1.The other German GDR
On Wednesday, local financial media reported that the China Europe International Exchange (CEINEX) was gearing up to launch a stock link between Shanghai and Frankfurt –called the Shanghai-Deutsche Stock Connect.
Some context: CEINEX was founded in 2015 as a joint-venture between the Shanghai Stock Exchange, Deutsche Börse Group, and China Financial Futures Exchange.
More context: The program seems to have been partially inspired by the success of the Shanghai-London Stock Connect which launched earlier this year.
- The connect will allow German blue chips to float China depository receipts (CDRs) on the Shanghai Stock Exchange.
- Chinese firms, particularly manufacturers, will be able to issue global depository receipts (GDRs) for purchase on the Frankfurt Stock Exchange.
Get smart: The stock connect model is an ideal setup from the standpoint of Chinese regulators, providing a convenient, but easily controlled, channel for portfolio investment.
Get smarter: China is also looking for areas of economic common ground with Europe in a bid to mend fences. Programs like this are a step in the right direction.
2.Xi projects hope
On Wednesday, official media reported that Xi Jinping recently sent a message to Project Hope – a public welfare program helping poor children get access to education.
Some context: Project Hope was established in 1989 by the Communist Youth League and the China Youth Development Foundation. Since its inception, the program has built over 20,000 primary schools and helped nearly six million students with financial assistance.
More context: Xi has promised to eradicate poverty in China by 2020.
Xi spoke highly of the program’s contribution (Xinhua):
- “Project Hope has helped millions of young people from poor families realize their dream of going to school and grow into pillars of society on all fronts.”
But this is about more than just poverty alleviation:
- “’The whole Party and society should…support Project Hope so that the young people can fully feel the care of the Party and the warmth of the big socialist family, and be well-prepared to join the socialist cause,’ Xi noted.”
Get smart: Learning to love the Party starts early – China’s education system is very much focused on legitimizing China’s political system.
Xinhua: 习近平寄语希望工程强调 把希望工程这项事业办得更好 让广大青少年充分感受到党的关怀和社会主义大家庭的温暖
Xinhua:Xi sends message to Project Hope
3. State Council discusses personal income tax reform
Yesterday, the State Council did its thing – holding its weekly executive meeting.
Top of the agenda: Individual income tax reform.
Some context: The Individual Income Tax Law was amended in September 2018. It created special deductions for certain expenditures – including children’s education, medical treatment for serious diseases, and elderly care (see September 3, 2018 Tip Sheet).
At yesterday’s meeting, top officials listened to a report on the latest reforms.
They agreed that things are going well:
- “In the first nine months of this year, more than RMB 440 billion of tax cuts have been accumulated, benefiting 250 million taxpayers.”
- “[It] has played an important role in improving income distribution, increasing residents’ income, and expanding consumption.”
Going forward, the government wants to further ease tax burdens on lower-income groups.
In this vein, the government will exempt individuals with annual salaries under RMB 120,000 from having to file end-of-year tax settlements for the next two years.
Get smart: This change is very small. It basically just saves eligible individuals a trip to their local tax bureaus. The move will have only a minimal impact on actual tax bills.
Gov.cn:李克强主持召开国务院常务会议 听取个人所得税改革情况汇报 确定有关税收优惠政策减轻纳税人负担等
4.State Council focuses on drug reform
Wednesday’s State Council meeting also discussed the government’s drug procurement program.
Some context: In January, the government launched a centralized drug procurement program,aimed atlowering the costof drugs for public hospitals (see January 18 Tip Sheet). Originally introduced in 11 cities, it was expanded nationwide in September.
The program has been working (Reuters):
- “The move caused the price of some medicines to plunge more than 90%.”
On Wednesday, officials decided to expand the program (Xinhua):
- “More drug types will be covered in the program, particularly those generic drugs with considerable price gaps from the originalones, and essential drugs that have passed relevant quality and treatment tests.”
- “A unified and open national procurement market will be developed from existing ones, at the provincial level.”
- “Medical institutions will be encouraged to buy and use drugs on the national essential drugs list or the medical insurance catalog.”
Get smart: The government is intent on lowering the cost of prescription drugs. Drug makers’ margins will continue to come under pressure.
5.Census shows industrial drop-off, service sector gains
On Wednesday, the government released the results of China’s national economic census – covering the period from 2013 to 2018.
The results were interesting, but not unexpected:
- The number of people employed in secondaryindustries(i.e. industry and manufacturing) decreased by 10.4%over the past five years.
- The number of people employed in the service sector increased by 28.9%, in the same time frame.
More detail: Manufacturing and construction took a big hit.
- These industries accounted for 115 million jobs at the end of 2018, down 17.9% from 2013.
By contrast, the service industry grew explosively:
- The total number of workers employed in wholesale and retail services reached 40.1 million.
- Employee growth in the sectors of information transmission, IT and software, and leasing and business services exceeded 80%.
- Additionally, employment in scientific research and technology services grew by 70.6%.
Get smart: These numbers reflect the changing nature of China’s economy. The slow climb up the value chain, from a manufacturing-driven to a service-driven economy, is a process that Chinese leaders are anxious to accelerate.