Driving the Day
1. PBoC thinking hard aboutpolicy stance
On Tuesday, the central bank (PBoC) held a symposium to discuss credit and monetary conditions.
PBoC Governor Yi Gang and Vice Governor Liu Guoqiang were in attendance – looking to address growing concerns over slumping credit growth.
Yi touted success on several goals, including:
- Increasingsupport for the real economy via the financial system
- Keeping M2 and credit growth roughly in line with nominal GDP growth
- Steadily lowering financing costs for companies
The problem: Yi and company warned that the road ahead is fraught with challenges, including:
- Continuing downward pressure on the economy
- Contractions in some types of local credit
What’s to be done?
Officials resolved to take the following (mostly familiar) steps to ensure China’s fiscal and monetary health:
- Stepup counter-cyclical adjustments
- Improve banks’ ability to supply credit
- Push down real lending rates
Get smart: Financial officials are signaling that they may have to put a little more oomph behind monetary support. But they are still far fromsignificant stimulus.
Our take: Keeping monetary growth in line with nominal GDP growth is not a recipe forstabilizing the economy – if officials drop or amend that goal, that’s when we know policy has fundamentally shifted.
Forexlive:PBOC says to continue with prudent monetary policy
2.LPR falls again
Speaking of counter-cyclical adjustments…(see previous entry).
On Wednesday, the central bank (PBoC) published the monthly one-year and five-year loan prime rates (LPR) for November.
- Both rates came in five basis points below their October rates.
- The one-year LPR is now at 4.15% – down from 4.20% previously.
- The five-year LPR is now at 4.8% – down from 4.85% previously.
Some context: Banks reduced their LPR rates in reaction to the 5-basis-point cut the PBoC made to the medium-term lending facility (MLF) earlier this month.
More context: In theory, banks are supposed to set their own LPRs. In practice, we understand that the PBoC still gives quite a bit of window guidance.
Even more context: The one-year LPR has fallen three times since it was established in August. This is the first time that the five-year LPR has changed.
Get smart: As we’ve written before, a 5-basis-point change is meaningless.
Get smarter: The central bank does want to lower financing costs. Butthese moves appear to be largely abouttrying to get banks used to the new LPR mechanism and testing out how it will work in practice.
Caixin: 一年和五年期LPR均下调 央行强调LPR对贷款利率引导作用
Reuters:China cuts new benchmark lending rate to lower costs, shore up economy
3. Meet the giant new manufacturing investment fund
Yesterday, China officially established a new super-sized national investment fund aimed at transforming and upgrading the country’s manufacturing sector.
This thing ain’t small potatoes – it hasregistered capital of a whopping RMB 147.2 billion.
For comparison: The China Integrated Circuit Industry Investment Fund (CICF), a state-owned fund set upin 2014, started off withwith RMB 138.7 billion (though it has since raised much more).
The fund is owned by 20 different shareholders. The top three are:
- The Ministry of Finance
- CRRC Corp – a state-owned rolling stock manufacturer
- China Development Bank (CDB) Capital Co. – CDB’s major investment arm
According to a filing by CRRC, the fund will focus investments on:
- New materials
- New information technologies
- Electrical equipment
National Development and Reform Commission researcher Zhang Yuzhesays it will take a comprehensive approach to investment (Euronews):
- “The new fund will invest throughout the entire manufacturing industry value chain.”
Get smart:China’s leadership has no intention of abandoning industrial policy. Instead, they are doubling down.
Caixin: China Sets Up Massive New Fund to Transform Manufacturing
SSE: 中国中车股份有限公司 关于参与发起设立 国家制造业转型升级基金股份有限公司的公告
Euronews:China sets up $21 billion fund to upgrade manufacturing – Shanghai Securities News
4.Beijing set for service sector opening
On Tuesday, the State Council effectively authorized Beijing to open some services to foreign investment – on a trial basis.
Some context: In January, the State Council approved Beijing’s work plan to open up its service industries.
More context: In August, Beijing released a three-year action plan to open up the tech, IT, finance, education, tourism, elderly care, and professional services industries.
- The TuesdayapprovalallowsBeijing to make local adjustments in the implementation of State Councilregulations and rules that would otherwise keep the city from opening these sectors.
- The local adjustments will be in place on a trial basis until January 30, 2022.
Foreign investors in Beijing’s designated pilot zones can now:
- Provide value-added telecom services without a joint venture
- Provide overseas tourism services to Chinese citizens without a joint venture
- Invest in non-profit, privately-owned elderly care businesses
- Own recreational and performance facilities without a joint venture
- Invest in audio and film making, as long as the Chinese partner retains the rights to final content review
Get smart: China is still very reluctant to openservices that it feels are sensitive, such as telecoms and media.These small-scale trials in the capital will be closely scrutinized.
5.MofCom sets up new FTZ department
On Tuesday, Caixin reported that the Ministry of Commerce (MofCom) recently created a new department to coordinate the development of China’s pilot free trade zones (FTZs).
- The new office is namedthe Department of Pilot Free Trade Zones and Free Trade Ports.
According to its website, last updated on November 6, the department will:
- Coordinate and promote the construction and development of FTZs
- Organize and conduct studies on regulatory frameworks
- Put forward policy proposals
Some context: The functions of the new department were pulled out from the Department of Foreign Investment Administration.
A bit more detail:
- The new department head – Tang Wenhong – used to head the Department of Foreign Investment Administration.
- The Department of Foreign Investment Administration is now headed by Zong Changqing, the former head for the Department of Market Order.
- The Department of Market Order was abolished.
RIP Department of Market Order…you will be missed.
The state of play: Since the first FTZ was established in Shanghai in 2013, a total of 18 FTZs have emerged across China, including eight announced in August.
Get smart: As China experiments with market openings, the FTZs will play an increasingly important role in testing things out – before such policies see wider application across the country.