HEARD IN BEIJING
"There are no such things as ‘re-education centers’
- Hu Lianhe, deputy director general of the United Front Work Department
Some context: Hu said that on Monday to a United Nations hearing on Xinjiang. Hu's protestations ring hollow. More in the Tip Sheet below.
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THE TIP SHEET
DRIVING THE DAY
1. Nobody believes China’s story on Xinjiang
By all outside accounts, Xinjiang increasingly resembles a police state.
But the Chinese government begs to differ (QZ):
"At a meeting of a United Nations human rights panel today (Aug. 13) in Geneva, a Chinese delegation categorically said there was no such thing as 're-education centers' in Xinjiang and nor was there any subjugation of religious freedom in the Muslim-majority region."Some context:"China’s response comes after the UN Committee on the Elimination of Racial Discrimination (CERD) said on Friday (Aug. 10) that there were 'credible reports' that 2 million Uyghur and Muslim minorities in China are being held in secret internment camps."The Global Times says China is just misunderstood:"Observers in the West, the paper added, fail to understand that such measures are a ‘phase that Xinjiang has to go through’…and are instead 'smearing' Chinese governance in Xinjiang."
Get smart: The crackdown in Xinjiang is undermining China’s reputation globally – as it should. The lack of transparency makes official protestations that nothing bad is going on ring hollow.
What to watch: The situation will only gain more attention from the global community.
FINANCE & ECONOMICS
2. Data dump – credit
China’s central bank (PBoC) released monthly credit data for July late on Friday.
We’ve been anticipating this data for a while (see yesterday’s Tip Sheet), so we're keen to dissect the numbers.
But at first blush, the data was confusing. That’s largely because the PBoC also announced a change in its methodology for calculating total credit data – making it difficult to compare July’s numbers with previous months.
What’s new? The PBoC added two new components to its Total Social Financing metric – asset-backed securities and loan write offs. It also released historical data for the two categories dating back to January 2017 – so we can do some comparisons with the old and new methods to see what’s going on.
According to the new calculations,total credit growth came in at 10.3 y/y – up from 9.8% June, showing a decent acceleration in the month.
But stripping out those new components shows credit growth of 9.7% y/y – DOWN from 9.8% in June and the slowest print on record.
Get smart: The two new categories accounted for the entirety of the acceleration in headline credit in July. As we explain in the next entry, that means fundamental credit growth dynamics haven’t changed.
FINANCE & ECONOMICS
3. Data dump – credit growth (cont’d)
Given the adjustment to credit data last month, it’s worth going under the hood to see what is genuinely happening.
Stripping out the new components within total credit (see previous entry), shows the following trends:
RMB bank loans grew by 12.9% y/y – up from 12.7% in June.All other forms of credit grew by a measly 2.8% y/y – down from 3.7% in June.
Get smart: That means that the credit dynamics that prevailed in the first six months of the year continued into July. Namely, solid bank loan growth was more than offset by extremely weak shadow banking growth, thanks to the de-risking campaign.
The upshot: Added liquidity throughout July did not translate into a genuine acceleration of credit. Newly tracked asset-backed securities and loan write-offs may have given a boost to the headline number under the new calculation, but neither element is significant enough to pump up economic activity in H2.
Why it matters: The underlying pace of credit growth is critical to understanding the strength of policy support. Support remained weak in July, which was evident in the economic data (see next entry).
FINANCE & ECONOMICS
4. Data dump – monthly econ indicators
Monthly economic indicators slumped across the board in July,according to data released by the National Bureau of Statistics on Tuesday.
Industrial production came in at 6% y/y – the same as the June print, but below expectations of 6.3%.Retail sales came in at 8.8% y/y – down from 9% in June.Investment came in at 5.5% y/y in the first seven months of the year – down from 6% in the first six months. That implies growth of less than 3% y/y in July alone.Infrastructure investment came in at 5.7% y/y in the first seven months of the year – down from 7.3% in the first six months.Check this: That last number implies that infrastructure spending actually contracted on a yearly basis in July – a remarkable stat.
Get smart: Given these numbers, its no wonder policymakers are concerned, especially on the investment side.
Get smarter: The data disappointed markets, but that’s largely because markets had overestimated both the magnitude of policy support and the speed with which it would transmit.
What to watch: Our guess is that markets will continue to be disappointed in August and September.
By the by: These numbers make clear that China’s economic woes are domestically driven, and have little to do with the trade war.
NBS: 7月份国民经济运行总体平稳 稳中有进
POLITICS & POLICY
5. Xi Jinping wants loyalty
Ding Xuexiang, Xi Jinping’s chief of staff, delivered a lecture to staff of the Party’s General Office on July 1, the anniversary of the founding of the CCP.
The text of the speech was recently released, and its content is telling.
But first…some context: The General Office runs to the day-to-day affairs of the Party’s top leaders.
In the speech, Ding said there are two things that you need in order to be a good cadre:
"Absolute loyalty” "Selfless sacrifice”Ding told the assembled cadres to focus on work, not riches:“General Office staff should aim for higher standards of work, and lower standards of living.”
Get smart: Ding was not speaking for himself but for Xi Jinping.
Get smarter: Xi has said that you don’t join the Party to get rich. He wants dedicated public servants and is happy to see the others leave.
Our thought: Xi has made the bureaucracy a less appealing place to work. Is that inhibiting the ability of the Party to attract the best and brightest?
POLITICS & POLICY
6. Government attempts to rationalize healthcare spending
On Monday, the General Office of the State Council released a planthat lays out the responsibilities of central and local governments with respect to healthcare spending.
For basic public health services,such as health education and vaccinations, central governments and local government will split costs, according to a sliding scale:
12 poor provinces will pay 20% of the costs.10 provinces will be responsible for 40% of spending.Three provinces will be responsible for 50% of spending.Four provinces will be responsible for 70% of spending.Beijing and Shanghai will be responsible for 90% of spending.For significant public health services, like disease prevention and control, the central government will foot the entire bill.
That’s not all. The plan also outlines spending responsibilities for:Medical insurance subsidiesMedical assistanceFamily planning subsidiesVarious capacity-building measures
Get smart: These reforms are part and parcel of larger fiscal reforms that seek to better align local government spending responsibilities with revenues.
Gov.cn: Reform plan for governments’ fiscal role in medical services
POLITICS & POLICY
7. Semiconductor industry people say China and the world can’t live without each other
Top leaders are concerned about their vulnerability to potentially “neck-choking” technologies (see August 10 Tip Sheet).
As Tip Sheet readers know, dependence on foreign semiconductors is of particluar concern.
But Dong Yunting says it’s not a problem.
Dong is the Director of the Expert Committee at the China Information Technology Industry Federation, and he says that foreign chipmakers rely on Chinese demand:
"[China is the world’s largest buyer of chips,] if you don’t sell them to us, whom will you sell them to?"
Dong went further, saying that the semiconductor industry cannot be restricted to national boundaries:
"There are hundreds of semiconductor components, and I can say that no country can do them all." "Therefore, this industry must be globalized.""I suggest that China's semiconductor industry put the main focus on two parts [of the value chain], one is design and one is manufacturing; because we have a big gap in materials and equipment."
Get smart: We agree with Dong on this one – China and the US are intertwined when it comes to chip making. That's how globalization works.
Get smarter: The problem is that the two countries’ leaders don’t seem to be believers in globalization.