Driving the Day
1. Right on cue, GDP growth slows
China released quarterly GDP stats on Friday morning.
As expected, the picture wasn’t pretty:
- Real GDP growth decelerated to 6% y/y – down from 6.2% in Q2 and the slowest growth in 30 years.
- Nominal GDP growth decelerated to 7.6% y/y – from 8.3% in Q2, marking the slowest pace of growth since 2016, when China was in the depths of a deflationary spiral.
The bottom line: China’s economy is still facing significant headwinds.
Under the hood: The stats bureau also released monthlydata for September – and once again, things weren’t pretty.
Consumer spending continues to struggle:
- It grew at 7.8% y/y in the month – up a touch from 7.5% in August, but still well below the Jan-Aug average of 8.2%.
- Infrastructure spending slowed to 6.3% y/y growth – down from 6.7% in August; that’s pretty decent growth in a 2019 context, but is dismalwhen compared to the more than 20% growth over the past several years.
What to watch: At this rate, China’s economy won’t bottom out until H1 2020.
Get smart: Policymakers will continue to gradually increase policy support, and the economy will eventually stabilize. But the uptick in economic growth – when it finally comes – will be shallow and short-lived.
Bureau of Statistics:国家统计局新闻发言人就2019年9月份国民经济运行情况答记者问
2.Why infrastructure spending is flagging
One reason infrastructure investment continues to struggle: Local governmentsjust don’t have a lot of shovel-ready projects to spend on.
That’s been true for some time, but the FT has a great piece outlining the current dynamics:
- “’There are not many economically viable projects for us to take on,’ an official at Sichuan Development [Guidance Fund] told the FT.”
- ‘‘We have plenty of bridges and roads already.”
That, of course, makes it awfully hard to put a floor under economic growth:
- “Infrastructure investment by local government-controlled companies such as Sichuan Development has traditionally helped the Chinese government to meet its economic growth target.”
- “But now such finance vehicles face mounting challenges in helping the Chinese government to prop up growth.”
The new reality: Local governments are reluctant to waste money on white elephants. That means growth will continue to undergo a structural slowdown in the coming years.
The good news:The quality of growth should continue to improve.
What everyone forgets: China needs slower growth. Policymakers’ reluctance to stimulate the economy might disappoint investors in the short term, but it’s a huge long-term positive.
Financial Times:Chinese local government funds run out of projects to back
3. Banks still on a capital raising binge
China’s banks are in dire need of capital – you know that, because you read the Tip Sheet.
Why it matters: It’s yet another reason that banks are reluctant to lend, and the economy continues to slow (see previous two entries).
Caixin has a good rundown of the state of play – highlighting banks’ reliance on perpetual bonds to raise capital:
- “As of Oct. 10 this year, commercial banks had issued bonds, including perpetual bonds, worth 977.7 billion yuan ($138.2 billion) for capital replenishment, a record high that is more than twice the value of those issued last year.”
A growing number of banks are getting in on the action:
- “Nine banks have issued a total of 10 perpetual bonds this year with a combined value of 455 billion yuan after policymakers gave the nod to their use of such bonds at the end of 2018.”
Get smart: China’s banking system will remain shaky for the foreseeable future. The capital raising efforts are meant to bolster the sector.
What to watch: Authorities are opening the financial sector. Domestic banks have huge balance sheets, which guarantee market share. But can they truly compete with foreign banks when it comes to offering advanced financial services?
4.Fiscal data dump
Yesterday, the Ministry of Finance released fiscal data for January-September.
The headline numbers:
- Total revenues are up 3.3% y/y.
- Tax revenues are down slightly, with -0.4% growth y/y.
- Non-tax revenue was up a whopping 29.2% y/y.
Get smart: Much of that non-tax revenue is coming from SOE dividends.
Here’s how those tax revenues break down:
- Domestic VAT is up 4.2% y/y.
- Consumption tax is up 15.5% y/y.
- Corporate income tax is up 2.7% y/y.
