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"China's downward economic trend...has nothing to do with the trade war."

- Liu Shijin, Deputy director of the CPPCC's economic committee

Some context: Liu – a respected senior advisor on the economy – said that in a recent speech. He thinks the economy is slowing because infrastructure and property peaked a few years ago, and no new growth drivers have emerged to replace them. We couldn't agree more – and we made a similar argument in our Bloomberg op-ed over the weekend. More in the Tip Sheet below.



1. A worrying stat for infrastructure investment

Why are regulators so keen to address weak infrastructure investment? Because the worst may be yet to come.

That's according to a report issued today by the National Development and Reform Commission (NDRC).

The critical finding of the report was around “intended infrastructure investment" – it contracted by a whopping 35% y/y in the first seven months of 2018.

Some context: Intended investment refers to contracts that have been signed – signaling intention to undertake a project soon – but not yet funded or approved.

Why that matters: Extremely weak infrastructure investment has been the key driver of China’s slowdown this year. Such a marked drop-off in intended investment has the NDRC concerned that things will only get worse in the coming months.

Get smart: The government is trying to juice local spending by having local governments accelerate their bond issuance. But the reality is that there may not be many “shovel ready” projects out there right now. That’s what the contraction in intended investment suggests.

Bonus read: For our deeper take on why China’s economic support measures won’t work, click the Bloomberg link below.

China Securities Journal: 发改委发布7月份全国固定资产投资发展趋势监测报告
Bloomberg: China’s Growth Woes Aren’t Going Away


2. The PBoC's counter-cyclical factor is back

Late on Friday, the central bank announced that it is re-imposing a mechanism to help stabilize the exchange rate.

That mechanism, called the “counter-cyclical factor,” is part of the formula that the central bank uses to set the currency’s initial trading rate each day.

Some context: The factor was first introduced in May 2017, as the central bank (PBoC) fought to counteract capital outflows and currency depreciation. But the bank had not used the counter-cyclical factor this year because capital flows were more balanced.

Get smart: As the PBoC said in its official statement, the commercial banks that help the PBoC determine the morning trading rate have already been working this factor back into their calculations in recent weeks. So this announcement just formalizes that process.

Get smarter: The central bank has become uncomfortable with the pace and magnitude of depreciation; this new policy adjustment will help keep traders from building up large short positions and magnifying currency volatility.   

What to watch: After the move, the dollar weakened in the US on Friday, and the CNY rallied today – but how long will that last?

PBoC: 人民币对美元中间价报价行重启“逆周期因子”
The Financial Times: China’s central bank gives itself more leeway on setting exchange rate


3. Party takes on "rule of law"

On Friday, Xi Jinping chaired the first meeting of the newly-established Central Commission for Comprehensively Ruling the Country by Law.

Some context: The body was created as part of the MASSIVE Party-state re-org announced in March.

The Commission has a big mandate. It is supposed to ensure  that: 

The legislature makes laws "scientifically"The government enforces laws strictlyThe judicial system makes judgments impartiallyThe people abide by the law 

The commission has three vice chairmen:

Premier Li KeqiangChairman of the National People’s Congress Li ZhanshuHead of the Party’s Central Secretariat Wang HuningThe meeting passed two documents:One specified the procedures for the commission's workThe second identified the commission’s 2018 work prioritiesThe meeting also deliberated – but did not pass – two documents:A revised Organic Law of the People's CourtsA revised Organic Law of the People's Procuratorates

What it all means: The new commission firmly asserts the Party at the center of China’s legislative and legal enforcement processes.

CPC: 习近平:加强党对全面依法治国的集中统一领导 更好发挥法治固根本稳预期利长远的保障作用


4. Reformers leverage slowdown to call for liberalization

China’s economy is slowing – everyone knows that.

But as senior policy advisor Liu Shijin says: it has nothing to do with the trade war.

Some context: Liu is the former deputy head of the State Council’s in-house think tank, the Development Research Center.

Liu thinks that the trade war is getting too much attention. He is concerned that focus on trade tensions will cause policymakers and analysts to lose sight of the more fundamental problems of China’s economy.

The challenge: China’s traditional drivers of growth – infrastructure and property – have already peaked.

So Liu says the government needs to unleash new growth drivers.Here are his suggestions:

More fiscal support for healthcare, education, basic research, and social securityFacilitating the flow of capital, labor, and landOpening monopolized sectors to private investors

Get smart: Liu, like many other economic liberals, is using the economic slowdown to push for more marketizing reforms.

Caijing: 刘世锦谈中国经济新动能:基建房地产投资已过历史需求峰值


5. Party’s new disciplinary rules: all about policy implementation

The Politburo has finally released the full text of its revised regulations on Party discipline.

Some context: The revisions were approved a few weeks ago (see August 1 Tip Sheet); they are the second set of revisions in the past three years.

Here's what caught our eye: The new regulations have several articles focused on penalizing poor policy implementation. 

According to the new rules, the following could now get you in trouble:

“Paying lip service to decisions of the Party center, but not actually implementing [them].”“Simply implementing [policies] by holding meetings and issuing more documents, but not actually doing anything in reality.”“Refusing to implement major policies of the Party center, and even going so far as to maneuver behind the Party center’s back.”

Get smart: You don’t make rules like that unless you have a problem. It’s clear that six years into Xi’s leadership, the Party center still struggles to get lower-level officials to implement its policies.

Get smarter: The new regulations will empower the Party’s discipline inspectors and should improve policy implementation.  

What to watch: The new regulations will take effect on October 1, 2018.

Xinhua: 中共中央印发《中国共产党纪律处分条例》


6. Xi takes down top generals

The SCMP scoops that three senior military officials have been demoted:

“Two generals who at different times held top military jobs in the country’s south, including overseeing the sensitive South China Sea, were demoted by seven grades to become deputy regimental officers, the sources said.”“At the same time, the man who was once the youngest lieutenant general in the People’s Liberation Army (PLA) and a former military spy chief, was taken away by investigators on Wednesday.”It all goes back to two men:“'All three generals [represent] the harmful influence left by Guo Boxiong and Xu Caihou,' one of the sources said."Some context: Guo and Xu were the highest-ranking military officials under Hu Jintao. Both have been exposed as massively corrupt.

Xi wants to send a message:“'Xi wants to use the three senior generals’ downfall as a warning to all military officers that the anti-graft campaign has not stopped,’ a retired senior colonel said.”“It’s foreseeable that more senior officials will be investigated because it takes time to eradicate an evil legacy.”

Get smart: Although the anti-corruption campaign terrifies many senior officers, the army’s rank and file love it.

SCMP: President Xi Jinping takes aim at more top Chinese generals as anticorruption drive rolls on


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