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TRIVIUM CHINA: The Tip Sheet, Know china better


"'Election anxiety disorder’ has appeared in the United States."

- People's Daily Commentary

Some context: That was one of the key comments from a People’s Daily piece, which took on a recent speech from US Vice President Mike Pence regarding China. China’s leadership is finally starting to grasp the fundamental shift in America’s policy stance towards China. But they also think the Trump team is using them as a boogeyman for the upcoming mid-term elections. More in the Tip Sheet below. 

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1. Golden Week consumption holds up well

The nickname for China’s week-long National Day holiday that took place over the past seven days is Golden Week.

That’s partly because Chinese consumers dole out spades of cash during the holiday each year – both domestically and abroad.

The relevant government agencies have already published spending data for this’s year holiday, and the numbers look pretty solid (MofCom and MCT):

The retail and dining sectors saw combined revenue of about RMB 1.4 trillion over the past seven days. That compares to RMB 1.5 trillion over an eight-day holiday last year (see October 9, 2017, Tip Sheet) – so daily spend was up.Per Ministry of Commerce calculations, daily revenue for these categories grew by 9.5% y/y, compared to 10.3% growth in 2017.The tourism sector saw revenue of RMB 599 billion in seven days this year – compared to 584 billion over eight days last year.According to the Ministry of Culture and Tourism, daily revenues grew by 9% y/y, down from 13.9% last year.

The rub: The ministries didn’t reveal their formulas for calculating daily revenue growth – the numbers don’t add up by just comparing the headline stats and accounting for the extra day in 2017.

Still – the overall data suggest consumption held up well during an important consumer week.

MofCom: “十一”黄金周市场繁荣兴旺 消费升级势头不减
MCT: 2018年国庆假期旅游市场情况


2. PBoC enacts fourth RRR cut of the year

On Sunday, China’s central bank (PBoC) announced the fourth cut to bank reserve requirement ratios (RRR) of 2018.

The details:

RRRs will be cut by 1 percentage point for the vast majority of banks, starting October 15On that day, RMB 450 billion of cash will expire as medium-term lending facility (MLF) contracts come dueThat means the RRR cut’s incremental addition to bank liquidity will be about RMB 750 billionGet smart: While the size of the cut was the largest of the year – at a full percentage point – expiring MLF contracts mean that the incremental addition to liquidity will be about the same as the RMB 700 billion released from a 50-basis-point cut implemented in July.

Get smarter: The main goal is to improve the structure of liquidity over time – the PBoC wants longer-term cash in the banking system to address a worsening structural shortfall in bank funding.

Why make the move right now?Chinese A-shares were clearly set to fall as trading opened on the back of last week’s holiday, so it was a convenient time to signal more liquidity to support the ailing stock market (although that didn’t work).

The big question: how will this move affect the currency?

The Paper: 央行降准1个百分点置换MLF,将释放增量资金7500亿元
PBoC: 中国人民银行决定下调部分金融机构存款准备金率置换中期借贷便利
Reuters: China slashes banks' reserve requirements as trade war imperils growth


3. RRR cut and the CNY

With the Federal Reserve steadily hiking interest rates and China’s central bank marginally loosening policy to shore up the economy, the CNY is coming under pressure.

The central bank knows that the outlook for the currency isn’t great given these divergent monetary policies and the ongoing trade war.

That’s why the PBoC addressed ramifications for the currency in a Q-and-A released alongside the announcement of the latest RRR cut.

The PBoC’s contention is that the cut will not put additional downward pressure on the exchange rate.

Their explanation:

Monetary and credit growth are still very weak, and they are what really matter when talking about currency dynamics.

Implicit in that argument is the idea that the RRR cut won’t – and isn’t meant to – really pump up the pace of lending or monetary growth.

We’ve been arguing that case all year – on the back of each successive RRR cut. And so far, we’ve been dead on. Credit and monetary growth continue to plumb historical lows.

Previously, when monetary transmission was working better, such cuts would indeed have only gone on to exacerbate capital outflows and currency depreciation – think the 2015-2016 timeframe – they aren’t doing so this time around.

PBoC: 中国人民银行有关负责人表示:再次降准置换中期借贷便利 稳健中性的货币政策取向保持不变


4. Data dump – FX reserves

Speaking of capital outflows…

The PBoC released foreign exchange data for September on Sunday.

