Driving the Day
1. CCCDR acknowledges local governments need leeway
On Tuesday, Xi Jinping chaired the 11th meeting of the Central Committee for Comprehensively Deepening Reform (CCCDR).
Some context: The CCCDR was established as part of the MASSIVE Party-state restructuring in March 2018. It is the Party’s most important policymaking body.
As always, it was a productive meeting. Officials approved seven documents on:
- The market-based allocation of factors of production
- Supporting agriculture
- Reforming the medical insurance system
- Strengthening “labor education” in primary, secondary, and tertiary education
- Building a modern environmental governance system
- Reforming the education supervision system
- Building a system of agricultural technology services
And that’s not all (Xinhua):
- “The meeting also reviewed and approved an action plan on implementing the important measures adopted at the fourth plenary session of the 19th CPC Central Committee, and an evaluation report on China’s overall reform progress in recent years.”
From the readout, this caught our eye (Gov.cn):
- “In implementing the reform plan, we should take local conditions into account.”
- “We should refrain from taking a ‘one-size-fits-all’ approach to reform.”
Get smart: Beijing is starting to realize that the centralization of policymaking under Xi has gone too far.
What to watch: What the CCCDR discusses today becomes policy tomorrow. Stay tuned.
Xinhua: Xi stresses implementing major measures of key CPC session
2.Guo still knows financial de-risking
One of our favorite financial officials, Guo Shuqing, is back at it – hitting the speaking circuit to tout financial de-risking.
- Guo is chairman of the banking and insurance regulator.
- He’s also Party secretary of the central bank (PBoC).
- And he’s been the driving force in implementing the de-risking campaign.
More context: As one eagle-eyed reader recently pointed out to us, Guo had been conspicuously absent from the news lately.
Right on cue, China’s financial media is leading today with reports of a rousing speech he gave in Jiangxi on November 14, which the PBoC just made public.
Guo summed up the key goals of financial supervision right now:
- Identifying and “handling” illegal financial institutions
- Disposing of shadow banking risks
- Cracking down on illegal fundraising activities
- Increasing efforts to expose and dispose of non-performing loans
- Stabilizing the leverage ratio of the overall economy
- Slowing the growth of local government debt, while simultaneously dealing with risks in the existing debt stock
- Supporting small banks in resolving risks and raising capital
- Dealing with external shocks (read: the trade war) and stabilizing the RMB
Get smart: The de-risking campaign rages on, which makes imminent stimulus impossible.
Weixin: 郭树清：坚决打击各种非法集资活动 继续拆解影子银行
PBoC: 郭树清在江西南昌主持召开“深化金融改革、服务实体经济发展” 座谈会并督导第二批主题教育
Bloomberg:China’s $40 Trillion Man Has the Toughest Job in Global Finance
3. Local bond allocation in motion
The local government bond train – aka everyone’s favorite train – is getting in motion.
- The Ministry of Finance has allocated RMB 1 trillion in special project bond (SPB) quotas to provinces since September.
- That’s 47% of the total RMB 2.15 trillion quota for all of 2020.
Some context: Until 2019, annual bond quotas were allocated each March. But in December 2018, the legislature took special action to allow for SPB issuance early in Q1 2019 – to help support the economy.
More context: Market watchers have long expected authorities to allocate 2020 bond quotas even earlier this year.
And now it’s happening.
Don’t get too excited. Quotas are issued, but the cash still isn’t flowing because:
- It takes time for provincial authorities to approve projects and allocate funding to lower level governments, which are prerequisites for SPB issuance.
- According to the budget law, it would be illegal to issue 2020 bonds in 2019, as that would technically surpass the 2019 quota.
What it means: Even if SPBs aren’t issued in December, early quota allocation means the locomotive is in motion.
What to watch:SPBs will be issued early and often in Q1 2020.
Get smart: The efficacy of SPBs for supporting economic growth is still in question (see yesterday’s Tip Sheet).
