Driving the Day
1. The economic policy debate intensifies
With the Central Economic Work Conference (CEWC) just around the corner, the debate around the 2020 economic growth target has been heating up (see the December 2 Tip Sheet).
The latest person to weigh in: Former Vice Director of the Development Research Center – i.e. the State Council’s key in-house policy think tank – Liu Shijin.
Based on his team’s research, Liu thinks medium-term growth will continue to slow (Jiemian):
- “China’s potential growth rate from 2020 to 2025 is between 5% and 6%.”
But achieving that potential growth rate won’t be easy.
- Liu argued that without further structural reforms, getting over the 5% hurdle for the 2020-2025 period won’t happen.
And the short-term prospects are looking bad, too:
- “The pressure and challenges for steady growth next year will be greater than this year.”
But Liu thinks lower growth now – if matched with hard policy choices – will mean better growth later.
That’s why, to those who are advocating for more aggressive stimulus via looser monetary policy, Liu warned:
- “Stimulus policy [now] may become an inducement for a real cliff-like decline in the economy in the future.”
Get smart: Many of China’s policy advisors now believe that the government should let real GDP growth drop below 6%.
Driving the Day, cont’d.
2.Why 2020 matters so much
You may be wondering why the 2020 growth target is generating so much debate – much more than the usual annual growth target.
That’s because next year is a critical year – when Chinese authorities are hoping to achieve a long-held goal of doubling per capita GDP from its 2010 level.
Based on recent GDP revisions, China’s needs right at 6% growth next year to hit the target.
So that is the bigger context behind the debate. Essentially, policy advisors are asking the question:
- Does it make sense for us to stimulate the economy to hit 6% and achieve this goal that (while arbitrary) we have worked so hard for,if it means much lower growth later on?
- Should we just miss the target by a year, and achieve much better performance over the next five years?
Our bet: There is a third option here. Don’t stimulate –just juice the numbers to claim the target was achieved.
That said: This is a genuine debate, and from where we sit, the non-stimulators look to be carrying the day…for now.
3. Data dump – inflation
The stats bureau dropped monthly inflation data for November on Tuesday morning.
- Consumer prices were up 4.5% y/y – compared to 3.8% in October.
- Within that, food prices were up 19.1% y/y – compared to 15.5% in October.
- Within that, meat prices were up 74.5% y/y – compared to 66.8% in October.
- Within that, pork prices were up 110.2% y/y – compared to 101.3% in October.
Get smart: In case it’s not obvious, pork prices are still the key – and pretty much only – driver of higher consumer prices, thanks to the African Swine Fever outbreak.
Get smarter: That’s despite recent claims by the government that it is getting things under control (see December 4 Tip Sheet).
Meanwhile, on the upstream side:
- Producer prices contracted 1.4% y/y – a slight improvement from the 1.6% contraction in October.
- The petroleum sector was the big driver – with prices contracting 12.4% y/y.
Get smart, again: Metals, chemicals, and coal prices were also down slightly – so policymakers will be wary of broadening deflationary pressure. That’s why we are still on the lookout for potential supply restrictions for key commodities.
The bottom line: The inflation picture in China isn’t pretty, but it also isn’t terrible,since it is driven by two quite idiosyncratic factors.
4.Bond defaults continue to mount
The hits just keep on coming for China’s bond market, as defaults continue to mount.
The latest culprit is of particular interest.
Why? Because it’s a local government financing vehicle (LGFV) – one of the entities that local authorities rely on to help finance infrastructure projects (Caixin):
- “The bond issuer, Hohhot Economic and Technological Development Zone Investment Development Group Co. Ltd., failed to repay interest on a private placement note on Friday.”
- “If the Hohhot LGFV fails to make the interest payment within a grace period of 10 days, it will cause a default.”
An LGFV default could be a game changer – indicating that local governments no longer have the fiscal resources to bail out these entities.
