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TRIVIUM CHINA: THE TIP SHEET, know china better



"Every coin has two sides."

- Li Keqiang, Chinese Premier

Some context: Li said that in Brussels on Friday. He was putting a positive spin on China's economic weaknesses, saying that they represent potential for growth. He's right, but it's a bit more complicated. More in the Tip Sheet below. 

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1. Economic policymakers meet, make no new plans

The Financial Development and Stability Committee (FSDC) held its 10th special meeting on Saturday – one day after regulators’ attempts to talk up the economy and financial markets (see Friday’s Tip Sheet).

The meeting was all about addressing financial risk. 

Some context: The FSDC meets under the guise of the State Council and is the most important economic body in the government. Its “special” meetings occur when policymakers have urgent business to discuss.

The group sought to project an air of confidence, saying that financial risks are under control. But their anxiety was belied by the fact that the meeting needed to take place at all.

Key action items coming out of the meeting were less than impressive(21st Century Biz):

Keep monetary policy neutral but improve policy flexibility and enhance policy transmission to the real economySupport private companies, potentially even establishing a fund to support the development of the private sectorImprove capital markets by enticing more long-term investors and speeding up SOE reform

Get smart: None of these efforts are new. The fact that policymakers held an emergency meeting and decided to continue doing what they were already doing underscores that they don’t have a plan.

21st Century Biz: 国务院金融稳定发展委员会召开防范化解金融风险专题会议


2. Markets are happy with policymakers, for now

Despite the absence of a long-term fix to China’s economic and financial challenges, markets are happy with the rhetoric coming out of Beijing.

The Shanghai composite was up 4% on Monday, the biggest jump since March 2016. That lifted markets across the region.

Regulators' anxiety has analysts expecting more stimulative policy measures.

After a draft version of new personal income tax deductions was released, an advisor to the central bank estimated that tax cuts may add up to 1% of GDP next year (see entry #6).

We’d be cautious here, though. Tax cuts notwithstanding, policymakers don’t have a clear plan, as we pointed out in the previous entry.

There is an unresolved debate as to how to balance financial de-risking and supporting growth.

So it’s not a done deal that significant new policy measures will be coming down the pike.

And even if they do happen, there's no guarantee that they will work.

Marketwatch: Big stock rally in China bolsters markets across Asia


3. Xi tells entrepreneurs that he values them

As Liu He said on Friday – the private sector is key to China’s economy (see October 19 Tip Sheet).

On Sunday, Xi Jinping echoed that sentiment (SCMP):

“Chinese President Xi Jinping has written an open letter to the country’s private business owners, saying Beijing will continue to value and protect them to ensure a ‘better tomorrow.’”“In an apparent move to boost the confidence of China’ capitalists…Xi said Beijing fully recognised the role of private enterprises and the ruling Chinese Communist Party would continue to bless their development.”Xi laid it on thick:“The letter, published by Xinhua on Sunday, said the private sector’s historic contribution to the country’s development was “indelible” and ‘should not be doubted.’”“’Any words or acts to negate or weaken private economy are wrong,’ Xi wrote.”“’It is always a policy of the Central Committee of the Communist Party to support private business development, and this will be unwavering,’ he continued.”

Get smart: Xi has been a strong and vocal supporter of the state sector – one letter does not change that. Entrepreneurs will want to see concrete policies, not pretty words.

Get smarter: Xi’s letter was addressed to entrepreneurs who pitched in to help his poverty alleviation efforts. So his fundamental message to the private sector is still to get in line with Party priorities. 

CPC: 习近平回信勉励广大民营企业家:心无旁骛创新创造 踏踏实实办好企业
SCMP: Xi Jinping promises to protect China’s private businesses to ensure a ‘better tomorrow’


4. Premier Li says the economy is just fine

While Liu He and other top officials were in Beijing trying to fix the economy (see entry #1), Li Keqiang was busy telling the international community that everything will be all right.

Li admitted that there are some problems:

“China’s development remains unbalanced and inadequate with significant disparities between different regions and between urban and rural areas.”“In many places, transportation, energy, utilities and other types of infrastructure remain underdeveloped.”“In rural areas, over 30 million people still live in poverty with an average annual income of less than 3,000 RMB yuan ($433).”But, he emphasized that those problems are actually a reason to be optimistic about China’s growth potential:“The upside of the disparities is that they also represent big space for development.”“With a huge market of more than 1.3 billion people, China has vast potential and great resilience.“Its economy is fully capable of sustaining sound growth.

