1. Q3 GDP preview
China’s Q3 GDP stats come out on Friday morning.
The economy undoubtedly continued to slow.Here’s what we’ll be watching to understand the extent of the weakness.
- People tend to pay attention to the real GDP growth number – butit’s so politicized that it’s basically meaningless.
- Nominal growth, by contrast, tends to capture the cycles in the economy better – it averaged 8.1% in H1 2019, and 9.3% in H2 2018.
- We think it dipped below 8% in Q3.
- Authorities are concerned that consumers – who have held steady through previous downturns – are starting to pull back thanks to increased economic uncertainty.
- Retail sales of consumer goods averaged 8.2% in the first eight months of the year – but likely dropped to 7% in September.
Local government investment:
- Central authorities pushed provinces to use up their special project bond quotas by the end of September.
- We’ll look to see if that caused any discernable improvement in local government infrastructure spending – but we doubt it.
- Weak infrastructure investment has been a key drag on China’s economy all year.
Get smart: Those are the stats to watch – we don’t think any of them will be pretty.
Nikkei: China GDP likely to slow to 6.1% in July-Sept: survey
2.Inflation? No problem
Nothing to see here. That’s what central bank (PBoC) officials are sayingwhen it comes to growing worries over inflation.
Here’s the latest from Caixin, reporting on a PBoC presserheld Tuesday:
- “’There is no basis for continuous inflation or deflation in China currently,’ [said] Sun Guofeng, director of the PBOC’s monetary policy department.”
Sun was reacting to this:
- “In September the consumer price index (CPI) rose 3%, up 0.2 percentage points from the month before and the highest reading since October 2013.”
Why the increase?
- “Faster-rising food prices, especially pork, were the major drivers of CPI growth.”
- “The average pork price rose 69.3% year-on-year in September, up from 46.7% the previous month and the fastest growth since August 2007.”
Oof – that hurts. So what’s the plan?
- “Sun said that when formulating monetary policy, the central bank will pay attention not only to CPI growth but also to other inflation indicators including the core CPI, factory inflation and the GDP deflator.”
Get smart: The pork issue is becoming a headache for the central bank. But they won’t admit it – because they are trying to project confidence.
Get smarter: We’re not in crisis mode yet. But keep an eye on this space.
Caixin:Central Bank Downplays Concerns of Spiraling Inflation
3. PBoC calibrates liquidity
The central bank is trying to thread the needle and simultaneously:
- Support growth
- Control debt
To do this, they are employing more active liquidity management (Bloomberg):
- “The People’s Bank of China added 200 billion yuan ($28 billion) of one-year cash through the medium-term lending facility on Wednesday. It kept the interest rate steady.”
- “The move took traders by surprise as the authorities usually inject liquidity when previously offered loans come due, and the next batch won’t mature until Nov. 5.”
Get smart: Don’t read this as all-out stimulus. The PBoC is just looking to keep liquidity stable.
That being said– the central bank might want to up its game next month:
- “More than 400 billion yuan of MLF will come due early next month, providing a window for the PBOC to lower interest rates and inject more liquidity into the financial system.”
- “The central bank may cut the cost on the loans by 10 basis points to 3.2% by the end of this year.”
What to watch: We’ll see how the PBoC reacts, but one thing is for sure – the bank won’t flood the economy with credit. It will stick with a gradual, calibrated approach.
Bloomberg:China Unexpectedly Injects $28 Billion of Cash as Growth Slows
4.State Council urges tax cuts – again
On Wednesday, the State Council held its weekly executive meeting.
Top of the agenda: Improving the business environment!
The most pressing matter is to reduce taxes and fees for businesses. Specifically, the meeting promised to:
- Implement tax and fee cuts
- Significantly reduce the tax burden on the manufacturing industry
- Reduce the tax burden on the construction industry, the transportation industry, and similar industries
- Not increase the tax burden on other industries
- Further handle unlawful fees levied on companies
Officials understand that this will put strains on local government budgets. But that is no excuse for not implementing the cuts:
- “[Local] governments must soldier through ‘hard up days’ and strictly control general expenditures.”
Local governments must also spend on public services:
- “Provincial governments [should] guarantee wages, transportation, and people’s basic livelihood in areas with financial difficulties.”
Get smart: It’s not easy to be a local official. They are simultaneously told to cut revenues, up spending on social services, and control debt.
Get smarter: Premier Li spends a lot of time urging local governments to implement tax cuts. That implies that manylocal governments are dragging their feet.
5.State Council looks to boost FDI
Wednesday’s State Council meeting also discussed another pressing topic – increasing foreign investment.
The meeting promised to open more sectors to foreign investment.
Two sectors in particulargot a shout out.
Promises to open the financial services sector were reiterated:
- “Restrictions on the business scopes of foreign-invested banks, securities companies and fund management firms already established in China will be fully lifted.”
The auto sector also got some love:
- “Policies on foreign investment in the auto industry will be refined, including equal treatment in market access for both domestic and foreign-invested new energy vehicles made in China.”
The meeting also specifically addressed some of foreign companies’ perennial complaints:
- “No forced transfer of technology will be allowed, including not in disguised forms.”
- “Trade secrets will be protected in accordance with the law.”
- “The notification-removal rule concerning patent infringement at e-commerce platforms will be improved.”
- “In government procurement, there should be no restrictions based on the ownership type of suppliers, nationality of investors, or the brands of products and services.”