The LGFV in question is particularly reliant on government largesse:
- “In 2014, fiscal subsidies it obtained from the local financial and audit bureau accounted for as much as 44.8% of its revenue — although the share dropped to 18.5% the next year.”
- “A lack of other revenue streams leaves companies like this in the lurch when government support becomes insufficient.”
Get start: Financing challenges for banks, companies, and governments are growing.
What to watch: Financial volatility will increase further in 2020.
5.New pipeline monopoly established
China officially has a new state-owned enterprise (SOE).
- The China Oil Gas Piping Network Corporation (COGPNC) was established on Monday to great fanfare.
- Executive Vice Premier Han Zheng attended a ceremony to mark the occasion.
- Premier Li Keqiang showed his support by sending congratulations to the ceremony.
What the new company does: COGPNC will take over and operate the natural gas and oil pipelines previously operated by China’s three national oil and gas giants.
Why it matters: The company has promised that its pipelines will be open to all third parties. In theory, that should help to improve the efficiency of gas distribution – and eventually lower prices.
The company will also lead the charge for a massive pipeline build out (China Daily):
- “By the end of 2018, the country had 76,000 kilometers of main pipelines carrying natural gas.”
- “According to a national plan released in 2017, the country’s pipeline networks will stretch to 240,000 km by 2025, with those for natural gas making up 163,000 km of the total.”
The big question: Where will the new company get the money to build these pipelines?
6.La vie en rouge
On Monday, Xi Jinping made a phone call to Charles Michel, the new President of the European Council.
On the docket: Discussinghow much China and the EU have in common.
Xi’s remarks were enthusiastic, bordering on effusive (SCMP):
- “China sees its relations with the EU from a long-term, high-level, strategic perspective.”
- “China and the EU are mutually beneficial partners, not zero-sum competitors.”
- “China’s development is an opportunity for the EU, not a challenge.”
Michel’s comments were a bit more guarded, focusing on concrete areas of cooperation with China:
- “[The EU and China have a] series of important high-level exchanges and cooperation priorities.”
He also tweeted:
- “Looking forward to strengthening our cooperation on climate change, trade and investments, and a rules-based order.”
The big news: The two sides reaffirmed their goal to get a bilateral investment deal done by the end of 2020.
What we are hearing: There’s growing skepticism among the European business community in China that the deadline can – or even should – be hit.
Get smart: Both Brussels and Beijing are keen to get an agreement over the line, but there are still a fair few sticking points – and EU businesses would rather have a good deal than a quick one.
7.Beijing looks to justify Xinjiang policy
Yesterday, the State Council Information Office held a press conference with senior officials from the Xinjiang Uighur Autonomous Region.
The main topic: Xinjiang’s anti-terrorism re-education camps.
Urumqi Party Secretary Xu Hairong described the region’s anti-terrorism efforts as successful (Xinhua):
- “The education and training programs in Xinjiang have yielded positive results.”
And Xinjiang Chairman Shohrat Zakir pointed out that (China.com.cn):
- “There have been no violent terrorist attacks in Xinjiang for three consecutive years.”
In fact, Zakir said that things have gotten so under control that (Reuters):
- “At present the trainees who have participated…have all graduated.”
Yes, you heard that right. According to Zakir:
- “With the help of the government, stable employment has been achieved and their quality of life has been improved.”
Going forward, all those facilities the government built to house the “trainees” will be redeployed to (FT):
- “…provide language, law and vocational skills training for village cadres, rural party members, farmers and unemployed high school graduates.”
- “Attendance of these programmes would be voluntary and trainees can come and go freely, he said.”
Get smart: Beijing is feeling pressure to justify its policies. But this press conference will not convince foreign observers – or the many Chinese citizens that disapprove of the policy.
FT: China hits back at US allegations over its handling of Xinjiang
Xinhua: China Focus: Xinjiang determined in counter-terrorism, deradicalization, maintaining development
Reuters:China says people held in Xinjiang camps have ‘graduated’, condemns U.S. bill