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TRIVIUM CHINA: Know China better



"SMEs account for 50% of taxes, 60% of GDP, 70% of technological innovation,...and 90% of all businesses."

- Liu He, Vice Premier

Some context: That's not an exact quote, but Liu did rattle off those stats at the latest meeting of the leading small group for SMEs on Monday. Chinese policymakers are trying hard to funnel money to those cash-strapped small businesses, but it's just not working. More in the Tip Sheet below.



1. Ramping up local government bonds

Financial regulators really want more local government bonds to be issued.

Some context: The State Council mandated faster local bond issuance as part of the package of economic support measures in late July, and the Ministry of Finance followed up recently with more detail (See August 15 Tip Sheet).

The reason: Infrastructure spending has been dismal in recent months – even contracting for the first time ever in July, on a y/y basis.

But thanks to the financial de-risking campaign, banks are reluctant to buy anything but the highest-quality, safest instruments. What’s more, since banks are increasingly required to recognize and write off their bad loans, banks need more capital.

To address those issues, regulators look set to soon lower the risk-weighting of local government bonds. Instead of holding 20% of capital reserves against such bonds, banks will soon be able to hold zero cash against them – at least according to local financial media.

Get smart: The hope is that lower risk-weighting will get banks to buy these bonds quickly, and in large numbers. That in turn, should get local infrastructure investment going.

Our take: We are skeptical that this is the magic bullet to boost local government spending.


China Securities Journal: 地方债风险权重有望降低


2. Clamping down on property trusts

China’s banking regulator (CBIRC) is frustrated that banks won’t lend more to support to the real economy.

In fact, the CBIRC has told banks to do so three times in the last month (see yesterday’s Tip Sheet).

But, the problem is that the CBIRC is trying to choke off funds to certain parts of the real economy at the same time.

The latest move is a crackdown on property trusts (Caixin):

“Caixin confirmed with separate sources…[several trust companies] were ordered by local bureaus of the China Banking and Insurance Regulatory Commission (CBIRC) to suspend new real estate trust business, which provides financing to property developers.”“China’s banking regulator has been stepping up scrutiny of trust companies since last year in an effort to tighten lending to the overheated real estate sector.”“The trust industry has been a key part of China’s massive shadow banking sector, which helps channel funds, especially from banks, into risky investments via complicated trust products to skirt lending regulations.”

Get smart: In China, increased liquidity and credit always flow into property first. Increasing credit while tamping down the property market are not congruent policy moves – something has to give.


Caixin: Regulator Tightens Scrutiny of Real Estate Trust Business


3. Liu He promotes SMEs

On Monday, Vice Premier Liu He chaired his first meeting of the State Council leading small group to promote small and medium enterprises (SMEs).

Some context: Liu was appointed to head the group last month.

Liu made a strong case for supporting small businesses, which he said account for:

50% of taxes60% of GDP70% of technological innovation80% of employment90% of all businessesHow Liu wants to support them: Get them some money!

Specifically, the meeting promised to:Increase fiscal supportImprove the credit transmission mechanismCreate more channels for direct financing

Get smart: Improving the transmission of monetary policy has become a policy fixation of late, as policymakers attempt to get more money to small businesses. The problem is that banks still think it’s safer to lend to large SOEs – and we have not seen any credible policy response to address that problem.


READ MORE 刘鹤主持召开国务院促进中小企业发展工作领导小组第一次会议


4. The property problem gets bigger

As regular Tip Sheet readers are well aware, the Chinese government desperately wants to rein in rocketing house prices. 

The problem: Administrative restrictions on sales and purchases aren’t really working.

In fact, in some places, things are only getting worse.

Over the past two weeks, local media has been documenting the rapid rise in rental prices in several big cities, including:

Beijing, Tianjin, Chongqing, and Guangzhou, which each saw over 20% y/y growth for rents in AugustThe government is passing the buck – blaming the skyrocketing prices on rental agencies:The agencies are reportedly amassing large amounts of rental units so they can have bargaining power in the newly-developing rental market.For their part, Beijing authorities called a meeting with such companies – telling them to knock it off.

