Driving the Day
1.Government wants to thread a monetary needle
The State Council did its thing on Wednesday, holding its weekly executive meeting.
You are never going to be guess what they talked about.
Supporting small businesses!
This is the fourth State Council meeting since the Two Sessions concluded in March. All four have focused on improving the business environment.
Wednesday’s meeting was all about making it easier for small businesses to get financing (Gov.cn):
- “It was decided at the meeting that the government must make flexible use of various monetary policy instruments.”
- “The scale of re-lending and re-discounts will be expanded, and more targeted cuts in the required reserve ratio for small and medium-sized banks will be made.”
- “A policy framework for applying a fairly low required reserve ratio for small and medium-sized banks will be established.”
- “Funds that are newly freed up from these measures will be used for lending to private companies and SMEs.”
The intended outcome:
- “All these measures are designed to ensure that the balance of loans extended to SMEs by the five State-owned commercial banks…will increase by over 30 percent this year, and the overall financing costs for SMEs will be trimmed by another one percentage point over last year.”
Get smart: The government is trying to thread a tight needle here, expanding credit to targeted areas of the economy, but not ramping up loan growth overall.
It’s going to be tough to pull off.
Gov.cn: 李克强主持召开国务院常务会议 听取2019年全国两会建议提案承办情况汇报等
Gov.cn: News measures to ensure meaningful reduction in MSEs’ financing costs
2.State Council stays on message
Besides tinkering with targeted monetary policy, the State Council is otherwise looking to stay the course on economic policy.
That was the other message from the group’s meeting on Wednesday, which came on the back of the solid economic data release for Q1 (see yesterday’s Tip Sheet).
Premier Li and company repeated their recent mantra (Reuters):
- “China will continue to implement a prudent monetary policy and will resolutely not adopt a ‘flood-like’ stimulus, the cabinet said on Wednesday, reiterating the current stance.”
Our take: Officials are aware that opening the credit floodgates will do more harm than good. Given thesolid March and Q1 economic data, they will be even more reticent than before.
3.Fiscal revenues fall off in March
There was one data point released this week that largely slipped under the radar, given the heavy focus onGDP numbers on Wednesday.
That was the fiscal data for March.
- Growth in fiscal revenue for the central government decelerated to 4% y/y – down from 7% in Jan-Feb.
The weak revenue was driven by tax cuts for individuals (Caixin):
- “Individual tax collections recorded the biggest change after the government reformed the individual income tax regime earlier this year.”
- “Individual tax collection in March dropped 48.4% from a year ago, according to finance ministry data.”
But another critical income source also faltered in the month:
- “Government income from land sales also shrank further in March, dropping 9.5% from the same period last year.”
Things are likely to get worse from here on the revenue front:
- “For the entire first quarter, China’s central government fiscal revenue grew 6.2% year-on-year.”
- “Since the first quarter often generates the highest fiscal revenue growth of the year, the government may see slower revenue growth in following months with the unfolding effects of tax and fee cuts.”
Get smart: Weak revenue growth will hamper the government’s ability to provide more direct support to the economy through fiscal outlays.
Get smarter: Ifgovernment spending becomes overly restricted due to weak revenues, then Li Keqiang’stax cut ambitions may have to be dialed back.
Caixin: Fiscal Revenue Growth Slowed in March Amid Tax Cuts
4.CSRC requires CDS for private company bonds
The securities regulator (CSRC) is quietly starting to pressure brokerages to help private companies that want to issue bonds – by offering insurance against potential default.
The 21st Century Business Herald reports that as of this week, the CSRC is essentially requiring bond underwriters to offer credit default swaps (CDS):
- “The official oral guidance given by the regulators is not to prohibit the issuance of private enterprises’ credit bonds, but to “strongly recommend” that appropriate CDS tools should be allocated, otherwise the process of issuing bonds will be longer.”
The idea, of course, is to help incentivize investors to purchase more private companies’ bonds – to address their financing needs.
Previously, officials had been asking securities companies to offer different types of credit enhancement:
- Regulators have previously sent letters to some securities firms allowing them to develop credit protection tools to support more private enterprises to raise funds in the exchange market, including joint issuance of debt financing support tools by securities companies.
This latest move deepens those efforts.
Get smart: Authorities are continuingto pull out all the stops to support the private sector.
But moves like this just shift risk to the brokers – they don’t do anything to actually improve the creditworthiness of private companies.
21st Cent Biz: 民企发债不存在“强制配发”CDS 难点在于监管衍生品套利
Reuters: China requires new private corporate bond issues to come with CDS – sources
5.NDRC mulls policy toboost consumption
The NDRC has drafted a policy to promote consumption of autos, home appliances, and electronics.
How do we know? The draft was leaked widely on Wednesday.
It was the auto purchase policies, in particular, that got our attention. Check this out:
- NDRC wants local governments to scrap car purchase restrictions.
- Big cities with license plate quota systems, like Beijing and Shanghai, are required to increase the quota by 50% and 100% from the 2018 level in 2019 and 2020, respectively.
The government is also considering making auto purchases tax-deductible.
But not all cars are born equal. New-energy vehicles will get preferential treatment on all fronts.
And…the government is going to raise taxes on gas to help pay for all of this.
Get smart: None of this is a done deal. As of yesterday, the NDRC was asking other ministries to provide feedback, so the policies could change.
Get smarter: These measures – if passed – may temporarily boost auto sales. But the longer-term outlook for the sector ain’t good.