4.China’s “too-big-to-fail” sweepstakes
On Tuesday, Chinese financial regulators issued draft regulations outlining a formula to identify the country’s systemically important banks (SIBs).
Some context: Last year, regulators issued guidelines aimed at regulating “too big to fail” (TBFT) financial institutions (see November 28, 2018 Tip Sheet) – these new regulations will help identify which banks are on the list.
According to the draft, financial regulators will collect data from the 30 biggest banks and evaluate their systemic significance based on four main elements:
- Total assets
- Overall interconnectedness – based on asset holdings of, and liabilities owed to, other financial institutions
- An “indispensability rating” – based on the total amount of annual payment clearing, size of custodial assets, and total number of licensed operations
- Complexity of business operations and financial products offered
The State Council’s Financial Stability and Development Committee will have the final say on which lucky banks get the coveted TBTF title.
- These banks will be asked to meet higher regulatory standards, including stricter requirements on liquidity and capital.
What to watch: The PBoC will lay out similar rules for insurers and securities companies soon.
Get smart: Officials see more financial challenges ahead – so they are trying to identify the weak spots and systemic transmission channels in advance.
5.Factor markets to see some liberalization
As we outlined in entry #1, the Party’s top policymaking body has approved a new document aimed at allocating factors of production in a more market-based fashion.
The terse readout didn’t offer much in the way ofspecifics (Gov.cn):
- “[We will] continue to deepen market-oriented reforms, expand high-level opening up, and remove institutional barriers that hinder the free flow of factors.”
- “[We will] expand the scope for the market-oriented allocation of factors.”
Get smart: That’s some pretty high-level stuff, but it could be hugely important.
Get smarter: China’s leadership takes a broad view of the factors of production. That means we could start to see increased liberalization across a number of fields – including human capital, financial capital, energy, and data.
Lots of foreign observers willbe skeptical that we’ll see much action here, given the recent ideological tightening and increased state presence in China’s economy – but this is now a space to watch.
Xinhua: Xi stresses implementing major measures of key CPC session
6. Drafting of 14th Five Year Plangets underway
On Monday, Premier Li Keqiang chaired a meeting of the State Council to discuss China’s 14th Five Year Plan (FYP), which will run from 2021 to 2025.
Some context: Over the course of the past year, every level of government has been conducting preliminary research to feed into the plan (see December 12, 2018, Tip Sheet).
Li first reminded everyone that this is serious business (Gov.cn):
- “The external environment may be more complex [than in previous years].”
- “Our country is in a critical period of transforming its development model, optimizing its economic structure, and shifting its drivers for growth.”
Then he asked officials to propose policies for the FYP that would:
- Develop the economy
- Prevent and resolverisks
- Delineate the boundaries between government and the market
- Build an international and rules-based business environment
What to watch: Li asked the assembled officials to consolidate their ideas, conduct more targeted research, and then draft an outline of the FYP. The Party will look to approve the outline at next year’s Fifth Plenum, which is likely to be held in October.
Get smart: We get asked a lot about what will be in the 14th FYP. The simple answer is it’s too early to tell.
7.This land is your land, this land is my land
On Tuesday, the Party Central Committee and the State Council issued new regs addressing rural land contracts.
- Buckle up: we know you can feel the excitement.
- The majority of rural land in China is owned by rural village collectives.
- Villagers can contract land from the collectives for agricultural use.
- The length of those land contracts haslong been capped at 30 years.
- But get this:All current contracting rights are supposed to expire in 2027.
That pending expiration has become a source of concern for many villagers.
But don’t panic! The new regs will:
- Extend contracting rights by another 30 years
- Require thatcurrently contracted land isn’t redistributed by collectives
- Discourage collectives from cancelling villagers’ land rights when they move to a city
Get smart: There was realdebate about how long these contracts should be extended. Some policymakers argued for a period of 70 years, but officials eventually opted for the 30-year option.
Get smarter: Land reform has always been a controversial, politically sensitive topic in China.