Local governments run amok – China Tip Sheet April 4

Driving the Day

1.Trade negotiations – so close, yet so far

Market optimism on a US-China trade deal is heating up, as details of the negotiations steadily leak into the media.

Bloomberg has the latest:

“Under the proposed agreement, China would commit by 2025 to buy more U.S. commodities, including soybeans and energy products, and allow 100 percent foreign ownership for U.S. companies operating in China as a binding pledge that can trigger retaliation from the U.S. if left unfulfilled.”

If that is true, it would be a big step forward, indeed.

But we’d counsel caution here. Our reading is still that Beijing simply can’t countenance a unilateral enforcement mechanism.

More, from Bloomberg:

“The text will also include benchmarks, likely set at 90 days and 180 days after signing, by which China is asked to fulfill key pledges, two of the people said, without giving further details.”
“U.S. and Chinese officials are still discussing when the two leaders could sit down to sign off on their trade deal.”

This would be very big:

“A meeting date between Trump and Xi could be announced as early as Thursday, people familiar with the plans said.”

Another note of caution: Until the moment a deal is signed, this thing has the potential to fall apart.

Politics Policy

2.NAO pushes to level the playing field

It’s not coincidence that while Vice Premier Liu He is negotiating in DC, back in Beijing government officials are chastising local cadres for disadvantaging foreign companies.

The National Audit Office (NAO) just published results of its Q4 2018 inspections of local governments (Xinhua).

They found that foreign companies are getting a raw deal across the country (SCMP):

“China has publicly named and shamed dozens of its local governments for mistreating foreign businesses in the latest effort to woo overseas investment.”
“[The NAO] found 45 local authorities who had committed violations relating to levying unauthorised fees and delays in granting business licenses.”

One example:

The Hunan provincial government…continued to demand service charges from foreign businesses even after they had been officially removed by the central government in March 2016, collecting 4.77 million yuan (US$710,000) from 46 foreign companies as of the end of 2018.”

And that’s just a sample of local government malfeasance. Local governments have also misused poverty alleviation funds, failed to carry out major construction projects, and misappropriated money that was supposed to be for employment stabilization.

Get smart: The government is serious about creating a better environment for foreign investment.

Get smarter: Six years into the Xi Era local officials are still running amok.

Politics Policy

3.Central government agencies cut budgets

Quite a few central government entities are trying to cut back – reducing their expenditures in the face of weaker government revenues, thanks to recent tax cuts.

That was the clear message from a raft of budgets that were released earlier in the week (Caixin):

“Of the 102 central government departments that released their 2019 budgets on Tuesday…46 reduced their general public spending budgets from what they actually spent last year.”
“However, 49 departments increased their budgets compared with last year’s actual spending. Seven departments did not provide such figures.”

Get smart: The fact that almost half of the departments cut spending is striking. Any organization is loath to do, so this underscores just how many entities are heeding central authorities’ calls for more prudence.

The key context:

“The budget reductions by some departments came after Beijing promised to cut taxes and fees this year by nearly 2 trillion yuan ($297.8 billion) in order to lighten the burden on businesses struggling amid the economic slowdown.”

Our take: Budget cuts are a recipe for unhappy cadres.

Politics Policy

4.State Council lays out fee cuts

On Wednesday, the State Council did its thing, holding its weekly executive meeting.

Top of the agenda: Cutting fees for business.

Check out this laundry list:

“Electricity costs in manufacturing will be reduced.”
“Average utility rates for general industrial and commercial businesses will be cut by another 10 percent.”
“A number of railway and port charges will be abolished or reduced.”
“Average broadband service rates for small and medium-sized enterprises will be cut by another 15 percent.”
“Average rates for mobile internet services [will be reduced] by more than 20 percent.”
“Starting from July 1, charges on real estate registration will be cut or canceled.”
“The coverage of patent applications and annual fee reductions will be expanded.”
“Charges on exit and entry travel documents such as private passports, registration of certain trademarks, and radio frequency uses in electricity and the Internet of Vehicles will be further reduced.”
“Payments by airline companies to the civil aviation development fund and national major water conservancy construction fund will be halved.”

The intended result: The government says this will save business and individuals RMB 300 billion this year.

Our take: These moves will be good for business…but bad for government finances (see previous entry).

Politics Policy

5.State Council finalizes amendments

On March 15, the legislature (NPC) passed a new Foreign Investment Law (FIL), governing foreign investment into China.

To implement the law, several other existing laws will need to be amended.

The State Council is doing its part. At its executive meeting Wednesday, it approved amendments to four laws:

Administrative Licensing Law
Trademark Law
Construction Law
Electronic Signature Law

What next: These amendments will now be submitted to the NPC to be deliberated and passed.

Get smart: We haven’t seen the text of the amendments, but we are guessing this is all pretty pro forma stuff. What’s really going to matter will be the supplemental guidelines and regulations on implementing the FIL.

Politics Policy

6.A setback for carbon trading

China’s environmental regulator (MEE) released long-waited draft regulations to establish a carbon trading mechanism yesterday.

The bad news: It’s going to be a regulatory clustercuss.

Some context: During the government restructuring announced in March 2018, responsibility for this program was transferred to MEE – and away from the National Development and Reform Commission (NDRC), which had been working on the program for years.

The new draft regs from the MEE work off a previous version written by the NDRC. But there is one important departure:

Whereas the NDRC had previously rejected requests to establish a coordination mechanism to share supervision powers over the carbon market, the MEE is being much more inclusive.

The new draft stipulates that:

A mechanism coordinating with other ministries will be established to decide major issues regarding emissions trading.
When formulating standards and measures to allocate carbon emission quotas, MEE will consult with other ministries to take greenhouse gas control targets, economic growth, and structural adjustment for various industries into consideration.
MEE can adjust carbon quotas over time, but must first obtain agreement from other departments.

Our take: We are all for sharing. But on this one, we side with the NDRC. Too many cooks in the kitchen will mean the carbon trading scheme gets fried.

Local governments run amok – China Tip Sheet April 4

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