1. PBoC doesn’t follow the Fed…yet
The big finance news from China today was what didn’t happen.
- China’s central bank (PBoC) did not cut interest rates on its open market operations.
Some context: On Wednesday in the US, the Federal Reserve cut interest rates by 25 basis points. The growing consensus among analysts is that the PBoC will look to follow the Fed, by similarly adjusting rates lower (see yesterday’s Tip Sheet).
- No rate cut today doesn’t necessarily mean no rate cut at all.
What to watch: The PBoC will announce the monthly loan prime rate (LPR) on Friday morning, which may make for an opportunity to cut rates on the medium-term lending facility.
Sound complicated? It’s not. Basically, tomorrow may be the last best chance for the PBoC to cut interest rates in Q3.
Our take: We think the PBoC will stay on hold, as authorities don’t want to send an overt easing signal to the market.
Authorities want to bring down the interest burden for companies over time, but they have also been clear that the key obstacle for private businesses right now is access to credit, even more than the cost of credit.
That’s our thinking – we’ll find out where the PBoC’s head is at tomorrow.
PBoC: 公开市场业务交易公告 第184号
2. Fiscal belttightening?
ICYMI: China’s economy didn’t perform so well in August.
The latest evidence: Fiscal spending fell last month for the first time in 2019.
Caixin has the deets:
- “[Fiscal] expenditure was 1.511 trillion yuan in August, a 0.2% decline from the same period last year.”
- “That’s down from a 3.4% increase in July and the first drop since November 2018.”
It may seem counter-intuitive that the government is reducing spending as growth slows. But not if you’ve been reading the Tip Sheet.
As we noted back in May, top policymakers including Li Keqiang have gone full Freddy Krueger on taxes, making cuts left, right, and center.
- The idea is to counter slowing growth by reducing the burden on small businesses and keeping employment up.
But lower taxes mean there’s less money for the government to spend.
- Indeed, the central government’s tax revenue dropped by 4.4% y/y in August as a result of the cuts.
Get smart: China’s rigid fiscal system is limiting the amount of fiscal support the government can offer. Tax cuts are great, but direct government outlays are better at juicing growth in the short term.
Get smarter: It’s just another reason to expect the economy to continue decelerating into 2020.
Caixin: China’s Fiscal Spending Declines as Tax Cuts Bite
3. China’s future development model explained
On Tuesday, the Development Research Center of the State Council, the Ministry of Finance, and the World Bank jointly released a major new report, titled “Innovative China: New Drivers of Growth.”
The report argues that:
- “China needs to foster new drivers of growth to address productivity challenges, intensify reforms and promote greater innovation in the economy.”
Yep – we are on board with that.
To address these challenges, the report suggests the promotion of “three Ds”:
- Removing distortions in the allocation of resources
- Accelerating diffusion of existing advanced technologies and innovations
- Fostering discovery of new technologies, products, and processes
How to get down with the Ds? Simple:
- Improve resource allocation
- Promote greater competition in the services sector
- Invest more in human resources
- Nurture and connect economic clusters
- Facilitate a free flow of labor
- Improve public sector transparency and accountability
Easier said than done: For China to unlock new growth drivers, market-oriented reforms are needed. Everyone knows that. But as we saw just last week (see September 10 Tip Sheet), China’s policymakers still believe that the state’s steady hand is critical for the country’sdevelopment.
The key question: Can policymakers find a sustainable balance between the state and markets?
4.Former CSRC chairmandoes some soul searching
At a financial forum yesterday, the former chairman of China’s securities regulator (CSRC), Xiao Gang, made a big speech.
The topic: What caused the China stock market meltdown of 2015 – and what canregulators learn from it?
Some context: Xiao was fired from his role as head of the CSRC in early 2016 – due to mismanagement of the stock market collapse.
In hindsight, Xiao thinks that one of the biggest lessons is for regulators*not* to pump up the stock market in the first place (Sohu):
- “Regulators should not view the rise in the stock market as a political achievement.”
Yeah – no kidding.
Instead, he argues that the goals should be to:
- Safeguard market openness, fairness, and justice
- Safeguard the rights and interests of investors – especially small and medium-sized investors
- Promotehealthy development of the capital markets
Xiao also diagnosed what’s currently ailing China’s equity markets:
- Market entry and exit is too difficult – which hampers competition and the quality of listed firms
- There’s no way to short stocks
- Changes in CSRC policy goals are too frequent
Our thought: We agree with all of this – but why did it take Xiao four years to see the light?
5.Xi reiterates his priorities in Henan
Xi Jinping wrapped up his tour of Henan on Wednesday, convening a meeting with top provincial officials.
He told the assembled cadres that things are tough (Xinhua):
- “The international situation remains challenging and complex, and our country’s development is facing new risks and challenges.”
But he also assured them it would all be alright as long as they stick to the Party’s plan:
- “We must manage our own affairs well.”
So what is that plan? Xi used the meeting to run down his top priorities:
- Put the “main focus” on developing a high-quality manufacturing sector
- Construct the Belt and Road
- Implement the rural revitalization strategy
- Attach great important to environmental protection
- Ensure the people’s well-being
- Promote Chinese culture
And, of course, Xi also implored officials to carry on with the Party study campaign launched at the end of May.
Get smart: None of this is new. Xi is doubling down on his agenda in the face of mounting pressures.
Xinhua: 习近平在河南考察时强调 坚定信心埋头苦干奋勇争先 谱写新时代中原更加出彩的绚丽篇章