The details:

Reserves fell by USD 22.7 billion in the month.They now stand at USD 3.087, down from USD 3.110 at the end of August.

The move wasn’t massive, but it was the largest decline in seven months – and it came as the PBoC continued to step up its currency intervention throughout September.

But things shouldn't get too much worse. Like the PBoC has argued – yesterday's RRR cut is unlikely to have a huge affect on currency dynamics going forward (see previous entry).

Instead, this is all about the trade war, a broadly strong dollar, and tightening US monetary policy.

What to watch: We expect monthly declines to stay in this range over the next three months – USD 15-25 billion per month – as the trade war grinds on and the Fed hikes rates again in December.

The big question: Will that push the CNY above 7:1 against the US dollar?

Source: China Foreign-Currency Reserves Drop on Trade Tensions, Yuan


5. Liu Shijin on exchange rate management

Speaking of the exchange rate – an important essay by monetary policy committee member Liu Shijin lays out the latest thinking on China’s exchange rate management.

Liu argues that CNY depreciation in 2018 is no big deal because (Caijing):

The CNY hasn’t depreciated more than other major currenciesTurmoil in other emerging markets has had a contagion effect – so part of the depreciation is not driven by dynamics in ChinaThe move is largely about broad strength of the dollarLiu then focuses on the benefits of CNY depreciation:"The moderate fluctuation of the exchange rate has played the role of 'automatic stabilizer' in the macro-economy…and…had a positive buffer effect on China's exports."Finally, he addresses the question of whether the CNY will depreciate past the 7:1 level against the USD:"We believe that the important thing is not the specific 'point,' but the correct exchange rate mechanism. As long as the mechanism is correct, we are not afraid to 'come back.'"

Get smart: The PBoC cares less about the specific level of the currency these days, and more about overall currency management that contains expectations and doesn’t lead to greater volatility.

Caijing: 刘世锦谈人民币汇率:破7论和保7论都忽略了均衡是动态的


6. Government still trying to cut costs for businesses

It’s not just the PBoC that is trying to support growth through marginal easing moves (see the four previous entries). In recent days, Minister of Finance Liu Kun has also been out emphasizing new government efforts to push through cost-cutting initiatives.

But he’s also been trying to remind businesses that the effects of tax cuts and other measures take time to filter through:

For example, the VAT rate for several industries was lowered from May 1 – that has meant the average VAT rate fell from 19.5% in the first five months of 2018 to just 2.1% in August.The Ministry of Finance has also estimated that tax cuts for 2018 will ultimately amount to RMB 1.3 trillion – up from the originally planned RMB 1.1 trillion. And more are coming next year.The latest efforts include:A list of 1,585 goods that will see tax reductions from November 1 (second link below)A widened scope of sectors where foreign investors can withhold income tax payments if they re-invest profits (third link below)

Get smart: These efforts are designed to alleviate pain inflicted by the trade war. It’s still not clear they will work, but Liu is right that only time will tell. 

MoF: 以更积极的财政政策护航中国经济行稳致远——财政部部长刘昆回应经济热点问题
MoF: 国务院关税税则委员会关于降低部分商品进口关税的公告
MoF: 关于扩大境外投资者以分配利润直接投资暂不征收预提所得税政策适用范围的通知


7. Party media call Pence remarks “fake”

Late last week, US Vice President Mike Pence delivered a marquee speech on the state of the US-China strategic rivalry.

The speech didn’t get much public attention on the Mainland – thanks to a combination of tight media control and the long holiday. It’s difficult to even come by the full text of the remarks on the Chinese web.

But despite China’s general downplaying of the speech, thePeople’s Daily put out a rebuttal commentary on Saturday:

"The so-called Chinese intervention into the US elections is completely illusory…We are already busy enough. There is no interest or intention to worry about American chores.""That Chinese media purchases in US media outlets [would] affect public opinion is totally far-fetched. Chinese media practices do not violate US law."The commentary indicated that foreign media outlets have done a nice job laying out why the US administration is claiming Chinese intervention:Shifting the focus away from the investigation of Russian interference in the 2016 electionStoking enthusiasm for the mid-term elections in NovemberPressuring China in the trade war

Get smart: This latest dust up just builds the competitive narrative between the two countries – making it even more difficult to dial things back.

People's Daily: 并不高明的造谣术(钟声)——评美国领导人诬蔑中国的种种奇谈怪论


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