Driving the Day
1.Policymakers focus on a moderately prosperous society
On Monday, Xi Jinping chaired a meeting of the Central Commission for Financial and Economic Affairs (CCFEA).
Some context: The CCFEA is the Party’s most important economic policymaking body.
Top of the agenda: Ensuring that China achieves the goal of becoming a “moderately prosperous society” by 2021.
More context: This goal isn’t new. For decades, the Party has focused on achieving two overarching goals:
- To become a “moderately prosperous society” by 2021, when the CCP celebrates its 100th anniversary.
- To become a modern socialist country by 2049, when the PRC turns 100.
According to Monday’s meeting, here’s what’s required to hit the first goal.
First – eradicate poverty.
But there is much more. Over the next two years, the Party also needs to:
- Address prominent environmental problems
- Improve compulsory education
- Improve basic healthcare
- Ensure clean drinking water
- Improve early education and elderly care
Get smart: That is an ambitious agenda. Officials are going to be under immense pressure to show results in all of these areas.
Get smarter: This goal is not simply about hitting some level of per capita GDP (although that is in there as well) – it’s about raising the overall standard of living for Chinese citizens.
CPC People: 习近平主持召开中央财经委员会第四次会议
Driving the Day
2.Economic policymakers repeat themselves
Monday’s CCFEA meeting also discussed economic policy for rest of the year.
But first, the government’s most important economic agencies gave reports on the state of implementation for key policieslaid out at the Central Economic Work Conference (CEWC) in December.
The lucky agencies were:
- National Development and Reform Commission
- Ministry of Industry and Information Technology
- Ministry of Finance
- People’s Bank of China
Here’s the game plan for the rest of the year. Top officials must:
- Improve counter-cyclical adjustments to macro policy
- Increase the impact and effectiveness of fiscal policy
- Enact tax and fee cuts as soon as possible
- Ensure that monetary policy reflects changes in economic growth and prices
- Strengthen support for financing the real economy
Get smart: This list is a reiteration of the goals laid out at the CEWC.
Our take: None of this offers any new signals as to the direction of policy in the coming months. Policymakers are set to stay the current course.
3.Chinese stocks react to the Politburo
Onshore stock markets are not loving the Politburo message from Friday (see yesterday’s Tip Sheet), as Reuters reports:
- “China stocks fell from a 13-month high on Monday, posting their worst session in nearly four weeks.”
The CSI 300 is now down 2.2% over the past two days, and the Shanghai Composite is off 2.5%.
That’s because onshore traders seem to finally be understanding what Tip Sheet readers have known for a long time – authorities are not going to throw big stimulus into the economy.
Our take: There is still some upside for Chinese equities throughout the rest of the year – thanks more to a dovish Federal Reserve than to the PBoC. But after a 30% run-up to date, any continued gains look to be much milder from here, likely in the high-single-digit range at best.
Related: The China Financial Futures Exchange just made it easier to hedge against stock price movements, rolling back trading restrictions that were put in place during the market volatility of 2015.
Also related: In a speech on Monday the new head of the securities regulator, Yi Huiman, had this to say:
- “We will greatly relax access to foreign investment in the securities, funds, andfutures industries.”
Get smart: Whisper itsoftly. Capital market reform is ramping up.
Reuters: China stocks fall most in nearly 4 weeks on worries Beijing may slow policy easing
Caixin: China Further Relaxes Curbs on Tool for Betting Against Stocks
The Paper: 易会满：将以更加积极务实态度，加强与各国资本市场开放合作
4.Bad loan recognition heats up
The provincial banking regulator (CBIRC) in Zhejiang is getting tough – telling banks to accelerate the acknowledgement and disposal of non-performing loans (Caixin):
- “Several banks in East China’s Zhejiang province have tightened their definition of nonperforming loans (NPLs) to those overdue by over 60 days, as the local regulator pushes lenders to come clean about their asset quality and set aside enough cash to cover potential losses.”
- “The rule is stricter than an order given by the CBIRC last year, which said the nation’s city and rural commercial banks should by the end of this year recognize all lending more than 90 days overdue as NPLs.”
The CBIRC’s motivation is to get a better sense of the overall scale of NPLs, so they can allow a higher NPL rate for the private sector:
- “’The tolerance of bad loans parked at small companies can be improved meaningfully only after the real (overall) NPL situation (at banks) is better revealed,’ the regulator said.”
Get smart: Like everything these days, the ultimate goal of this policy is to free up space so banks can funnel more money to small businesses.
What to watch: Zhejiang is likely taking the lead due to its outsized private sector – look for other provinces to follow suit.
Caixin:More Banks Forced to Recognize Bad Loans Under Tougher Standard
5.A revenue sharing pilot for local governments
Any business in China knows that it’s often incredibly difficult to uproot operations and move them to a new location. That’s because local governments try to stop such moves to avoid losing tax revenue.
But things might be changing, thanks to a pilot revenue sharing policy.
Recently, two city districts and one county – all located at the junction where Shanghai, Zhejiang, and Jiangsu meet – have begun discussions for a tax sharing mechanism.
Localities are touting the trial program as a potential precursor to broader administrative integration. According to a local tax bureau official:
- “In the construction of Yangtze River Delta integration, tax sharing is a trend.”
- “It may make a breakthrough in this first demonstration zone.”
Some context: Regional integration is one of Xi Jinping’s national development strategies – with the Yangtze River Delta being one of several key regions. Authorities want to optimize these regional economies by integrating their markets.
Get smart: Fiscal revenue sharing schemes – if workable – will give local governments greater incentive to integrate with each other.
Get smarter: The downside for businesses is that revenue sharing may lead to less competition among localities for investment – meaning that preferential investment policies may be tougher to come by.
The SCMP highlights an interesting bit of Chinese diplomacy toward the US:
- “President Xi Jinping has written to a group of US high school students saying he is impressed by their country’s ‘beautiful landscape, hospitable people and diverse culture’ and that he has made many American friends, in a goodwill move amid strained bilateral ties.”
- “China’s official Xinhua news agency said Xi was replying to a letter written in Chinese from the group of 40 students at Niles North High School in Illinois asking him if he liked music and whether he liked his job.”
Xi’s job sounds kind of like ours:
- “Xi told the young Americans, who are studying Chinese, that his job is to serve the people.”
- “He described his work as ‘tiring’ but also ‘very pleasant’, according to the letter published by Xinhua.”
We have to agree with him on this point:
- “’The younger generation is the future of Sino-US friendship,’ Xi wrote. ‘I hope you will cherish your time and study hard and contribute to the friendship between the Chinese and American people.’”
Get smart: This will have no impact on bilateral relations. But it is a sign that Xi is keen to have constructive bilateral relations .
Our question: When is Xi going to answer OUR letters? We’ve written him dozens!