Potemkin rates - China Tip Sheet March 4, 2020 - Trivium China - Policy insights driving brilliant China strategies

Driving the Day

1. Lower infection rates, higher Potemkin rates

New virus cases within China dropped again yesterday.

The latest numbers:

Tuesday saw 119 new infections nationwide.
Of these, only four were outside of Hubei.

Now, the big question is when the economy can get going again.

There are some positive indications– such as the return of refreshing, industry-sustaining pollution (Bloomberg):

“Nitrogen dioxide levels rose across China’s industrial heartland.”
“Levels plummeted in February after Chinese authorities locked down communities to contain the virus.”

But the news is not all good.

An increasing number of reports indicate that official statistics have fallen victim to rampant industrial fudgery (Caixin):

The head of a manufacturing firm in Cangzhou, Hebei said that the local government asked him to falsely report the number of employees who had returned to work.

Ditto Wenzhou (Global Times):

“Some lower-level county governments…called on the companies under their jurisdiction to consume more electricity…so that they would be considered as having fully restarted business operations.”

Get smart: We still don’t have a clear picture on how the economy is functuing. We do know it remains severely depressed – but is making steps towards getting back to work.

Finance Economics

2.Local governments’ big investment plans

Chinese financial media is getting all hot and bothered by the rollout of provincial investment plans.

The big headline: The provincial plans are really starting to add up – with some reports putting the overall tally at RMB 34 trillion.

The big question: Is this the major stimulus that everyone’s been waiting for?

Regular readers won’t be surprised by our answer: a definitive “no.”

Some key details:

A dozen plus provinces have announced investment plans in the past few days.
Depending on how you count it, they add up to between RMB 24 and 34 trillion.
But these plans are for the next several years – not just 2020.

Our take:

Some provinces are certainly increasing their investment plans to shore up confidence, but this isn’t a centrally mandated stimulus, and is much less than meets the eye.

The bigger question: Where will the provinces get the money to fund these plans? Most are short of cash, and they can’t finance all this through bond issuance.

The bottom line: Local governments are issuing big plans to show their constituents (and their bosses) they are working to support the economy. But this looks like more talk than walk.

Finance Economics

3.PBoC holds the line

In a very notable development, the People’s Bank of China (PBoC) opted not to follow the US Fed’s rate cut.

This morning, the PBoC decided not to do any open market operations, stating (PBoC):

“The current total liquidity of the banking system is at a reasonable and sufficient level.”

Why it matters: The Fed’s rate cut *should* make it easier for the PBoC to cut its own rates – because the US cut should relieve some downward pressure on the CNY.

But the fact that the PBoC stood firm underscores that Chinese policymakers want to remain targeted in their policy response to the coronavirus.

Lots of folks are pointing out that the Fed cut will bolster stocks, but won’t do much for the economy itself.

That’s exactly the type of trap the PBoC wants to avoid falling into.

The bottom line: Big stimulus is happening everywhere except China.

The big picture: As with its virus containment efforts, China is much further along in its economic policy response – in terms of timing, not size – than the rest of the world.

READ MORE

PBoC: 公开市场业务交易公告 [2020]第41号

Politics Policy

4.State Council focuses on stability

Yesterday, the State Council did its thing – holding its weekly executive meeting.

Top of the agenda: Stabilizing the economy.

In particular, Premier Li Keqiang focused on ensuring the “six stabilities.”

Some context: The six stabilities were introduced at the July 2018 Politburo meeting and emphasize the need for stable employment, investment, financial markets, foreign trade, foreign investment, and expectations.

To achieve this, the government is going to (Gov.cn 2):

“[Refine and leverage] inter-agency coordination on macroeconomic policies, foreign trade and investment, and financial stability.”
“Formulate strong and effective response measures to boost the internal dynamism of the economy.”
“Strive to keep major economic indicators within the proper range for the whole year.”

Get smart: Keeping economic indicators within the “proper range” this year was a tall order even before the outbreak. Now it’s looking downright impossible.

Our question: At what point does the government give up on the economic growth target? Or re-think its aversion to large stimulus? Cause something’s gotta give.

Politics Policy

5.Li-bound and Down

At Tuesday’s State Council meeting, Premier Li Keqiang also urged the transportation and logistics sectors to resume normal operations.

That’s because the premier realizes the importance of logistics in (Gov.cn):

“Provid[ing] a strong underpinning for epidemic control”
“Help[ing] smooth the flow of economic activity”
“Meet[ing] people’s daily needs”

To help logistics companies resume normal operations, Li asked local governments to:

Abolish unreasonable approval procedures for work resumption
Supply logistics companies with sufficient face masks and other protective gear
Treat state-owned postal services and privately-run delivery-service providers equally

Li also announced a series of measures to alleviate the financial burden on transporters:

Certain port, railway, container, and cargo fees are waived or discounted from March to the end of June.
Insurance providers are encouraged to extend insurance coverage periods or deduct policy renewal fees for commercial vehicles, ships, and airplanes suspended because of the epidemic.
Financial institutions are encouraged to defer loan repayments from operators of toll roads whose businessesareaffected by the toll-free pass policy.

Get smart: A functional logistics system is the foundation for an operational supply chain. Li knows this and is acting to clear any roadblocks along the way.

Politics Policy

6.Modern environmental governance system

Yesterday, the CCP Central Committee and the State Council jointly issued a set of guidelines to build a modern environmental governance system.

Some context: China’s most important policymaking body, the Central Committee for Comprehensively Deepening Reform (CCCDR), approved the document last November (see November 27, 2019 Tip Sheet).

Provincial governments will play a key role in the governance system.

The central government is responsible for setting big picture goals and strategies.
Provincial governments will oversee implementation in their jurisdictions.
Provincial governments will stump up the majority of funds.

This is going to be a headache for companies with facilities in different regions.

Local legislatures will have leeway to formulate their own environmental management rules.

Additionally, bad actors will see their corporate social credit scores downgraded and will be subject to penalties.

Some qualified good news: Environmental regulators can’t shut down business operations due to government events…except for big, national events.

Get smart: The document is mainly summarizing what the government is already doing.

Get smarter:The theme of last year’s Fourth Plenum was “building a modern governance system.” We’re now seeing that imperative applied throughout the system.

Potemkin rates — China Tip Sheet March 4, 2020

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