1. Politburo anxious about the economy
It might be time to worry.
That’s our takeaway from Friday’s Politburo meeting, which met to discuss the economic policy outlook for H2.
The meeting’s readout reflected rising concern about the economic outlook:
- “At present, the global epidemic continues to evolve, the external environment is becoming more complex and severe, and the domestic economic recovery is still unstable and unbalanced.”
To counter this downward pressure, Beijing plans to lean more heavily on fiscal policy.
Specifically, the government wants to:
- Ensure that budgeted investment projects actually get underway
- Speed up the issuance of local government bonds (SPBs) – and then put those funds to work
Some context: The central government allocated RMB 3.5 trillion for SPBs this year. But as of the end of June, local governments had issued only RMB 1.01 trillion of SPBs – a mere 27% of the annual quota.
While Beijing looks set to ramp up fiscal spending, they are going to hold the line on monetary policy.
- The readout insisted monetary policy will remain “prudent” and focus on “ensuring that liquidity is properly ample.”
The readout also pointedly stated that the government will “strengthen the autonomy of our monetary policy.”
- To us, that’s a clear indication that authorities won’t let the actions of other central banks disrupt efforts to maintain normalized monetary policy at home. (We’re looking at you Fed).
The bottom line: The government is worried about the outlook for H2 – that means investors should be as well.
2. Delta nudging China into lockdown
Things are looking bleak on the COVID-19 front.
From last Monday to Sunday, China reported (NHC):
- 269 new domestically transmitted symptomatic infections, up from 92 in the previous 7-day period
- 95 new domestically transmitted asymptomatic infections, up from 32 in the previous 7-day period
Some context: This outbreak began two weeks ago among airport staff in Nanjing.
- It has now spread to 28 cities in 12 provinces, infecting more than 370 people.
Pre-symptomatic tourists and travelers spread the virus beyond Nanjing, igniting more local outbreaks in:
- Zhangjiajie, a major tourist destination in Hunan province
- Yangzhou and Huai’an, also in Jiangsu province
Get this: Most of these domestic cases are the highly contagious Delta variant, and share sequencing with the initial cases identified in Nanjing.
Central authorities are taking these outbreaks very seriously.
- Last Wednesday, the health ministry (NHC) called for a unified national response to the Nanjing outbreak and its linked infections.
- From Thursday to Sunday, Vice Premier Sun Chunlan went to Nanjing to inspect epidemic control work.
- Sun said a whole-of-province effort was needed to contain the Jiangsu outbreak. She also dispatched working groups to Hunan province and Henan province.
Get smart: Sun is a big gun. She was deployed to Wuhan in the early days of the COVID-19 outbreak in 2020.
Get smarter: Many local governments are now admonishing residents not to travel.
- The next few weeks are critical – if mishandled, the Delta variant could push China back into lockdown.
3. There’s a new education boss in town
Listen up class.
On Monday, Huai Jinpeng was appointed Party boss of the Ministry of Education (MoE).
Why that’s interesting: The timing of Huai’s appointment is notable.
- Huai is now Beijing’s point man leading the share-shattering crackdown on China’s private tutoring sector.
A little about Huai:
- Huai is a computer guy, with a PhD in computer science from Beijing University of Aeronautics and Astronautics (Beihang).
- His research there focused on software, computational theory, and network information security.
- After graduation, Huai continued working at Beihang, ultimately serving as university vice president (2000-2009).
Stop fidgeting at the back!
As we were saying…
- In February 2015, Huai was appointed vice minister of information technology.
- Huai then enjoyed nine months as deputy Party secretary of Tianjin (Dec. 2016-Aug. 2017).
- Since Tianjin, Huai has served as the Party secretary of the China Association for Science and Technology.
- Huai is an academician of the Chinese Academy of Sciences and a member of the 19th Central Committee (2017-2022).
Get smart: The current minister of education, Chen Baocheng, was slated to retire in May this year. We expect Huai will also nab the minister title once formalities conclude.
Get smarter: Huai being appointed MoE Party boss in the middle of a major crackdown shows he enjoys the trust of top leadership.
4. Getting consumptive
Last Wednesday, the CCP Central Committee invited the leaders of China’s minor political parties to give their thoughts on the state of the economy.
