Driving the Day
1. To stimulate or not to stimulate, that’s the question
The year’s most important economic policy meeting – the Central Economic Work Conference (CEWC) – will be held in around two weeks.
That means that policy advisors are piping up in the hopes of shaping the thinking of top leaders.
Last Friday, Renmin University published a 2020 macroeconomic report.
The big news: The report recommended that the 2020 economic growth target be 5.5-6.0%, the lowest target in decades.
Xia Bin, economic advisor to the State Council, is on board (CMF WeChat):
- “The proposed target is in line with central decision-making needs.”
But not everyone agrees.
Yu Yongding, a member of the Chinese Academy of Social Sciences, argued that policymakers should not let growth fall below 6% (Sina):
- “Pessimistic expectations will lead to a more pronounced decrease in investment and consumption.”
- “Reduced aggregate demand will then cause GDP to fall further, forming a vicious circle.”
Yu thinks the government should spend more to support growth:
- “I would rather see fiscal conditions deteriorate temporarily to stabilize economic growth.”
Get smart: The debate about whether or not to stimulate will continue rage up until the CEWC.
2.Yi Gang’s monetary masterclass…
Central Bank Governor Yi Gang published a long article on monetary policy in the Party’s most important theoretical journal over the weekend.
And. We. Are. Excited.
Yi first outlined the modern history of monetary policy.
Then he got down to business, describing how he thinks about monetary policy.
- This is hugely important stuff for anyone who wants to understand modern macroeconomic management in China, and – critically – how it is changing.
For the umpteenth time, Yi underscored his hesitance to stimulate:
- “Monetary policy needs to pay attention to economic growth, [but should not] over stimulate.”
- “Monetary policy only affects demand in the short term, but it will affect supply and economic structure in the medium and long term.”
- “Overuse [of monetary policy] may create complicated problems later on.”
Get smart: In case you haven’t realized it by now, major stimulus is off the table. Not just for 2020, but likely for as long as Yi Gang is PBoC governor. We can’t emphasize that enough.
3. …Yi Gang talks currency…
Yep we’re still on this essay, so keep feasting (see previous entry).
Next, Yi talked currency:
- “We should stick to the fundamental goal of currency stability.”
Get smart 1: Currency stability is technically supposed to be the PBoC’s top priority – according to the law that created the bank.
But Yi didn’t list it as the top priority. In fact, he couched currency stability mainly within the broader need for financial stability:
- “At the same time, the central bank should also strengthen the goal of financial stability and better combine maintaining currency stability with maintaining financial stability.”
- “China’s financial system and asset market are huge in scale and prone to pro-cyclical fluctuations. “
- “Therefore, we must strengthen the macro-prudential policy to better maintain the stability of the financial system.”
Get smart 2: Yi’s views on the fragility of China’s financial system are a key reason why the de-risking campaign has been longer and tougher than anyone expected.
4.…Yi Gang on policy coordination
The hits just keep on coming (see previous two entries).
Yi concluded the “practical” section on monetary policy by saying it needs to be coordinated with other policies:
- “Monetary policy cannot fight alone. It needs to cooperate with other policies and form a joint force.”
- “We should have a deep understanding of the possible changes in the transmission mechanism of monetary policy.”
Get smart: This is one reason China created the Financial Stability and Development Committee – to coordinate policy and improve transmission mechanisms.
Yi also spoke to the limitations of monetary policy:
- “The main function of monetary policy is to keep a short-term demand balance, and avoid economic ups and downs, while economic growth is fundamentally dependent on structural adjustment and technological progress.”
There was much more in the essay as well – about theroles that monetary policy can play indevelopment.
Do yourself a favor and read the whole piece (linked below in Chinese).
The bottom line: China’s top policymakers have fundamentally changed how they view the role of monetary policy.
The upshot: Credit-fueled stimulus is a thing of the past. So everyone can stop asking, “How bad does it have to get before they really stimulate?”
5.Party seeks more control over SOEs
Xi Jinping chaired a meeting of the Politburo on Friday.
Two documents were deliberated:
- Work Rules for Grassroots Party Organizations in Party and State Departments
- (Pilot) Work Rules for Grassroots Party Organizations in State-Owned Enterprises (SOEs)
Some context: The first set of rules are a revision of rules passed in 2010. The SOE rules are brand new.
Some more context: These SOE rules are a long time in coming. In 2013, the Party identified the need for SOE Party organization rules. They were supposed to be completed two years ago, but are only just now being finalized.
The SOE rules restate the importanceof SOEs:
- “State-owned enterprises are an important material and political foundation of socialism with Chinese characteristics.”
They then call for more Party control:
- “[We must] integrate the Party’s leadership into all aspects of corporate governance and embed corporate Party organizations into the corporate governance structure.”
Get smart: It’s counterintuitive, but reformers are trying to use empowered Party organizations to make SOE’s more market-oriented.
Get smarter: How to manage the state-owned economy remains a matter of serious debate – and contention – within the Party.
6. Shanxi gets a new Party boss
There’s a newtop official in Shanxi – Lou Yangsheng.
Lou takes over as Shanxi Party Secretaryfrom Luo Huining, who stepped down due to reaching retirement age.
A little about Lou:
- Lou is from Zhejiang, and he worked in the province for over 32 years.
- Lou’s deep Zhejiang ties have led many to classify him as part of the New Zhijiang Army, which describes a group of Xi Jinping allies that worked with Xi when he was Zhejiang Party secretary from 2002-2007.
- After Zhejiang, Lou spent five years in the provincial leadership of Hainan and Hubei.
- In June 2014, Lou was appointed deputy Party secretary of Shanxi – a politically sensitive post as Xi looked to root out the power base of Ling Jihua, Hu Jintao’s former chief of staff and a Shanxi native.
Our take: Lou’s promotion makes him a contender for the 2022 Politburo.
What to watch: Yunnan Party Secretary Chen Hao and Guizhou Party Secretary Sun Zhigang reached retirement age earlier this year and are due to step down soon.
7.Yangtze River Delta to integrate further through 2025
On Sunday, the Central Committee and the State Council jointly released a high-level strategic plan to guide the integration and development of the Yangtze River Delta (YRD) region.
Some context: The YRD composes all or part of Shanghai, Jiangsu, Zhejiang, and Anhui. It covers an area of 358,000 square kilometers.
The timeline: The plan guides YRD integration and development through 2025, with a forward look at 2035.
Goals for 2025 include:
- 207 kilometers of railway for every 10,000 square kilometers
- 5 kilometers of highway for every 100 square kilometers
- 80% 5G internet coverage
- 70% urbanization rate
- Income disparity between urban and rural populations under 2.2 to 1
- 18% of industrial production from high-tech production
- 80% of days havinggood air quality
- A 10% decreasein energy consumption to GDP compared to 2017
- Public spending of RMB 21,000/person
- 11.5 years of education for the average worker
- Average life expectancy of 79 years
But we are more interested in this: The Partywants the YRD to create a unified market and regulatory framework.
Get smart: The central government is trying to overcome local protectionism by giving provinces common goals.