- Personal income tax is down 29.7% y/y.
Government spending is increasing at nearly triple the rate of revenue growth:
- Central government expenditures are up 9.2% y/y.
- Local government expenditures are up 9.4% y/y.
So what is the government spending its money on? Areas that have seen the biggest spending increases include:
- Science and technology, up 10.6% y/y
- Social security and employment,up 9.2% y/y
- Environmental protection,up 14.5% y/y
Get smart: What the government spends money on gives a clear picture of where its priorities lie.
Get smarter: The government is already spending much more than it takes in. That’s just one more reason why we don’t expect major stimulus going forward.
Ministry of Finance:
5.Top leaders reiterate call to end poverty
Yesterday was the sixth annual National Poverty Relief Day.
To make things a bit more festive, the third National Poverty Alleviation Awards were awarded at a ceremony in Beijing.
Some context: Xi Jinping has promised to eliminate poverty by 2020 (see October 18, 2018 Tip Sheet).
Top leaders were keen to show their appreciation, including four Politburo members:
- Xi Jinping sent a note to the ceremony.
- Premier Li Keqiang also sent a note.
- Vice Premier Hu Chunhua spoke at the ceremony.
- Chinese People’s Political Consultative Conference ChairmanWang Yang met with the award winners.
Xi’s comments were characteristically grandiose:
- “The problem of absolute poverty, which has plagued the Chinese nation for thousands of years, is about to be solved in a historic way.”
Li Keqiang focused more on how to get the job done:
- “We shall strengthen measures such as industrial poverty alleviation and employment assistance as well as follow-up support for poverty alleviation and relocation…to prevent the return of poverty.”
Get smart: Poverty alleviation is one of Xi’s signature initiatives. But hitting his ambitious targets will be tough – those still remaining in poverty are the toughest ones to help.
6.Li Keqiang says US businesses are welcome in China
On Thursday, Li Keqiang met with a delegation from the US-China Business Council.
Li’s message: China is open for business.
- “‘China’s door of opening-up will not be closed, but will only open wider,’Premier Li said.”
- “We welcome enterprises around the world, including the United States, to expand investment in China for mutual benefit and win-win results.”
He said that he is doing all he can to improve the business environment:
- “China is trying to create a market-oriented, law-based and international business environment that will meet the international advanced level, in which Chinese and foreign-invested enterprises will be treated as equals while property rights and intellectual property rights will be better protected.”
Li said it was silly for the two sides to keep fighting:
- “China and the United States, as the biggest developing country and the biggest developed country in the world, will benefit each other and the world with healthy and stable relations.”
- “Therefore, China and the US should tackle issues through dialogue…to push forward the rolling of bilateral trade along the right track, he said.”
Get smart: Li’s words are nice. But it will take a lot more than nice words to win back American business.
One thing that won’t help: Chinese government officials demanding that American businesses fire employees who speak ill of China, à la what happened with the NBA (Sports Illustrated).
Gov.cn:Premier meets visiting USCBC delegation
Sports Illustrated:Adam Silver: Chinese Government Asked NBA to Fire and Discipline Daryl Morey
7.New winter, new curtailment plan
On Wednesday, the Ministry of Ecology and Environment (MEE), along with nine other central government agencies and six provincial governments, released its winter curtailment plan for industrial production in northern China.
Some context: Since 2013, the government has curtailed industrial production during the winter in order to curb air pollution.
The scope: The plan covers 30 cities insix provinces:
The big goal:
- To reduce fine particulate matter (PM 2.5) by 4% from 2018 levels.
Get smart: The 4% reduction target is more ambitious than 2018’s target of 3%. But…it’s less ambitious than an initially proposed target of 5.5%.
Local governments listen up: The central government has told local governments not to use a one-size-fits-all approach to shutting down production. Instead, they want production cuts to be focused on the most egregious polluters.
Get smarter: The central government encouraged a more targeted approach last year as well. But local governments largely ignored them.