- Yup, China has eight officially sanctioned minor political parties which play an underappreciated role in the political system, providing feedback and suggestions to CCP honchos.
Xi Jinping presided over proceedings, listening to other party leaders discuss economic work priorities for H2, including:
- Improving China’s demographic outlook
- Building a national immunization barrier
- Pushing forward China’s environmental goals
- Ensuring the buildout of national laboratories
- Ensuring the development of the Hainan Free Trade Port
The most interesting comments came from Liu Yi – Chair of the Department of Public Finance at Peking University’s School of Economics – who attended the meeting.
Liu proposed to get domestic consumption humming by:
- Improving the quality of consumption statistics and incorporating virtual and service consumption into overall retail sales statistics
- Allowing local governments to keep a larger share of consumption tax revenue
- Increasing investment in the development of the digital economy
Get smart: That second one is key. If cash-strapped local governments got to keep more of the tax receipts, they’d be incentivized to turbocharge local consumption.
5. Check yourself before you wreck yourself
On Friday, the Information and Communications Bureau within the Ministry of Industry and Information Technology (MIIT) called in 25 tech companies for a chat.
- All of China’s biggest tech companies were in attendance.
Here we go again: Since late 2020, we’ve followed closely as multiple regulators subject techcos to rising scrutiny around a host of compliance issues.
- Just last week, MIIT kicked off a six-month campaign to crack down on a variety of misconduct in the internet sector.
At Friday’s meeting, MIIT gave companies a checklist of widespread misconduct and ordered them to rectify their own misbehavior.
The checklist included:
- Blocking links to competitors
- Using pop-ups to trick users into spending more time on-screen
- Providing unauthorized internet access
- Sharing personal data without users’ consent
Lu Chuncong, deputy director of the Information and Communications Bureau, elaborated on why preventing the illegal collection of personal data is so difficult (Caixin):
- “Regulation has lagged behind development of the tech sector.”
- “There are a huge number of apps and technological iteration is fast…[which] poses a huge challenge to regulate [personal data collection].”
Get smart: Regulators may be able to identify serious issues, but they still struggle to devise regulatory solutions and enforcement mechanisms in complex, technical fields.
Get smarter: The ongoing tech crackdown is an up-hill battle for regulators.
- It’s easier for regulators if companies keep their own houses in order.
- But most companies won’t do so unless the threat of enforcement is credible.
6. MIIT summons 12 companies on data law compliance
On Friday, the Ministry of Industry and Information Technology’s (MIIT) Network Security Bureau invited 12 companies for tea.
- The lucky 12 included Alibaba, Tencent, Meituan, JD.com, ByteDance, and Pinduoduo.
MIIT’s message was simple: Take the upcoming Data Security Law (DSL) seriously (MIIT):
- “Treat data security as the bottom line and the red line of companies’ operations.”
- “Strengthen the risk assessment and export management of important data security.”
Some context: The DSL will take effect on September 1, 2021, and will be an important pillar of China’s data regulatory regime.
Be Role Models: Don’t be the dirty dozen. The MIIT urged big tech companies to set a good example of following the DSL for the broader tech sector.
Get smart: There’s not much time for these companies to sort out their data security issues.
Get smarter: Data regulation is the next frontier, so get ready for a wave of regulatory actions to come in this space.
7. Get that plan published ASAP
The Politburo held its monthly meeting on Friday, where it was clear that meeting climate goals is a top political priority.
Get on with it! The agenda included a call to issue, ASAP, an action plan for peaking carbon emissions by 2030.
Some context: The State Council – the government’s highest body – has promised to release an action plan for achieving peak emissions by the end of this year.
- The National Development and Reform Commission – China’s macro planner – is leading the plan’s development.
But don’t go mad. The meeting readout also called for coordinated and orderly efforts in achieving peak carbon and carbon neutrality:
- The Politburo wants local governments to avoid drastic measures to achieve climate targets.
- They should implement measures in line with local conditions.
And just chill a bit with the “two highs” — i.e. high-energy consuming and high-emission industries:
- Local governments should focus on building a cleaner economy before tearing down the old dirty one.
- But they should continue to curb blind development of new projects in the “two highs” category.
Our take: Everyone’s excited about the action plan, but maybe rushing something so important isn’t a good idea.