Driving the Day
1. State Council looks to boost pork production
African Swine Fever has decimated China’s pork population.
- Thatsent pork pricessoaring almost 50% y/y in August (see yesterday’s Tip Sheet).
The government is now scrambling to boost pork supplies.
Yesterday, the State Council released new measures to boost production.
The measures address some pressing problems:
- “The circular… called for timely payment of subsidies for mandatory butchering due to African Swine Fever.”
- “The reserve of frozen pork should be supplied at a proper pace, and the production of poultry, beef, mutton and other alternatives should be accelerated.”
- “A mechanism to link social assistance with rising consumer prices will be established.”
The measures also look to ensure supply in the medium term:
- “95 percent of pork should be supplied by the domestic market.”
- “Provincial-level governments were urged to offer preferential policies in farming land, funding and financing.”
Longer term, officials are determined to avoid this ever happening again:
- “The circular also urged further efforts to accelerate the development of African swine fever vaccines, improve disease monitoring…and enhance grassroots epidemic-prevention teams.”
Get smart: Skyrocketing pork prices are becoming a genuinely concerning social issue. Officials are pulling out all the stops to deal with it.
2.Data dump – credit
The PBoC released monthly credit data for August late on Wednesday.
- Total credit growth came in at 10.7% y/y – the exact same pace as in July.
- RMB-denominated bank loans grew by 12.6% y/y – down from 12.7% in July.
- Monetary (M2) growth edged up to 8.2% y/y – from 8.1% in July.
Quick take 1: Overall credit growth continues to remain heavily range-bound, having bounced between 10.1% y/y and 10.9% y/y over the past eight months. It averaged 10.6% y/y during that time.
Why it matters: We’ve argued all year that authorities were unlikely to push credit growth above 11% y/y in 2019. Absent a concerted acceleration in credit growth, the economy will take a long time to stabilize – we now put the bottom of the growth cycle in late Q1 of 2020.
Quick take 2: Authorities want to keep credit growth steady – and they want bank lending to improve while shadow banking dwindles.
But that hasn’t been happening.Bank lending has decelerated for five consecutive months – even as authorities have actively tried to support such lending. That reflects weak credit demand among businesses.
Get smart: These numbers will ramp up calls for stimulus. But authorities are still committed to a targeted approach.
3. SAFE scraps QFII quota
On Tuesday, China’s foreign exchange regulator announced that it will scrap quotas on a key channel for capital inflows.
The FT has the details:
- “The State Administration of Foreign Exchange said on Tuesday evening that it had decided to scrap the overall ceiling of $300bn on total asset purchases under its qualified foreign institutional investor, or QFII, scheme.”
- “’Henceforth, foreign institutional investors with the relevant qualifications can simply remit funds to carry out investment in securities in compliance with regulations,’ the regulator said in a statement.”
Our take: This is another small step on the steady path to financial opening, which officials have accelerated over the past two years.
We are seeing a lot of lazy takes on this one – arguing this is a bid to stoke capital inflows amid increasing concerns that money is heading for the exits.
Some context: Foreign investors had not been using the full QFII quota, so removing it won’t lead to any ramp up in capital inflows.
Get smart: China does want and need long-term capital inflows, and that’s why policymakers will proceed with pragmatic opening of the financial sector. But yesterday’s move was far from a desperate shot at stoking short-term inflows.
4.BYD churns out first Huawei smartphones
On Monday, Chinese auto and electronics manufacturer BYD announced that it had produced its first batch of Huawei handsets.
Some context: Back in July, Huawei and BYD signed a smartphone production contract, with the latter committing to churn out 80,000 handsets per day by the end of the year.
More context: Flex, Huawei’s previous handset supplier, scaled back handset production due to US government restrictions on American companies doing business with the Chinese telecom giant.
The long view: Independence from foreign (particularly American) technology has been on Huawei’s agenda since at least 2012 (see June 11 Tip Sheet). US sanctions have only added urgency to the push for self-sufficiency.
- It’s been a punishing year for Huawei, but the company is already establishing alternative supply chains.
The big question: Certain components can be easily produced domestically, but other high-end technologies such as chipsets are still dominated by American companies. Will Chinese firms be able to create viable homegrown alternatives?