Get smart: Chinese leaders are desperate to push back against the growing narrative that China is not a good place for foreign companies to do business.
Gov.cn:More changes friendly to foreign investors on way
6.China identifies manufacturing value chain vulnerabilities
On Tuesday, China’s top engineers gathered to discuss how to build China into a manufacturing superpower.
Zhou Ji, President of the Chinese Academy of Engineering (CAE), said that the CAE had recently assessed the value chains of 26 manufacturing subsectors.
Of the subsectors analyzed:
- Six are “self-controllable”
- 10 are “safe and controllable”
- Two have “a high degree of foreign reliance”
- Eight have “an extremely high degree of foreign reliance”
Zhou didn’t specify which subsectors were considered vulnerable. But he did specify six technologies that China needs to develop to ensure it achieves its manufacturing superpower ambition:
- High-end chips
- Key materials
- Artificial intelligence
- Integrated circuits
Industrial policy will be key: Zhou suggested that the same State Council group that oversaw the Made in China 2025 initiativeshould develop policies to support development of the six technologies listed above.
Get smart: There is a consensus in Beijing that China must become self-reliant in key technologies.
Big picture: Policymakers are currently looking at a range of long-term macro risks. In the past week, the government revisited its energy security strategy (see Monday’s Tip Sheet) and released a white paper on food security (see Tuesday’s Tip Sheet).
21st Century Biz:重磅!中国产业链安全评估：中国制造业产业链60%安全可控，光刻机、设计仿真软件存“卡脖子”短板
7.Carrie Lam booed off stage
Yesterday, Hong Kong Chief Executive Carrie Lam tried to deliver her annual policy address before the Legislative Council.
It didn’t go so well. Lam was forced to abandon ship in the face of persistent heckling bylawmakers.
Lam then gave it another go via video link, shielded from the slings and arrows of the peanut gallery.
Lam laid out several initiatives designed to address longstanding public grievances.
Several were related to Hong Kong’s perennial housing woes, including:
- Constructing 10,000 new homes over the next three years
- Relaxing the mortgage financing ceiling for first-home buyers
- Invoking eminent domain to reclaim land set aside by developers and repurpose it for public housing
Lam also suggested some rather piddling fixes to slow economic growth and unemployment, like:
- Increasing public transit subsidies
- Waiving tolls for traffic tunnels
Finally, in a move that will *definitely* put an end to Hong Kong’s months of unrest, Lam promised to convene a group of academics, officials, and community leaders to examine social conflict in the city.
Get smart: The speech pleased nobody.
Get smarter: Hong Kong could use some strong leadership right now…something that Carrie Lam is failing to deliver.
SCMP:Hong Kong policy address key takeaways: Leader Carrie Lam homes in on housing ‘grievances’ and unveils cash sweeteners in bid to rescue city from brink
SCMP:Carrie Lam insists she still has will and determination to govern Hong Kong despite criticism that policy address does not target unrest
8.Mini trade deal still not agreed
Another day, another update on the trade negotiations with the US.
So…looks like we will have to wait another month before we actually have the “mini deal” agreed on Friday (see Monday’s Tip Sheet).
That’s according to US Treasury Secretary Steve Mnuchin (Reuters):
- “Mnuchin said the Trump administration’s ‘objective’ was for the agreement to be signed at the APEC summit.”
Here’s the game plan:
- Deputies are talking by phone this week.
- Vice Premier Liu He will speak by phone with US Trade Representative Robert Lighthizer and Mnuchin next week.
- Liu, Lighthizer, and Mnuchin will most likely meet in Chile ahead of the planned Xi-Trump meeting there.
Mnuchin also said that it’s possible that he and Lighthizer might travel to China at some point, though nothing is planned.
Our take: This is tough to watch. This mini deal doesn’t include any tough issues, and yet it is still going to take the two sides another month to finalize it.
Get smart: If a mini deal is this difficult, a comprehensive deal would seem all but impossible.
Reuters:U.S., Chinese teams working on Phase 1 trade deal text: Mnuchin
9.Chinese legislature denounces US legislature
The Chinese legislature (NPC) is not happy with the US legislature.
That’s because the US House of Representatives passed the Hong Kong Human Rights and Democracy Act.
Some context (WSJ):
- “[The bill] tasks the U.S. secretary of state with annually evaluating whether Hong Kong remains autonomous enough for the special treatment that has allowed it to grow into a global financial hub.”
- “The bill also requires the president to identify people who have suppressed freedoms in Hong Kong and sanction them.”
You are not going to believe this, but the NPC is not a fan (Xinhua):
- “The move constituted ‘blatant interference in Hong Kong affairs and gross intervention in China’s internal affairs,’according to a statement issued by the NPC Foreign Affairs Committee.”
- “‘Hong Kong belongs to China, and Hong Kong affairs are China’s internal affairs that must not be interfered with by any other country,’ the statement read.”
- “We strongly urge the U.S. Congress and certain politicians to stop interfering in Hong Kong affairs.”
Get smart: China-US tensions are rapidly expanding well beyond arguments over trade and investment. Things are likely to get worse before they get better.
What to watch: The Senate is likely to vote on the bill soon.
Xinhua:Top legislature slams U.S. interference in Hong Kong affairs
Govtrack.us:H.R. 3289: Hong Kong Human Rights and Democracy Act of 2019
WSJ:U.S. House Passes Bills Supporting Hong Kong Protesters