DRIVING THE DAY
1. China appeals to the world in the trade war
With the trade war deepening, the Chinese government is experimenting with its messaging strategy.
One new-ish message that was really pushed in the State Council’s white paper on US-China trade (see yesterday’s Tip Sheet) is that the trade war hurts US economic interests.
At a press conference on Tuesday, government officials doubled down on that message – even suggesting that US businesses are losing their edge to counterparts from other economies (SCIO).
As evidence, authorities highlighted some data:
In H1 2018, China’s agricultural imports from non-US countries, including Brazil and Australia, increased substantially; growth in US imports was negligible.The US used to be the largest supplier of automobiles to China, but Germany has recently surpassed it.The US could become an important LNG supplier to China, but thanks to trade restrictions, Australia will have the edge.
And it didn’t stop with the trash-talking press conference.
Former central bank governor Zhou Xiaochuan is leading a high-level delegation to talk with EU think tanks about the trade war. Zhou told them China-EU investment negotiations should be accelerated (China Daily).
Get smart: China is trying to get the rest of the world on its side in the trade war.
But will it work?
China Daily: Germany, EU urged to deepen cooperation with China
FINANCE & ECONOMICS
2. Central government wants every fen of its money counted
The Chinese government spends trillions of RMB every yearon services and investment. But to date, they’ve never really assessed the efficacy of that spending.
That’s set to change soon, given that the Party Central Committee and the State Council issued a top-level policy document on Monday, called “Opinions on Comprehensive Implementation of Budget Performance Management.”
To put it simply, measuring budget performance requires continuous assessment of the impact of fiscal spending – and a roadmap for improvement over time.
The new system will focus on assessing and improving:
Fiscal revenue structureRevenue collection efficiencyEffects of preferential fiscal policiesEfficiency of fiscal expenditure
And get this: All government departments are required to do performance assessments before applying for budgetary money for major policies or investments.
Plus, agencies’ future budgets and officials’ personal careers will be affected by how smartly they spend money.
The timeline: The system should be established in three to five years.
Get smart: This is huge deal. The central government is starting to force local governments to be honest with their books (see next entry). The new budget performance system will help sustain that effort by guiding them – as well as central agencies – to spend money more efficiently going forward.
FINANCE & ECONOMICS
3. Getting serious about resolving local government debt
Local government efforts to account for their off-balance-sheet debt are making some real headway.
Some context: Both the Party’s Central Committee and the State Council have issued high-level documents in recent months ordering local governments to audit and address their implicit debt positions (see August 16, August 28, and September 14 Tip Sheets).
As part of the effort, local governments have filled out detailed forms called, “The Form to Have a Clear View Into and Resolve Local Government Implicit Debt by the end of August 2018.”
It’s a mouthful – and the form itself is a doozy. Local governments have had to account for:
The work unit (danwei) that incurred each debtUses of debt, including the name of the project it financed, the project code, and moreSources of the funds and financing agreementsThe time the debt was borrowed, along with repayment schedules and expected balance at the end of 2018The debt maturity structure in the 2019-2028 timeframe Debt repayment arrangements An annual debt dissolution planAnd assets corresponding to debt items, including the liquidity of such assets
Our take: This effort mirrors the campaign to audit banks’ off-balance-sheet debt last year. That program was successful thanks to detailed implementation. We wouldn’t count this one out either.
21st Century Biz: 国家审计署8月下旬全面开展地方政府隐性债务审计 债务摸底需填报八大类信息
FINANCE & ECONOMICS
4. Authorities support the panda bond market
China’s financial authorities are trying to buoy the panda bond market – that’s why the central bank (PBoC) and the Ministry of Finance (MoF) issued new guidelines on Monday to govern issuance of the bonds.
Some context: Panda bonds are onshore RMB-denominated bonds issued by foreign institutions. To date, the market hasn’t gotten a lot of uptake. The bonds that have been issued were mostly symbolic shows of support – by foreign entities looking to earn points with the Chinese government.
According to the 21st Century Business Herald, the idea is to pick things up by establishing clearer rules:
"The new regulations divide issuers of Panda Bonds into four categories: foreign government institutions, international development institutions, overseas financial institutions, and overseas non-financial enterprises." "[They then] establish rules, issuing conditions, issuing procedures, and information disclosure requirements for these four categories."
As one local banker put it:
"This document clarifies issues that were previously ambiguous, such as the issuer's qualification requirements, financial norms, and so on."
Why it matters: The discussion around RMB internationalization usually focuses on developing RMB assets abroad. But equally important is the willingness of companies to borrow in a given currency. We’ll see if these new rules are enough incentivize foreign companies to incur RMB liabilities.
21st Century Biz: “熊猫债”迎统一管理办法 外资评级机构获益
POLITICS & POLICY
5. Getting serious about tax compliance
We’ve written a lot lately about big changes to China’s tax rules and compliance procedures.
Now, it seems the tax authorities are getting even more serious – using inspections to make sure local authorities are carrying out the changes (gov.cn):
“In order to further implement the measures of simplifying administration and reducing the tax burden, 36 inspection teams were sent to tax departments of various provinces on September 25.” The goal of these inspections is:“To carry out a six-day special supervision and inspection on the implementation of preferential tax policies.”
And they are keeping a narrow focus to start:
"The inspections focus on the implementation of a series of preferential tax policies, such as the reduction of VAT rate and the refund of VAT."
Why it matters: China's tax system, and overall fiscal system, needs an overhaul. Lower tax rates help to ease the burden on businesses, which is the point of these inspections. But that needs to go along with better tax enforcement to keep up government revenues.
What to watch: Inspection tours tend to be a powerful tool to ensure compliance, but the jury is still out, as local governments are not keen to lower taxes.
Gov.cn: 税务总局派出36个督查组赴各省（区、市）开展督导督查 确保减税政策和“放管服”改革措施落实落地
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