1. Yi Huiman is unhappy
Over the past 24 hours, Chinese financial media has been buzzing about an op-ed written by Yi Huiman, head of the securities regulator (CSRC).
Yi wants regulators to get tough (Yicai):
- “The basic responsibility of the CSRC is regulating.”
And he’s not thrilled with some of his subordinates:
- “Some [people] in the cadre supervision team are unwilling or unable to shoulder their responsibilities.”
He reminded everyone of the three goals of effective regulation:
- Protect the rights and interests of investors, especially smaller investors
- Improve transparency and efficiency by demanding rigorous information disclosure and improving mechanisms for capital market entry and exit
- Prevent systemic risks
One the first score, Yi said that regulators will speed up the establishment of a class-action lawsuit system for investors to protect themselves.
Get smart: Tightening supervision and respecting the market have been core to Yi’s mission since he took the top CSRC job in January. Recent actions taken by the regulator clearly reflect these goals.
2.Data dump – industrial profits
There were so many important financial developments on Wednesday that we didn’t get to highlight the terrible industrial profits data.
So here we go. The details:
- October industrial profits contracted by 9.9% y/y – that’s down from a 5.3% contraction in September.
- It marks the steepest drop in eight months.
Our current pet peeve: Lots of analysts and news articles are tying this drop to the trade war. That makes for a convenient storyline, but China’s industrial powerhouses aren’t big exporters.
Our take: This is all about China’s domestic economic slowdown – especially weak infrastructure spending, property development, and auto production.
- The profit slump fits with the recent rapid decline in upstream prices (see November 11 Tip Sheet).
Stop us if you’ve heard this one before, but the industrial profit data is just the latest indication that China’s economy has yet to bottom out.
And yet: Still no stimulus.
What to watch: It’s going to be a tough 2020. Markets are now starting to talk about a global economic rebound next year, but we’re skeptical. If China is part of any upswing, it won’t be until H2.
The long view: The reticence to stimulate should be positive for China’s medium-term economic trajectory.
Reuters: China’s industrial profits post steepest fall in eight months
3. Saving the (business) environment
On Wednesday, Premier Li Keqiang chaired an executive meeting of the State Council.
The agenda: Turning China into a “world-class, market-oriented business environment governed by a sound legal framework.”
The meeting focused on the recently released “Regulations on Optimizing the Business Environment,”which gointo effect on January 1, 2020 (seeOctober 24 Tip Sheet).
Li’s gave everybody theirmarching orders (Gov.cn):
- Local governments were directed to issue supporting measures and bring all existing rules in line with the new regulations.
There are also lots more changes in the works:
- Administrative approvals will be streamlined.
- The time required to start a business will be shortened.
- Market access qualifications related to registered capital will be relaxed.
- Unjustifiable logistics costs will be lowered.
- Discrimination based on ownership structure will be eradicated.
- And much, much more!
Get smart: As growth slows, it’s critical to squeeze more efficiency out of the economy. These measures are a step in the right direction – although they will take time to bear fruit.
Get smarter: China’s got a long way to go to before it’s a true world-class business environment.
4.State Council follows through on investment relaxations
On Wednesday, the State Council released a policy meant to boost fixed-asset investment – by a touch.
Regular Tip Sheet readers won’t be surprised by this development – we flagged it two weeks ago, when the State Council first said this was coming (see November 14 Tip Sheet).
Time for a quick recap…
The policy is intended to unlock debt financing for infrastructure projects by reducing minimum equity ratios – i.e. the amount of equity funding (as opposed to debt) that a project is required to have.
The new regsofficially codify moves to reduce equity ratios:
- From 25% to 20% for ports and shipping projects
- By around 5 percentage points for roads, railways, urban construction, logistics, environmental protection, and social welfare projects
Get smart: Given the ongoing economic slowdown, officials are increasingly keen to support investment spending.
Get smarter: In the old days, they would’ve flooded the banks with cash to fuel aninfrastructure binge. The new approach involves tinkering with equity ratios and providing other marginal incentives to spend.
Our take: The new approach is less effective in the short term, butmore effective in the long term.
5.Xi calls for overhaul of military education
There’s a Chinese saying that goes “don’t waste good iron to make nails or good men to make soldiers.”
Xi Jinping begs to differ.
On Wednesday, the big man delivered the opening address for a training session at the PLA National Defense University.
- In the speech, he called for a new type of military talent, possessed of both unimpeachable moral rectitude and impeccable professional ability.
To this lofty end, Xi called for a new style of military education and suggested some improvements to the existing system including:
- Updating curriculum to be in line with the latest military developments
- Strengthening specializedtraining
- Improving combat effectiveness
- Building a high-level and ideologically reliable teaching staff
- Supporting the construction of more military colleges
And oh yeah:
- Upholding the Party’s absolute leadership over the military
We almost forgot that one.
Get smart: As we’ve mentioned before, modernizing and upgrading the military has been one of Xi’s signature projects for as long as he’s been in office. Now, Xi is enlisting military colleges to teach recruits how to fight a real war.
Keep this in mind: The PLA hasn’t seen combat since the three-week-long Sino-Vietnamese War in 1979, which they lost.