraction is reflective of still-weak domestic demand.
3.Hebei promises more cuts to steel capacity
Hebei Party Secretary Wang Donfeng announced cuts to steel capacity at the Two Sessions on Thursday.
Reuters has the details:
- “China’s top steelmaking region of Hebei will cut 14 million tonnes of annual steelmaking capacity both this year and next year as it strives to improve air quality.”
- “Speaking at a meeting of Hebei delegates at the National People’s Congress in Beijing, Wang Dongfeng also said the province would reduce its concentration of PM2.5…by at least 5 percent this year from 2018 levels.”
Wang didn’t mince words on this one:
- “We would rather sacrifice GDP in order to guard blue sky in Beijing. That’s a political task.”
Get smart: That’s a pretty stunning statement. We’ve been waiting to see if Beijing’s desire to shift local government KPIs away from growth and toward the environment would pay dividends. Looks like the message is starting to filter down.
Get smarter: We know lots of folks think the data on capacity cuts are bunk. But we don’t think it matters, because it’s really temporary production stoppages that make the most difference in terms of supply, demand, and pricing.
What to watch: Are we set for a bump in Chinese steel prices?
4. Yang Weimin blasts current economic policy
On Thursday, Yang Weimin said that China should stop setting so many economic targets (Caixin):
- “We can get rid of at least half of these targets.”
Yang is worth listening to. Until last year, he was Liu He’s deputy at the Party’s main economic policymaking body. Yang is still plugged into economic policymakers, and stays in the mix via his post as deputy head of the CPPCC Economics Committee.
Yang’s big complaint with targets – they go against a market economy.
- “If you want the market to play a greater role, then it is inappropriate to set planned targets for the import and export of goods and services and foreign direct investment.”
Yang is also wary of new measures to boost auto purchases:
- “[Previous auto purchase subsidy programs] brought damage and destruction to many companies’ production and operations.”
- “The current decline in automobile consumption is because past stimulative policies have been withdrawn.”
- “We should let the market play the leading role.”
Get smart: Yang’s analysis is right on, and it’s encouraging that he has been so central to economic policymaking in recent years.
Get smarter: The fact that Yang’s outlook on economic policy is still a minority view shows just how entrenched more conservative elements are.
Caixin: 杨伟民委员：发展指标或过细或矛盾 至少可以压一半
5.SOEs get moretargeted KPIs
The state-owned enterpriseadministrator (SASAC), releasednew assessment criteria for the performance of centrally-administered SOEs on Thursday.
Some context: This is the fifth revision to the KPIs since 2003 and an update of the 2016 edition.
SOEs continue to be divided into three categories:
- public interest
Commercial SOEs will be more focused on efficiency as opposed to scale:
- SOEs will be judged on whether or not they increase net profits instead of total profits
- And labor productivity will be prized over totalturnover.
Metrics for SOEs serving strategic goals are getting more sophisticated:
- SOE leaders in high-tech sectors will be assessed on RD input and technology output.
- SOEs operating internationally will be benchmarked against their foreign peers.
- The assessments of SOEs with large debt loads will place greater weight on improving asset-to-liabilityratios and operating cash flow.
Get smart: These changes look sensible to us. They’re not going to solve all SOEs’ problems, but they should serve to push them in a more productive direction.