driving the day
1. Meat: it’s what’s not for dinner
This morning, the National Health Commission (NHC) released the latest nationwide COVID-19 numbers.
On Thursday, China reported four new COVID-19 cases (NHC):
- All were imported from abroad.
The outbreak in Beijing still seems to be under control:
- On Thursday, Beijing reported no new confirmed, asymptomatic, or suspected cases.
Some context: Beijing hasn’t reported a single new confirmed COVID-19 case since Monday.
But the fallout from the Beijing outbreak continues.
At a State Council press conference late Friday afternoon, officials from the General Administration of Customs announced that:
- Since the start of the market-linked Beijing outbreak, they have conducted tests for COVID-19 on 227,934 food, packaging, and environmental samples that were imported into China via cold chain logistics networks.
- So far, 23 meat producers have either voluntarily suspended or been ordered to suspend exports to China due to the presence of COVID-19 in their products of facilities or packaging.
Get smart: Meat prices are already up in part due to import restrictions.
2. The ghost of markets past
On Wednesday, China’s securities regulatory (CSRC) called out 258 financial institutions for conducting illegal margin trading and called on investors to avoid seeking margin loans from unlicensed institutions.
The CSRC’s notice comes as margin loans in China hit a five-year high (Financial Times):
- “Total margin finance in China reached Rmb1.27tn ($184bn) on Tuesday after more than a week of consecutive daily increases.”
- “The CSI 300 index…leapt almost 6 per cent on Monday and continued to climb on the following days.”
But a bullish market is a good thing, right?
- Well yes, but actually no.
Some context: Margin trading was one of the major factors behind the Chinese stock market’s explosive growth and spectacular crash in 2015. At the time, state media had encouraged investors to pile into stocks to boost flagging growth – thereby throwing gasoline on the fire.
- After the crash, policymakers were shook. The CSRC banned margin trading except by qualified brokerages.
Now, confronted with an eerily familiar set of indicators, policymakers are letting their regulatory PTSD guide their approach to managing the market.
Get smart: China’s regulatory outlook has matured a lot since 2015. Financial de-risking and sustainable growth remain the order of the day.
FT:Rise in margin lending stokes fears of China bubble
SCMP:China Securities Regulatory Commission warns investors about illegally financed margin trading amid run-up in markets
3. Are SPBs a bridge to nowhere?
On Tuesday, we told you that the central government approved the last batch of annual special purpose bonds (SPBs) (see July 7 Tip Sheet).
Some context: SPBs are key to the government’s ability to support the economy because they are the main funding channel for local governments to invest in infrastructure.
But according to a provincial government’s internal report on SPB use obtained by 21st Century Biz, there’s been a methodological change in the way that quotasare allocated to local governments.
- Then: For the past two years, local governments with higher debt ratios got smaller SPB quotas.
- Now: The size of local government SPB quotas will depend on how many shovel-ready projects the locality has.
But according to one local official, it’s getting increasingly difficult to find infrastructure projects that meet the requirements (Xinhua):
- “At this stage, the construction that should have been completed is basically done.”
- “To be frank, there are not as many [large scale infrastructure projects] as there were a few years ago.”
What’s more, the report found that officials are reluctant to borrow money for infrastructure projects for fear of getting saddled with the debt if things don’t pan out.
Get smart: The government can no longer rely on infrastructure investment to be the economic savior that it used to be.
4. When the levee breaks
Yesterday, the State Council held its weekly executive meeting.
Flood control was at the top of the agenda.
Some context: As of July 3, heavy seasonal floods have affected more than 19 million people and claimed 121 lives across 26 provinces.
- So far, the direct economic cost is calculated at more than RMB 41 billion.
More context: Massive floods may seem like the cherry on top of an almost biblical set of disasters in the first half of the year, but statistically, both the human and economic costs of this year’s flooding have only been about half as bad as the average over the past five years.
Even so, the State Council is not taking it lightly. The meeting decided to (Gov.cn 1)
- “Increase material and funding support to help local authorities relocate disaster-hit residents.”
- “Repair damaged projects and restore production to the parts of the country most severely affected by floods.”
It’s also a perfect excuse to discuss infrastructure investment:
- “The meeting studied the arrangements for 150 major water conservancy projects.”
Get smart: These floods will deal another blow to the struggling economy.
What to watch: The floods could get worse as the rainy season continues.
5. Li Keqiang pushes for market-oriented reforms
Controlling floods was not the only thing discussed at yesterday’s State Council meeting (see previous entry).
Premier Li Keqiang also discussed one of his favorite topics: Improving the business environment.
Li said that the first priority is to implement the measures already passed (Xinhua):
- “If we can fully deliver the tax and fee cuts and fiscal funding support for this year, together with the interest concessions…businesses can get through this trying time.”
But Li also wants officials to be forward looking (Gov.cn):
- “[We must] also think about the long term, and use reforms to create a market-oriented, law-based, and international business environment.”
To this end, Li proposed new reforms (Xinhua):
- “Unwarranted restrictions on market access in education, healthcare and sports will be removed.”
- “Online verification of professional qualifications will be realized by the end of June next year.”
- “Cities at prefectural level and above will be given the mandate for foreign-invested business registration.”
- “Regulatory certificates for import and export will be processed…via a single stop.”
Get smart: Li and other top leaders have consistently stressed that economic support policies should be designed to enhance the economy’s long-term competitiveness.