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TRIVIUM CHINA: Tip Sheet China, know china better


“We respect Africa, love Africa, and support Africa.”

- Xi Jinping, PRC President

Some context: Xi said that in his keynote address at the Forum on China-Africa Cooperation (FOCAC) Monday. He put his money where his mouth is and promised USD 60 billion in financing for the continent, including USD 15 billion in grants and concessional loans. More in the Tip Sheet below. 

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1. Xi pledges solidarity with Africa

Xi Jinping gave the keynote address at the opening of the Forum on China-African Cooperation (FOCAC) on Monday.

He promised the assembled leaders that China’s aid to Africa comes with no strings attached, saying that China follows a “five-no” approach:

“No interference in African countries' pursuit of development paths that fit their national conditions”“No interference in African countries' internal affairs”“No imposition of our will on African countries”“No attachment of political strings to assistance to Africa”“No seeking of selfish political gains in investment and financing cooperation with Africa”Xi also said that China is on Africa’s side in the global arena:“We call for increasing the representation and voice of developing countries in international affairs and support efforts to strengthen the South.”“We will continue the efforts to make the global governance system better represent the will and interests of the majority of countries, especially developing countries.”

Get smart: Xi’s pledges of South-South solidarity and no-strings-attached assistance is in deliberate contrast to assistance from the West. 

Xinhua: Full text of Chinese President Xi Jinping's speech at opening ceremony of 2018 FOCAC Beijing Summit
Xinhua: 中非合作论坛北京峰会隆重开幕 习近平出席开幕式并发表主旨讲话


2.  Xi’s China-Africa plan

Xi’s speech contained more than lofty rhetoric. He also proposed eight new China-Africa initiatives:

an industrial promotion initiativean infrastructure connectivity initiativea trade facilitation initiativea green development initiativea capacity building initiativea health care initiativea people-to-people exchange initiativea peace and security initiativeXi promised money for all of it:"To make sure that these eight initiatives are implemented on the ground, China will extend US$60 billion of financing to Africa in the form of government assistance as well as investment and financing by financial institutions and companies.""This will include US$15 billion of grants, interest-free loans and concessional loans, US$20 billion of credit lines, the setting up of a US$10 billion special fund for development financing and a US$5 billion special fund for financing imports from Africa."And debt-relief for some:“For…Africa's least developed countries, heavily indebted and poor countries, landlocked developing countries and small island developing countries that have diplomatic relations with China,…debt…in the form of interest-free Chinese government loans due to mature by the end of 2018 will be exempted.”

Go deeper: There are more details on the initiatives in Xi’s speech (see link below).

Xinhua: Full text of Chinese President Xi Jinping's speech at opening ceremony of 2018 FOCAC Beijing Summit
Xinhua: 中非合作论坛北京峰会隆重开幕 习近平出席开幕式并发表主旨讲话


3. New avenue to buy local government bonds

A circular issued by the banking regulator (CBIRC) will make it easier for banks to buy local government bonds.

The recently issued circular (a photo of which can be seen in the link below) gives banks’ investment arms more leeway to purchase bonds that the bank itself is underwriting, by removing a 20% cap on such purchases.

Why it matters: Right now, banks are busy underwriting a surge in local government bonds, so those bonds will be the first beneficiaries of the policy. Authorities want to accelerate issuance of those bonds, to help get local infrastructure spending going.

Some context: Data released today shows that the final amount of local government bond issuance in August came in at RMB 856 billion – and that is set to accelerate further into September (see chart).

Get smart: Local governments will have largely hit their annual quotas by the end of September, so bond issuance will slow dramatically in October.

Think of this as a shot in the arm to try to jolt local government spending back to life. 

The upshot: It’s not enough to stop the overall growth slowdown.

21st Century Biz: 银保监发文:银行承销地方债风险管理参照国债


4. Foreigners jump into China’s bond market

Pan Gongsheng is the head of China’s foreign exchange administrator (SAFE), and he sat down for an interesting interview with Yicai.

Pan touted the progress regulators have made in opening the domestic bond market to foreign players. The key stat:

"By the end of July 2018, more than 1,000 foreign institutions had invested in the interbank bond market, with a debt holding of nearly RMB 1.7 trillion."That’s up from just 400 foreign investors, holding RMB 800 billion, last year.

There are two big reasons that foreign investors are jumping in:The inclusion of Chinese bonds into various global indices has forced some money managers in.The market infrastructure is improving.

On the second score, Pan highlighted that bonds can now be settled with a method called delivery versus payment (DvP) – that allows for simultaneous transfer of a security's ownership upon payment.

It’s a big improvement, and brings China in line with international best practice, making foreign bond purchasers more comfortable.

Get smart: China is deepening and professionalizing its bond market, and it wants foreign players involved in the process. Over the past year, foreign investors have been increasingly happy to oblige.

Yicai: 独家专访潘功胜:债市开放持续推进,投资环境更加便利友好


5. Local protests as governments face debt issues

Chao Deng at the WSJ has an excellent look at the practical and social outcomes of an ongoing debt crisis in Leiyang, Hunan.

The latest move to save on government expenditures is angering some parents:

"The city’s plans to deal with overcrowded public-school classrooms by sending students to more expensive, often inferior private schools drove hundreds of parents and others to protest.""On Saturday, some threw bottles, bricks and firecrackers at local officials and police.""Officials moved on Monday to defuse tensions, promising the parents that tuition would be capped at the public-school level.""Even so, the debt problems—and public dissatisfaction—aren’t expected to dissipate soon in Leiyang, or in any of the other legions of local governments in financial straits."

Some context: We highlighted the financial straits in Leiyang, and in broader Hunan, this summer (see June 12 Tip Sheet). The area is a test case for how local governments will deal with their debt problems.

Get smart: As central authorities increasingly hold local governments’ fiscal feet to the fire, any belt tightening will have real world impacts. If authorities stick to the program, this will be a painful process.

WSJ: A Broke Chinese City Is Raked Over the Coals by Furious Citizens


6. Equity fund partners get a tax hike

On Friday, China’s legislature cut income taxes for most citizens (see yesterday’s Tip Sheet).

But some of China’s wealthiest citizens are going to see a tax increase.

That’s because of new rules by the State Administration of Taxation (SAT) that require limited partners in private equity funds to pay tax of 35% on their earnings, as opposed from the previous 20%.

This will bite: The SAT is applying the rate retrospectively, so fund partners will have to pay back taxes.

How did this happen? The China M&A Association explains (link below):

Local governments have been giving tax breaks to private equity funds in order to attract them to set up in their jurisdictions.But SAT has said that the incentives are illegal.And the association is unhappy:“[The tax increase] will make a large number of investment funds that have made great contributions to China's economic rise and the development of high-tech industrial enterprises withdraw from the domestic market.”

Get smart: As part of the MASSIVE government restructuring in March, the tax authorities were restructured. The result is that authority is more centralized, and local governments have less discretion over tax decisions.   

The big picture: Tax enforcement is being tightened across the board.

MA-China: 关于“国家税务总局对合伙制基金征税政策”的看法 补税35%?创投机构“未雨先忧”


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