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"We've basically laid out the road and now it's a matter of whether cars want to drive on it."

Anonymous person close to financial policymakers

Some context: China's plan to bring its tech companies home is faltering. The main reason is that Chinese stocks are not a happy place for investors right now. More in the Tip Sheet below.

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1. China's rotten vaccine problem

A scandal over ineffective vaccinescontinues to dominate political life in Beijing (see July 23 Tip Sheet).

Monday’s State Council meetingpromised to punish those responsible (

“Those held responsible and involved in the rabies vaccine case should be given higher penalties and subject to hefty fines.”Police have already detained 18 people (People's Daily):“Police in Changchun, Jilin province, asked prosecutors on Sunday to approve the formal arrests of 18 people from Changchun Changsheng Biotech…[including] the chairwoman.”This is not an isolated incident. The SCMP details a host of problems.

Some vaccines themselves are fake:“A senior executive with a Chinese vaccine maker…said manufacturers often forged vaccine test data to get state approval.”Other times, medical data is fake:“It was also common practice to sweep the numbers for some diseases under the carpet rather than treat them, the source said.”

The State Council is now demanding an overhaul of the vaccine policy framework.

Get smart: One dangerous but persistent narrative is that this and other scandals have occurred thanks to the privatization of state-owned vaccine manufacturers. That narrative is gaining some credence among the public.

The big picture: That kind of false narrative can do huge damage to much-needed market-oriented reform initiatives.


READ MORE Premier Li stresses improving full-cycle vaccine monitor system
People's Daily: Arrests of 18 sought for rabies vaccine
SCMP: Fake data – the disease afflicting China’s vaccine system 李克强主持召开国务院常务会议 听取吉林长春长生公司违法违规生产狂犬病疫苗案件调查进展汇报等


2. A masterclass in China's banking system

Gabe Wildau and Jia Yizhen have an absolute must-read piece in today’s Financial Times – at least if you want to understand how China’s banking system works.

They focus on China’s smaller “regional lenders,” and explain why these are the most vulnerable financial institutions in the country.

One key passage:

"Several regional banks have already gone bankrupt in all but name before being bailed out and restructured by local authorities.""Others have become piggy banks for local governments or politically-connected tycoons with an outsized influence over local banks.""These lenders are largely not permitted to operate outside their home territory and are therefore highly dependent on local governments, state enterprises and entrepreneurs to support their businesses."

Tip Sheet readers will know these “regional lenders” as the city commercial banks (CCBs) that we often highlight, as well as rural commercial lenders (which are just smaller versions of the CCBs).

One caveat: While these lenders all have issues, they are individually very tiny, so a bunch of them have to blow up at the same time to truly threaten the financial system.

The piece is definitely worth the click.

The Financial Times: Regional lenders: China’s most dangerous banks


3. MofCom tightens and loosens foreign share purchases

The Ministry of Commerce (MofCom) released new draft rulesgoverning “strategic” equity investments by foreigners on Monday.

By “strategic” investments, MofCom means large A-share purchases, bought directly from a company – not purchased from an exchange.

The rules make it both easier and harder for foreigners to make such purchases:

In terms of tightening: The rules broaden the power of MofCom to review and approve foreign equity purchases on national security grounds – much like the US has recently strengthened its CFIUS review process.In terms of loosening: For non-security related purchases, the regulator lowered total asset requirements for qualified purchasers – meaning that smaller investors can now take part. MofCom also lowered the lockup period for such purchases to one year, from three years previously.Our take, as told to the FT yesterday:“'This move is in line with two major trends in China: accelerated financial opening and increased concerns around economic national security,' said Andrew Polk at Trivium, a Beijing consultancy."“The [Communist] party wants to draw clearer lines around what is and is not permitted in terms of foreign investment.”

Get smarter: China wants capital inflows. But it wants to control where they go. That's a tough needle to thread.


MofCom: 商务部关于《关于修改<外国投资者对上市公司战略投资管理办法>的决定(征求意见稿)》公开征求意见的通知
The Financial Times: China plans tighter controls on foreign acquisitions


4. WSJ on the uphill battle for CDRs

It’s a good day for the foreign financial media on China.

Another great piece from Chao Deng, Liza Lin, and Julie Steinberg at the WSJ explains way China is having trouble bringing its tech companies home:

“With new securities known as Chinese depositary receipts, Beijing had aimed to reverse a trend of overseas listings by marquee names—such as Alibaba Group Holding Ltd., Tencent Holdings and Baidu Inc."The instruments would give local investors access to such fast-growth stocks, while the issuers’ other shares would continue to trade offshore."The plan, formalized in June, was supposed to show that exchanges in mainland China can compete with rivals in Hong Kong, New York and elsewhere."However, people close to the companies said the securities regulator has cooled on a quick rollout, while people close to the regulator said companies are dragging their feet on applying.""At least two—Alibaba and Inc. —have suspended issuance plans."

Get smart: It’s never good when the regulator and the companies are blaming each other.

Get smarter: The real culprit is the recent bloodbath in stock markets. There’s not a lot of appetite for new share issuance of any kind.

Go deeper: Click the link below.


WSJ: China’s Plans for Tech Homecoming Stall


5. The latest effort at SOE reform

The State Council wants to improve state-owned enterprise (SOE) performance.

Monday it issued a new trial program for state-owned capital investment companies and state-owned capital operations companies.

The big idea: These companies will oversee China’s SOEs – instead of having the government do it. The idea is to create a buffer between government and the SOEs.

The operations companies (i.e. holding companies) will mainly act as financial investors in SOEs – and will be evaluated by their returns.

But investment companies have an extra layer of political responsibility: 

“State-owned capital investment companies aim to serve the national strategy…enhance industrial competitiveness…promote industrial structure in major areas and industries concerning national security.” An added bonus – the Party cells will be strong in these entities:“[We should] Integrate the leadership of the Party into every segment of company governance.”

Some context: It might not seem like a big shift, but last year top regulators changed tack on SOE reform – instead of focusing on the performance of industrial enterprises themselves, the idea is simply to boost returns for state-owned capital.

Get smart: Investment and holding companies are seen as the key platforms for boosting returns, but its not clear they can actually get it done.


READ MORE 国务院关于推进国有资本投资、运营公司改革试点的实施意见 Pilot reform of State-owned capital investing, operating companies


6. SASAC wants to hold SOE executives accountable

The State Council pilot wasn’t the only SOE reform document issued yesterday.

The SOE administrator (SASAC)announced a new set of rules meant to hold central SOE executives accountable for poor management.

SASAC promises to crack down on the following behavior:

Poor risk management, including debt riskEmbezzlementSelling assets at low pricesInvesting into areas restricted by the governmentThey will also increase scrutiny over:Mergers and acquisitionsCompany restructurings and changes in ownershipOversea investmentsOne more thing:The authorities promise to crack down on business decisions that are not in line with the government's policy objectives.

Get smart: Incentive structures for SOE execs need a revamp. In general, holding them more accountable is a good thing.

But, but, but…we’re not sure how much these measures will help. Things like embezzlement were already illegal. And some of the other measures look likely to cower executives into conservative inaction, which is not a recipe for market dynamism.

SASAC: 中央企业违规经营投资责任追究实施办法(试行)


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