Driving the Day
1. Data dump – credit
Monthly credit data for October dropped late on Friday.
The headline: Credit growth continues to slow, and that’s not good.
- Aggregate financing grew by 10.7% y/y – down from 10.8% in September, and marking the fourth consecutive month of decelerating growth.
- RMB-denominated loans grew by 12.5% y/y – down from 12.7% y/y in September and marking the slowest growth rate so far this year.
- All major forms of shadow banking remained deep in contractionary territory on a y/y basis.
Our take: This is not a good credit print. Financial regulators have been rightly cautious in providing monetary and credit stimulus over the past two years – butuntil mid-2019 they had been offering just enough support to keep credit growth gently accelerating.
Over the past few months, things have gone into reverse – with credit growth decelerating despite ongoing, targeted loosening.
Get smart: We are now watching to see if financial authorities will signal a shift in tack. Their efforts to date simply haven’t been working to get credit growth up to a reasonable pace.
What to watch: Slowing credit growth now will push any economic stabilization further into the future – we are talking late H1 2020at this point.
2.CBIRC to keep the pressure on financial de-risking
On Sunday, Vice Chairman of the banking and insurance regulator (CBIRC), Zhou Liang, spoke at a financial forum in Beijing.
The topic: Furthering the CBIRC’s financial de-risking efforts.
Not mincing his words, Zhou reminded everyone what is at stake:
- “Financial credit reflects the credit of the Party and the state.”
Zhou said that efforts so far have been pretty good:
- “Over the past two years, the CBIRC has confiscated more than RMB 6.5 billion and punished more than 9000 violators.”
Some context: That is more than the sum of the previous ten years.
To keep the momentum going, Zhou thinks that regulators shouldn’t be afraid to ruffle some feathers:
- “Offending people is exactly what supervision does.”
- “We should dare to be tough and not be scaredy-cats.”
Theregulator needs to:
- “Strive to build an ‘Iron Army’ which dares to supervise and is competent at and honest in supervision.”
Get smart: Getting regulatory oversight on track and financial risk under control are preconditions for improving China’s medium-term growth prospects.
That said, in the short term, these efforts are contributing to weak credit growth (see previous entry).
The big question: Can officials find a way to boost overall lending while staying tough on bad lending?
3. Data dump – inflation
The stats bureaureleased monthly inflation data over the weekend.
Much like the credit data (see entry #1), things did not look good:
- Consumer prices increased by 3.8% y/y – up from 3% in September and marking the fastest rise in eight years.
- Producer prices decreased by 1.6% y/y – down from 1.2% in September and marking the biggest drop in three years.
Quick take 1: Soaring pork prices continue to drive consumer inflation.
Quick take 2: Deepening upstream deflation is reflective of a slowing economy and weak corporate earnings.
Get smart: High and rising consumer prices, with low and falling producer prices, is the worst possible combination for China’s central bank.
Get smarter: Neither of these data prints amounts to an emergency, but alongside the credit data, they suggest to us that the policymakers may have to get more aggressive in their growth support soon.
What to watch: Any change of tack on economic policy should first be signaled at the December Economic Work Conference – which is still over a month away.
4.MofCom wants more data on foreign investors
On Friday, China’s Ministry of Commerce (MofCom) released two draft documents strengthening information reporting requirements for foreign-invested enterprises in China. The drafts are open for comment until December 2.
The reporting rules apply to Chinese entities who are foreign invested in any capacity – either directly or indirectly.
Some context: The reporting requirements are designed to support the implementation of the Foreign Investment Law scheduled to take effect at the beginning of 2020.
- Foreign investors must submit basic information on their operations, shareholders, debts and liabilities, local subsidiaries and affiliates, certifications, and other info as requested by MofCom.
- Failure to report on time can result in fines ranging from RMB 100,000 to RMB 500,000.
- Foreign investors who don’t comply with reporting requirements may also be subject to regulatory penalties by market, foreign exchange, customs, and tax authorities under the corporate social credit system.
What to watch: The drafts call for the creation of a MofCom-controlled “Foreign Investor Integrity Case System”, a data platform where violations will be recorded. This platform will feed data into the NCISP, the central social credit database.
Get smart: Requiring MNCs to reportto MofCom isn’t new, but the enforcement mechanism is. Companies will need to get up to speed on the new reporting requirements.
5.Central and local officials don’t see eye to eye
On Saturday, officials discussed economic policy at the Caixin financial forum in Beijing.
Former Deputy Head of the Office of the Central Leading Group for Finance and Economics Yang Weimin said that it is important that China continue to upgrade traditional industries.
Seems non-controversial, right?
Yang was trying to make a point. He thinks that local governments are too focused on new industries – and aren’t paying enough attention to traditional industries.
But local officials say it’s not their fault. Hebei Vice Governor Zhao Haishan said that central policies make it hard to support traditional industry:
- “Some industrial policies and economic-related policies are very rigid.”
- “There is no wiggle-room at the local level.”
Have no fear. National Development and Reform Commission Deputy Secretary General Zhao Chenxin has a solution:
- The central government is committed to building channels that will allow local governments – and the public – more input into policymaking.
Our take: It’s one thing for the government to say it will allow more input into policymaking. Making that happen is quite another.
6.Beijing urges Hong Kong to legislate against unrest
On Saturday, Zhang Xiaoming, director of theHong Kong and Macau Affairs Office (HKMAO) discussed what the recent Fourth Plenum means for Hong Kong.
What the city needs isa healthy dose of good ol’ fashioned patriotism!
According to Zhang, Hong Kong’s chief executive must be:
- “a patriot who is trusted by the central government…[and] has trust in the central government”
The statement also suggested that Hong Kong’s unrest was due to the failure of the city’s government toproperly implement Article 23 of the Hong Kong Basic Law:
- The article empowers the SAR government to pass laws prohibiting seditious activity and preventing Hong Kong political groups from establishing ties with foreign organizations.
Zhang also suggested that the current protests are illegitimate:
- “Any activities that endanger the sovereignty of the state [or] challenge the central government…must not be allowed.”
Get smart: Beijing’s got a point.But statements like this will likely further galvanize protesters.
The big question: This weekend saw a major uptick in the level of violence that spilled into Monday. If violence continues to escalate, will Beijing be tempted to take a more hands-on approach?
7.Xi tells the military to obey the Party
Xi Jinping’s weekend focused on military matters.
On Friday, he celebrated the Air Force’s 70th anniversary at the China Aviation Museum on the outskirts of Beijing.
Xi’s message (CGTN):
- “We must…strive to build the People’s Air Force into a world-class air force.”
Then, Xi spoke at a meeting of the Central Military Commission on strengthening the military’s rank and file.
The armed forces are undergoing big changes (SCMP):
- “‘The grass-roots level of the military is experiencing new conditions and changes in its mission, construction, daily operation, unit structure, personnel composition and social environment,’ Xi…was quoted as saying.”
As the armed forces evolve, Xi believes it is more important than ever that the Party keep firm control:
- “He said that, because these lower-ranked units formed the basis of the military, they needed to be under the Communist Party’s tight ‘grips’ to ensure their strength and discipline.”
Get smart: Xi has expended enormous efforts to modernize China’s armed forces. But they are still many years off from being truly combat-ready.
CGTN:Xi Jinping marks 70th anniversary of founding of PLA Air Force
CPC People:习近平：发扬优良传统 强化改革创新 推动我军基层建设全面进步全面过硬
Xinhua:Xi stresses building world-class air force
Xinhua:Xi requires all-round progress in military development at primary level
SCMP:Xi Jinping reiterates rallying call to Chinese military, stresses need for Communist Party’s ‘grip’