Driving the Day
1.State Council to cut social insurance burden for companies
Premier Li Keqiang is a man on a mission.
Having laid out an ambitious pro-business agenda at the Two Sessions earlier this year, Li has wasted no time in implementing it.
At last week’s State Council meeting, he urged a quick enactment of tax cuts.
And at Tuesday’s State Council meeting, Li took steps to lower the burden for social insurance contributions for businesses (gov.cn):
- “China will cut the share of enterprise contributions to urban workers’ basic old-age insurance from 20 percent to 16 percent, starting from May 1.”
- “The meeting required local governments to…extend the policy of reducing premium rates for unemployment and work-related injury insurance for one more year, to April 2020.”
- “The meeting prohibited local governments from taking any measure that may increase the payment burden of small and micro enterprises.”
Get smart: This move will directly help the bottom line of businesses. Trust us – we have to pay these!
Get smarter: While the move will alleviate pressure on businesses, it won’t have a huge affect on economic growth. Companies will keep these savings for a rainy day – they won’t go and invest the proceeds.
Driving the Day, Cont’d
2.Li Keqiang demands a better business environment
Tuesday’s State Council meeting was about more than just reducing social insurance burdens.
It was also about improving the business environment.
Here’s the plan (gov.cn):
- “The government will further streamline administration by cutting procedural requirements, including shortening the negative list on market entry, separating business licenses and operating permits, [and] simplifying the review process for construction projects.”
- “The goal is to cut the time required for starting a business to within five working days.”
Our take: The latter goal is hugely ambitious – and would be lightning fast, by any country’s standard.
There is also a specific focus on helping private businesses, including foreign ones:
- “It was also decided at the meeting to implement the principle of competitive neutrality, and overhaul the policies and measures that hamper the growth of private businesses or fail to treat domestic and foreign investors as equals.”
- “Any policy measure that does not treat domestic and foreign companies as equals should be revised as soon as possible, or abolished as soon as possible.”
Get smart: The government isn’t undertaking these moves out of a sudden fondness for the private sector. But officials understand that private businesses offer key social benefits – chief of which is supporting employment.
Gov.cn:China to further improve business climate focusing on weak links
3.Data dump – industrial profits
China’s stats bureau released industrial profit data for Jan-Feb on Wednesday.
The numbers were brutal (Reuters):
- “Profits notched up by China’s industrial firms in January-February slumped 14.0 percent year-on-year to 708.01 billion yuan ($105.50 billion).”
- “It marked the biggest contraction since Reuters began keeping records in October 2011.”
The terrible performance was largely down to deflation in some key sectors:
- “Price contractions in key industrial sectors such as auto, oil processing, steel and chemical industries, [were a major contributor to the decline, said] Zhu Hong of the statistics bureau.”
- “Zhu added that production and sales are slowing as well.”
There was also a seasonal component:
- “Zhu said the timing of Lunar New Year holidays that fell in early February also had a bigger negative impact on business operations this year than in 2018.”
Get smart: The seasonal issues mean profitability isn’t quite as bad as the headline number suggests, but Chinese industrials are definitely struggling.
At the heart of the woes are both cyclical and structural drags to the auto sector:
- “Industry data out on Monday also showed China’s automobile…sales down 13.8 percent in February year-on-year, marking the eighth consecutive month of decline.”
The bottom line: The economy is struggling.
Reuters:China’s industrial profits shrink most since late 2011 as economy cools
4.Apple suppliers in China feeling the pinch
Apple Inc.’s China woes are dragging down suppliers.
It’s all down to falling phone sales (Caixin):
- “Slumping sales first impacted manufacturers in November, when Apple told many of its suppliers that it was cutting its orders, Caixin has learned. Some companies said Apple’s orders were slashed by 30%.”
- “’This means companies’ profitability is set to take a hit this year, as a sudden cut in orders will increase their leverage and inventory levels,’said an executive at a South China-based company.”
Apple’s struggles intensified last quarter.The impact on employment was almost immediate:
- “Biel Crystal Manufactory Ltd., the biggest producer of iPhones’ touch screens, reportedly laid off around 5,000 temporary workers from its factory in Huizhou, Guangdong province in November.”
Get smart: Apple is looking to reinvent itself as a subscription services company – to compete with the likes of Netflix and Hulu. That might help the company’s bottom line, but it won’t do much for the many suppliers for whom Apple was the biggest customer.
Get smarter: This is all part of the broader slowdown in China’s manufacturing sector.
Go deeper: Click on the link below.
Caixin:In Depth: iPhone Slowdown Hits Apple’s Chinese Supply Chain
5.Government cuts back on NEV subsidies
On Tuesday evening, the Ministry of Finance released a policy document, which raised technical requirements for any NEV to be eligible for a consumer subsidy (Xinhua):
- “The new measures steadily raise the energy density threshold for the NEV power battery system, moderately raise the energy consumption requirement and raise the mileage threshold for the continuous driving of pure electric passenger vehicles.”
Even for NEVs that are still eligible, the government has cut subsidies in half – with the goal of transitioning to zero subsidies by 2020.
Local governments are required to wind down their subsidies even faster:
- “After a three-month transition period starting Tuesday, local governments should stop subsidizing purchases of NEVs other than new energy buses and fuel cell vehicles.”
Instead, NEV infrastructure will get some love, as local governments are required to allocate the money that was subsidizing vehicle purchases to improve the charging infrastructure.
Get smart: TheNEV subsidy program has created anindustry reliant on government handouts.
Get smarter: The government will still promote NEVs using other policy tools, like preferential tax policies and bans on traditional combustion vehicles.
6.Xi tells skeptical European leaders to trust him
To cap off his European sojourn, Xi Jinping met with French President Emmanuel Macron, German Chancellor Angela Merkel, and European Commission President Jean-Claude Juncker on Tuesday.
The four discussed global governance.
Xi suggested a four-pronged approach to address existing “deficits” (Xinhua):
- “Firstly, the Chinese president called for fairness and reasonableness to address the governance deficit.”
- “Secondly, Xi called for consultation and understanding to address the trust deficit.”
- “Thirdly, he called for joint efforts and mutual assistance to address the peace deficit.”
- “Fourthly, Xi called for mutual benefit and win-win results to address the development deficit.”
Get smart: Nobody disagrees with these lofty sentiments. The problem is that many foreign governments do not think that China plays fair on the international stage.
Merkel summed up the sentiment (Reuters):
- “We, as Europeans, want to play an active part [in the Belt and Road].”
- “That must lead to a certain reciprocity, and we are still wrangling over that a bit.”
What to watch: Xi could do several things to improve trust – open more sectors to foreign investment, publish a list of domestic subsidies, and/or publish transparent guidelines for BRI investments. Will he do any of those?