one big thing
1. Finance gets greener
On Wednesday, five regulatory agencies – led by the environmental ministry–published a set of guiding opinions designed to direct more resources toward climate-friendly projects, and mobilize the financial system to combat climate change.
Some context: The opinions were originally issued on October 21, but just now made public.
The opinions were jointly issued by:
- Ministry of Ecology and Environment
- National Development and Reform Commission
- People’s Bank of China
- China Banking and Insurance Regulatory Commission
- China Securities Regulatory Commission
Specifically, the document envisions the financial sector playing a greater role in protecting the environment by:
- Mitigating climate change by developing strategic emerging industries, developing non-fossil fuel energy sources, supporting carbon capture projects, and helping finance carbon sinks
- Adapting to climate change through disaster prevention and mitigation, speeding up infrastructure construction, supporting scientific research, and helping improve the adaptability of agriculture
While much of the document is big picture, the opinions also outline a handful of specific measures, including:
- Eventually allowing qualified individuals and financial institutions to participate in China’s carbon trading system
- Supporting the development of financial derivatives like carbon futures
- Supporting the raising of yuan-denominated climate funds overseas
- Allowing yuan-denominated green financial products to be traded overseas
- Allowing foreign entities to issue green bonds
- Developing clear standards for green financing
Get smart: A cynic might say that Beijing’s environmental concerns open up a bunch of new areas for state-led infrastructure investment, thereby keeping the wheels of the growth machine spinning.
Get smarter: While some local governments will use green finance as an excuse to borrow more, Beijing’s environmental concerns are real, and support for reform comes all the way from the top.
The bottom line: Investors need to pay attention to documents like these — they will determine where the money flows in China’s economy over the next few years.
2. Kashgar outbreak shows limited spread
On Tuesday, Xinjiang officials held their third press conference on the COVID-19 outbreak in Kashgar prefecture, where the first asymptomatic carrier was found on Saturday.
As of Tuesday, Kashgar has reported (Xinjiang HC):
- 22 confirmed cases
- 161 asymptomatic carriers
Don’t expect to see many more infections:
- Kashgar has already completed citywide testing of 4.7 million residents and found no further contagion.
- All transmitted cases were found within one county.
There is still no official word on the outbreak’s origin,but on-the-ground reporting by Caixin indicates the new infections stem from a local garment factory (Caixin):
- “A new cluster of Covid-19 cases…was linked to a garment factory designated to lift villagers out of poverty.”
Wherever it came from, epidemiologists say the risk of further spreading is low (The Paper):
- “The probability of a large-scale outbreak is very small.”
With 183 people already infected, Kashgar is instituting relatively mild response measures, notably without:
- A citywide lockdown
- Suspension of air, rail, or road traffic
- Banning or quarantining incoming travelers
- Barring travelers from leaving Kashgar
Get smart: With citywide testing done, the Kashgar outbreak looks under control.
3. Guangdong legal
On Monday, Hong Kong’s Secretary for Justice Teresa Cheng Yeuk-wah published a blog post calling for Hong Kong enterprises in the Greater Bay Area (GBA) to be able to adopt Hong Kong law for purposes of arbitration and contracts.
We’ll let Cheng explain what that means (Gov.hk)
- “We hope that wholly owned Hong Kong enterprises in the [GBA]…may choose the law of Hong Kong as the applicable law when entering into…contracts, and decide to choose Hong Kong as the seat of arbitration when disputes arise.”
- “[T]he agreement on choosing Hong Kong laws or using Hong Kong as the seat of arbitration will not be considered invalid due to the absence of any foreign-related elements.”
Some context: Under Chinese law, foreign-invested enterprises operating in China can only adopt foreign (including Hong Kong) law for arbitration if one or more parties to the dispute are foreign citizens or if the subject matter of the case is located outside the mainland.
- Cheng’s proposed reform would effectively scrap this requirement.
Get smart: Conflicting legal systems is one of the thorniest challenges facing the economic and financial integration of the GBA. The proposed reform would help bring clarity to the question of when and where a given set of laws takes precedent.
Get smarter: Given Hong Kong’s increasingly dire economic situation and the chilling effect of the national security law, mainland leadership may be more amenable to the proposal than in years past.
Why this matters: The GBA is China’s highest-priority regional economic development plan.
- The success (or failure) of GBA integration will be critical in determining China’s future growth path.
- It will also have huge implications for China’s continued integration with the global financial system via Hong Kong.
4. MoF says no to PPP
On Wednesday, the Ministry of Finance (MoF) said that special purpose bonds (SPBs) cannot be used to finance public-private partnership (PPP) projects.
- This was a direct response to a policy suggestion from some legislative representatives in Gansu province, who requested to fund local PPP projects via SPBs.