Get smart: The tech decoupling genie is now well and truly out of the bottle.
5.Securities regulator introduces new round of capital market reforms
On Monday and Tuesday, Yi Huiman, head of China’s securities regulator, chaired a symposium on reforming capital markets.
Yi was all pro-market:
- “[We should] learn from international best practices.”
- “[We will] revere the market, rule of law, professionalism, and risk.”
The symposium drew up a list of 12 reform tasks. The most important are:
- Expand the registration-based IPO system beyond the Nasdaq-style tech board
- Improve the quality of listed companies over the nextfew years
- Continue the opening-up of capital markets
- Increase the supply of derivatives for real economy companies to hedge against risk
- Bring longer term capital into the market through various measures – such as allowing individuals to invest private pensions in mutual funds
- Revise laws to allow for securities class action lawsuits – aiming to significantly raise the cost of fraud for publicly listed companies
Our thinking: Many of the reform measures look like a genuine attempt to introduce international practices to China’s capital markets. Officials are serious about getting this right – they understand that deep, well-functioning capital markets are key to boosting economic efficiency and productivity.
Xinhua: China’s securities regulator lists priorities of capital market reform
6.Real tax cuts for advanced manufacturing
Get ready to get wonky…
Last week, the Ministry of Finance and the State Administration of Taxation expanded refunds for “end-of-period un-credited value-added-tax (VAT)” on advanced manufacturing products made by certain eligible companies.
Say that again, but slower? These are basically refunds for companies that overpaid their VAT.
Some context: VAT refunds for overpayment were first rolled out for a few sectors in 2018.
Why it matters: The aggregate size of overpaid VAT is HUGE, with some estimates putting it close to RMB 1 trillion! That puts a lot of cash flow pressure on companies and offsets the positive impact of VAT reform.
More context: Starting in April 2019, partial refunds for VAT overpayment were rolled out for all companies, but there were lots of strings attached to the refunds.
To make things easier, last week’s policy:
- Eased eligibility requirements for VAT refunds
- Allowed eligible companies to receive their refunds in full
But there’s still a catch:
- The new policy only applies to companies in a handful of advanced manufacturing sectors.
Get smart: The new refunds won’t make a dent in the estimated RMB 1 trillion in backlogged payments – which is still a problem for plenty of companies. But it’s still a step in the right direction.
7.Li Keqiang promises more opening to foreign companies
On Tuesday, Premier Li Keqiang met with representatives from the US business community.
Some context: The executives were in town for the US-China Business Exchange.
Li said that China and the US should find a way to work out their differences:
- “We should find a solution to our differences that are acceptable to both sides.”
Then Li trotted out this old chestnut:
- “China will open wider to the outside world, and is committed to creating a market-oriented, law-based international business environment where domestic and foreign enterprises are treated equally, and great importance is attached to the protection of IP rights.”
To which the one US representative replied:
- “[We are] encouraged by China’s latest opening measures.”
- “American businesses will take a long-term view of the current economic and trade frictions between the US and China.”
Get smart: Li is looking for allies as the next round of trade negotiations are set to begin in Washington on October 13 – but few US businesses are willing to come on board.
Get smarter: Most of them don’t love the trade war, but they hope it ultimately leads to better market access in China.
8.China aims to salve pain from trade war
China is looking to ease the pain from the trade war on some of its companies.
Bloomberg has the details:
- “China announced a range of U.S. goods to be exempted from 25% extra tariffs put in place last year, as the government seeks to ease the impact from the trade war without lifting charges on major agricultural items like soybeans and pork.”
- “The exemptions, effective from Sept. 17 to Sept. 16 2020, will cover 16 categories of products worth about $1.65 billion, according to Bloomberg calculations based on China’s 2018 trade data.”
Get smart: Policymakers are keeping tariffs where it causes the most pain to America – agriculture.
Get smarter: Chinese officials see that as their biggest point of leverage over US President Trump, since it disproportionately affects his base voters. In other areas, where Chinese tariffs are not causing much damage, there’s really no point in leaving them on.
Bloomberg: China Exempts Certain Products From Tariffs