Driving the Day
1. Xi talks finance and economics
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: Coordinating economic development amongst different regions.
The overarching goal (China Daily):
- “The meeting stressed the necessity to foster a unified, open and competitive economy and let the market play a decisive role in resource allocation.”
Some context: Because of local protectionism, China’s economy functions like a collection of poorly integrated regional economies.
Why that matters: If China could create a more unified national market, it would allow for economies of scale that could boost efficiency and productivity, which would help to underpin economic growth.
The meeting proposed several measures to facilitate market integration. Three of the more interesting were:
- Creating a national pension system
- Allowing for more flexible land management
- Improving the fiscal transfer system
Get smart: Xi’s push for a unified national market illustrates one of the central themes of his economic agenda. He wants to use increased state power to create more efficient markets.
That may sound like a paradox to many of our readers. But to Xi and co., it makes perfect sense.
2.LPR implementation will be phased in
Financial authorities understand that it will take time for banks to start using the new loan prime rate (LPR) mechanism.
The faster, the better. That was the message from a meeting on Monday, where the Shanghai branch of the central bank (PBoC) convened representatives from over 170 banks to talk implementation.
The key goals:
- By the end of September, 30% of new loans should be issued in conjunction with the LPR.
- By the end of December, that proportion should be up to 50%.
- And by March next year, regulators want to hit 80%.
To make sure it happens, officials have decided to make LPR compliance part of the quarterly Macro-Prudential Assessments (MPAs) that the PBoC uses to grade each bank’s performance.
Some context: A bad grade on the MPA can lead to fines, or even removal of certain privileges – such “primary dealer,” which gives certain banks access to the PBoC’s daily open market operations.
Our take: It’s positive that regulators understand that this change will take time – and are trying to incentivize banks to get it done.
The bottom line: The slow phase-in means any impact from a reduction in the PBoC’s reference rates will be slow to transmit to the economy.
3. China to launch new FTZs
On Monday, the State Council announced the creation of six new pilot free trade zones to be launched in the following provinces:
Notice anything unusual?
With the exceptions of Jiangsu and Shandong, the new FTZs are concentrated primarily in China’s poorer and/or inland provinces.
That’s because the government hopes to use foreign trade to boost economic development in these regions.
The plan seems to be aimed at getting:
- Yunnan and Guangxi to build closer ties with neighboring ASEAN nations
- Heilongjiang to leverage its proximity to Russia
- Jiangsu and Shandong to serve as a conduit for trade with Japan and Korea
- Hebei to open up its biomedical and healthcare industries and speed the development of the Jing-Jin-Ji economic zone
Vice Minister of Commerce Wang Shouwen touted the plan at a press conference Monday (SCMP):
- “The FTZs will tap into respective geographical advantages to deepen trade and economic cooperation with neighboring countries.”
And of course, there’s always a BRI angle:
- “The arrangement will…serve major national strategies such as the Belt and Road Initiative.”
Get smart: As growth slows, it’s more important than ever for the government to do more for China’s economically “left-behind” regions.
4.NPC approves Drug Administration Law
The NPC Standing Committee’s August session concluded yesterday after approving the Drug Administration Law (DAL).
Some context: This is the first big overhaul of the law since 2001.
One of the biggest developments: The law officially approves the Marketing Authorization Holder (MAH) system for nationwide rollout after four years of pilot programs in 10 cities.
Why it matters: The MAH system will incentivize companies to develop more drugs.
The third reading of law saw a few last-minute changes:
- The law now clearly supports adding manpower for the drug approval process, which has seen significant personnel shortages recently (see June 12 Tip Sheet).
- The final version changed the total ban of online sales of prescription drugs to a partial ban.
- The revision also decriminalizes the importation of small amounts of prescription drugs without a license. Interestingly, this decision is partially based on the public response to a 2018 movie that touched on the issue(see July 18, 2018 Tip Sheet).
Get smart: The oft-repeated cliché that China’s legislature is a rubber stamp is an oversimplification. A lot of debate takes place which ultimately influences the final shape of key polices.
5.Other NPC business
The legislature also adopted two other laws yesterday:
- An amendment to the Land Management Law (LAL)
- A new Resource Tax Law (RTL)
The biggest change to the LAL was that some collectively-owned construction land in rural areas can now bypass the government and be sold directly.
Our take: This won’t affect land supply much, for now.But it is an interesting experiment.
Likewise, the RTL didn’t see much of a shakeup. The NPC passed the law as part of its effort to improve existing tax regulations and increase its power over tax collection – at the expense of State Council bodies.
Some context: The government collected a bit over RMB 16 billon in resource taxes in 2018. This accounts for only 1% of total tax revenue – clearly not a game changer.
Interestingly, the NPC delegates apparently engaged in a robust debate about a provision in the RTL that allows provincial governments to set preferential tax rates. The provision was ultimately left in.
Get smart:For all Xi’s efforts to rein in local governments, local interests still have powerful backers in Beijing.