Some context: PPP projects are jointly funded by local governments and private businesses. But they’re often used by local governments as disguised channels for raising debt.
More context: In June 2019, the CCP Central Committee and the State Council jointly released a policy document to relax rules on the use of special purpose bonds. The move sparked public speculation that the money would be allowed to flow into PPP projects.
However, MoF isn’t budging on this one (Caixin):
- “Although the [PPP] model can drive large-scale investments, it is prone to create expectations of implicit guarantees from the MoF.”
- “[They] are highly risky and very difficult to operate.”
Get smart: As Beijing is shoring up the economy via SPBs, local governments hoped to take the opportunity to fund pet projects.
Get smarter: China has come a long way from the undisciplined stimulus bomb that was its response to the 2008 global financial crisis.
5. Aluminum, coking discouraged by MEE
On Tuesday, the Ministry of Ecology and Environment (MEE) recommended that aluminum and coking be removed from an official list of “encouraged industries” for development in China’s western regions.
MEE’s recommendations were addressed to the National Development and Reform Commission, telling the body that (MEE):
- “Coking and electrolytic aluminum are highly polluting and highly energy-consuming industries with overcapacity nationally, and should not be included in the catalog of encouraged industries in the western region.”
- Specific line items encouraging development of aluminum and coking industries in Inner Mongolia should be deleted.
Some context: Policymakers want to encourage some industries to relocate, both in the interest of reducing the environmental burden in the east and encouraging growth and job creation in the west.
The message from MEE is clear – there is no reason to develop new aluminum and coking projects. Anywhere.
Get smart: Lists like these serve two important functions. They help local governments to identify and prioritize appropriate sectors for support, while also allowing companies to focus their investment efforts in localities where new projects will be welcomed.
Get smarter: This is yet another signal that strict climate and environmental targets are likely to be front and center in the forthcoming 14th Five-Year Plan.
6. Another technical tweak for the yuan
The People’s Bank of China (PBoC) has phased out the “X-factor,” a counter-cyclical component of the calculations behind the yuan’s daily fixing.
Some context: The 14 banks that submit the daily quotes upon which the fixing is calculated had used the X-factor since January 2017 as a part of their calculations.
The main point: The change gives those banks more scope to submit weaker fixing levels (more on that in a second).
The other point: The China Foreign Exchange Trade System – the central bank’s foreign exchange system – said that the change will promote transparency and efficiency (Reuters).
More context: This is the second measure in as many weeks that creates space for the yuan to weaken – or to at least strengthen less quickly.
- In mid-October, the PBoC lowered the reserve requirement ratio for financial institutions conducting foreign exchange forwards from 20% to zero, thereby making it less expensive to short the yuan.
Get smart: The yuan’s strengthening path this year is giving policymakers space to remove some of the constraints they placed on the foreign exchange market previously.
- Over time, this should allow genuine market forces to play a greater role in setting the exchange rate.
- For now, it’s a good way to take some of the steam out of the CNY rally, which threatens to over-tighten domestic financial conditions and hurt exporters.
7. Zhou Xiaochuan on digital currency
On Tuesday, Zhou Xiaochuan, former governor of the People’s Bank of China (PBoC), spoke at the Budapest Eurasia Forum via videolink.
Zhou’s message: We’ll let the market decide the best technology for China’s digital currency (DCEP).
Some context: On October 9, the G7 central banks and the Bank for International Settlements published a paper on central bank digital currencies (CBDC), seeking an optimal solution for CBDC design.
But Zhou says the PBoC is taking a different approach (Eurasia Forum via YouTube):
- “It’s not necessary for central banks to choose a certain type of CBDC.”
- “[DCEP] is not a typical CBDC program.”
Contrary to the paper’s suggestions, Zhou said that China will let the market determine an optimal design while maintaining centralized control over the underlying protocols behind DCEP.
- “We can’t single out the optimal choice of technology…because two or three years later there might be a better technology.”
- “We are trying to set up the DCEP system to accommodate this kind of evolution.”
ICYMI: The following institutions are developing the front-end applications for DCEP:
- The big four state-owned banks
- The three state telecoms
- China’s mobile payment duopoly: Alipay and WeChat Pay
Editor’s note: Seven state-owned enterprises and a duopoly doesn’t exactly sound like “the market.”
Nevertheless, Zhou called on these institutions to increase interoperability and make it easier for merchants and consumers to make payments across different platforms.
Get smart: Despite keeping a tight hold of the policy and technology reins, Beijing genuinely wants to build in flexibility so that DCEP can evolve to meet changing consumer demands over time.
Go deeper: Listen to Zhou’s full talk on DCEP here.