Get smart: Li makes a very important point. China’s economy is rife with inefficiencies. If those are addressed, it could improve growth. But that’s a big “if.”

Get smarter: Unlocking those efficiencies would require genuine, liberalizing reforms. Don’t hold your breath.

READ MORE Full text of Premier Li’s speech at the 12th ASEM Summit


5. Chinese households to get more tax relief

On Saturday, the Ministry of Finance (MoF) unveiled draft updates to the Individual Income Tax Law.

Some context: The legislature revised the Individual Income Tax Law in August and asked MoF to identify detailed tax deductions in six different areas (see September 3 Tip Sheet).

Here’s what MoF came up with (SCMP): “From January 1, 2019…homeowners will be allowed to claim up to 1,000 yuan a month against mortgage interest payments on a first property.”“Those in rented accommodation will get a tax-free allowance of 800 to 1,200 yuan a month.”“Parents will be able to claim a 12,000 yuan tax deduction against the yearly cost of each of their children’s education expenses.”“Adults will be allowed to offset between 3,600 and 4,800 yuan of the annual cost of their own further education.”“People with ‘serious’ illnesses will receive a 60,000 yuan a year tax allowance, while those who care for elderly parents will be entitled to tax relief on up to 2,000 yuan a month.”

Get smart: Tax deductions for individuals are totally new in China. So the ultimate effect will depend on how smoothly the process is handled, and on public awareness to make use of the new deductions.

READ MORE 《个人所得税专项附加扣除暂行办法(征求意见稿)》征求意见
SCMP: China proposes new personal tax perks to cut cost of housing, education and health care


6. Li pushes for more integration with Europe

On Friday, Li Keqiang addressed the Asia-Europe Meeting (ASEM) Summit in Brussels.

Some context (ASEM):

“The Asia-Europe Meeting (ASEM) is an intergovernmental process established in 1996 to foster dialogue and cooperation between Asia and Europe." "Presently it comprises 53 partners: 30 European and 21 Asian countries, the European Union and the ASEAN Secretariat.”Li's speech was all about deepening connectivity:“We need to improve ‘hardware connectivity’ in terms of highways, railways, aviation, fiber optics and other infrastructure.”“At the same time, we need to strengthen ‘soft connectivity’ in areas such as institutions, policies, rules and standards.”And increasing cooperation:“China would like to work with all interested partners in Asia and Europe to promote cooperation in scientific and technological innovation and the new economy, including in digital economy, smart cities, intelligent connected vehicles and other areas.”The Belt and Road Initiative was put forward by China, but it belongs to the world."

Get smart: Li’s calls for cooperation come amidst rising skepticism of the Belt and Road and Chinese investment more generally, including in Eastern Europe (see Bloomberg article).

Bloomberg: China Is Forced to Reconsider Its Route Into Eastern Europe Full text of Premier Li’s speech at the 12th ASEM Summit


7. Yang Weimin on government planning

Yang Weimin is now dean of the newly-established China Development Plan Research Institute at Tsinghua University.

Some context: Yang was formerly a high-ranking advisor to the Party on economic matters, and Vice Premier Liu He’s deputy before Liu was promoted to his new post.

At his inauguration ceremony, Yang shed some light of the role of government plans. They are (Tsinghua):

“An action plan for the whole society”“A guide for resource allocation”“The basis for the government to perform its duty”“A guideline to restrain market behavior”Get smart: That last point is about providing proper regulation and market fail-safes – not about ditching markets altogether.

Yang also reflected on what government plans should NOT do:“[They should not set goals for] certain products to achieve indigenization by a certain year.”“New products, new industries, new business types cannot be planned…because it would lead to redundant construction and overcapacity.”

Get smart: It may come as a surprise, but policy advisors like Yang have a pretty clear understanding of the shortcomings of economic plans.

What to watch: The new institute's mission is to help improve and evolve government plans.

Tsinghua: 杨伟民——改革规划体制,更好发挥规划的作用


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