Driving the Day
1.SMEs get more support
On Sunday, the Party Central Committee and State Council released new opinions to support small business.
The sprawling document details how the government will support these companies over the coming year.
Efforts will be focused in six areas:
- Improving the overall market environment – via concrete efforts to ensure fairer competition for firms (including foreign companies)
- Easing financing constraints for SMEs – via loan re-discounting and more direct financing
- Boosting financial and tax support for SMEs – by reducing fees and increasing subsidies
- Supporting SME innovation – by better protecting IP rights
- Improving service support for small companies – through sharing platforms for credit information and an SME policy support directory
- Strengthening policy coordination – via ongoing inspections into the on-the-ground issues faced by SMEs
Get smart: None of this is really new. It’s simply a move to deepen – and better coordinate – the efforts that policymakers have made to support SMEs over the past nine months.
Markets loved this: The policy outlined some specific steps on the SME financing side, likemore targeted cuts to reserve requirements for banks lending to SMEs.
Our take: It’s all part of the government’s new approach to supporting the economy. But we wouldn’t call this “stimulus.”
Gov.cn: 中共中央办公厅 国务院办公厅印发《关于促进中小企业健康发展的指导意见》
Reuters: China to step up bank reserve ratio cuts to help small firms
2.Data dump – FX reserves
China’s foreign exchange reserves rose in March for the fifth consecutive month.
That’s according to data released by the central bank on Sunday.
The details (Bloomberg):
- “Reserves increased by $8.58 billion to $3.0988 trillion in March.”
- “The reading compares with $3.09 trillion from the previous month and the median estimate of $3.09 trillion in a Bloomberg survey of economists.”
The key driver behind the improvement was changes in asset valuations:
- “The stockpile increased on price gains of financial assets in March, the State Administration of Foreign Exchange said in a statement, adding the holdings will likely remain stable due to higher flexibility of the yuan and reasonable economic growth.”
Why it matters: The fact that FX reserves have risen slightly for five months is testament to how steady China’s currency market has been recently.
Our take: A surge in capital outflows from China can never be fully written off as a concern, but for now markets are focused elsewhere.
Politics and Policy
3.China and US getting closer to “epic” deal
Another week, another round of trade negotiations with the US.
Vice Premier Liu He was in DCApril 3-5 where he reached a “new consensus” with his American interlocutors (Xinhua).
Both sides, in statements released after the meeting, said that they made “progress” discussing the following issues
- Intellectual property
- Technology transfer
- Non-tariff barriers
Trump invited Liu back to the Oval Office, where Liu delivered a letter from Xi Jinping (SCMP):
- “I hope the economic and trade teams of both nations can wrap up negotiations on the text as early as possible…For that, strategic leadership is needed.”
Trump said a deal could be done within the next month (White House):
- “We’re getting very close to making a deal.”
- “Within the next four weeks or maybe less, maybe more…something very monumental could be announced.”
Head of the US negotiations, US Trade Representative Robert Lighthizer, had some kind works for Liu:
- “We have a great — a great partner in the Vice Premier.”
- “He’s become a good friend.”
- “And I think he’s — his commitment to reform in China is the reason that this has a chance.”
Get smart: Lighthizer is shooting himself in the foot. Conservatives in Beijing are already suspicious of Liu’s liberal leanings. That suspicion will only increase if the Americans start touting it.
CPC People: 中美经贸高级别磋商顺利结束
SCMP: Xi Jinping tells Donald Trump strategic leadership is key to trade deal amid talk of 4-week countdown
Whitehouse.gov: Remarks by President Trump and Vice Premier Liu He of the People’s Republic of China Before Bilateral Meeting
4.Li Keqiang’s European vacation
Li Keqiang is on his way to Brussels for the annual China-EU Summit.
There are already indications that the summit might not go too well. The two sides cannot agree on a joint communique (Reuters):
- “According to an early draft put forward by the European Union and seen by Reuters, Beijing would be bound into completing talks on an investment agreement and committing to remove what the EU says are unfair barriers to trade.”
- “But Chinese officials have removed or changed many of those references,…EU diplomats said.”
The SCMP has some more details:
- “According to EU officials, Beijing refused to include any reference to a ‘rules-based international order’ in the joint statement, despite the two sides’ reaffirming their commitment to the concept at the 20th EU-China summit in July in Beijing.
- China also rejected including any reference to extending the mandate of the global steel forum, a soon-to-expire mechanism that G20 leaders created in 2016 to reduce excess production capacity in steel and address Beijing’s subsidies to the steel industry
Get smart: It wouldn’t be the first time the two sides could not agree. There were no joint communiques in 2016 and 2017.
What to watch: If there is to be a communique, it would be released tomorrow after Li meets with European leaders.
CPC People: 李克强将赴欧举行第二十一次中国—欧盟领导人会晤、第八次中国—中东欧国家领导人会晤并正式访问克罗地亚
Reuters: EU, China stumble over trade, human rights ahead of summit
SCMP: China, EU leaders’ plan for joint statement in Brussels hits snag over market access row, EU sources say
5.Local officials go all out on anti-pollution
The SCMP ison the ground in Hebei, taking a look at how the war on pollution is affecting factory owners:
- “Hundreds of small factories in Yuanshi county, on the outskirts of Shijiazhuang in Hebei, …were ordered to halt production in November to help reduce air pollution over winter.”
- “They had been hoping to get back to work last month.”
- “Although many of the workshops have been fitted with equipment like dust collectors to curb emissions, …they were told by county officials the ban would continue, to keep pollution down while environmental inspectors were in town.”
One factory owner describes how disruptive the inspections are:
- “[The factory owner] said the work involved with compliance had become so onerous that he had hired someone to take care of visiting officials.”
- “’Provincial officials come to do the job, but the officials from the county government are different,’ he said.”
- “Every time they come we are expected to take them for lunch and we are fined for the most minor of problems.”
Get smart: Local officials are under a ton of pressure to carry out central mandates. They often find it easier to issue blanket bans instead of employing a more targeted approach. That puts even efficient, environmentally sustainable companies at risk.
6. A big shift in urbanization policy
On Monday morning, China’s primary macroeconomic planning agency (NDRC) released its urbanization task list for 2019.
One item, in particular, caught our eye (NDRC):
- “Large-scale cities with a permanent population of 3 million to 5 million people should fully liberalize hukou restrictions, and restrictions on the settlement of key groups should be completely abolished.”
- “Super large and mega-cities should … significantly increase the scale of people receiving hukou.”
Get smart: That marks a departure from previous policy
The current plan guiding urbanization stipulates much softer and vaguer goals:
- Conditions for obtaining hukou in big cities should be rationally set.
- Population in mega-cities should be strictly controlled.
Our question: Will this mean a change to the population control policies in Beijing and Shanghai?
You’ll never guess how markets read the announcement…more stimulus! Give us a break.
The bottom line: The policy change is less of an about face and more of a recognition of what is already happening. Other than Beijing and Shanghai, pretty much all of China’s major cities have been competing for talent over the past two years.