Some context: Top policymakers have recently signaled that restrictions on property sales would stay tight, while rental units would be encouraged to help solve affordability problems.

Get smart: The challenge is that rental yields in big cities like Beijing run less than 2% – which disincentives landlords to rent units. To build a sustainable rental market, rents need to increase or sales prices need to drop, or both.


Wall Street China: 不止是北京,其他一二线房租涨得更凶猛:成都同比31% 深圳29%
Xinhua: 北京市住建委联合多部门约谈住房租赁企业 要求不得恶性竞争抢占房源
Xinhua: 业主报价7000元,有机构为“囤房”多加800元“拿下”——热点城市租金上涨新动因调查


5. Xi wants the PLA to get political

Xi Jinping chaired a three-day meeting of the all-powerful Central Military Commission over the weekend.

His message:

To be a good soldier, you need to be a good communist.That means doing what the Party leadership tells you to do (Xinhua):“Strengthening CPC leadership and Party building in the military is a requisite for advancing the ‘great new project’ of Party building and the building of a strong country with a strong military.”Practically, that means that Xi wants Party groups within the military to play a bigger role:“Measures should be taken to ensure that all kinds of work are placed under the unified leadership of the Party committees and all important issues are discussed and decided by the Party committees.”“To fulfill the primary duty of war preparedness and combat capability, more efforts are needed in improving the system of Party organizations in the armed forces and strengthening their leadership, organizational, and executive capacity.”

Get smart: It’s not just the military – Party committees are becoming more important in the government and state-owned enterprises. Because of the Party’s relative opacity, that makes it more difficult to know what is going on in those bodies.


CPC: 习近平:全面加强新时代我军党的领导和党的建设工作 为开创强军事业新局面提供坚强政治保证
Xinhua: Xi requires strengthening CPC leadership, Party building in military


6. Sino-Malaysian ties back on track?

Xi Jinping met with Malaysian Prime Minister Mahathir Mohamad on Monday.

Some context: Sino-Malaysian ties have been rocky since Mahathir was elected in May (AFP via Yahoo):

“[Mahathir] has railed against a series of deals struck with Chinese state-owned companies by the administration of toppled leader Najib Razak.”“His government has suspended China-backed projects worth more than $22 billion, including a major rail link, and Mahathir had pledged to raise the issue of what he views as unfair terms related to some of the deals on his five-day trip.”Mahathir had some tough words for Premier Li Keqiang (SCMP):“We do not want a situation where there is a new version of colonialism happening because poor countries are unable to compete with rich countries.”Despite some tensions over these projects, the Malaysians appear happy with the outcome of the meetings:“A source from the Malaysian delegation said Mahathir’s trip had…‘exceeded our expectations.’”“Those involved on our side were happy with how it went.”

Our thought: We wouldn’t be surprised if the Chinese were willing to renegotiate some of the deals done under Najib Razak. As tensions with the US heat up, Beijing is eager to keep good relations with its neighbors.


CPC: 习近平会见马来西亚总理马哈蒂尔
Yahoo: Malaysia PM calls for China's help with fiscal problems
SCMP: Malaysia big part of Beijing’s belt and road vision for future, says Xi Jinping


7. China's internet buildout – a long way to go

The China Internet Information Center has released the latest data for internet users in China.

As of June 2018, the country had 802 million internet users – a penetration rate 57.7%That’s up from 772 million people at the end of 2017 – or growth of 3.8% over that time.

One interesting detail: The vast proportion of internet users in China are (unsurprisingly) using mobile devices. In fact, over 98% of users are on mobile devices – representing 788 million people.

Get smart: The government's Internet Plus program aims to expand internet access to those in the rural parts of the country that don’t have it. It’s worth remembering that, despite being the second largest economy in the world, over 42% of China's population doesn’t have internet access!

That represents a lot of growth potential. But it also highlights that large swathes of the country remain underdeveloped.

What to watch: China wants internet penetration to hit one billion people – or about 71% of the population – by 2020. To do that, they are going to have to speed up the build out.


Sohu: 2018中国互联网报告:网民首次超8亿,其中98%用手机上网 


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