HEARD IN BEIJING
"Downward economic pressure has increased."
- Politburo Readout
Some context: The Politburo met on Wednesday to discuss the economy's trajectory. Things are not looking good, and the Politburo wanted to signal support. But there was little new in terms of policy. More in the Tip Sheet below.
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THE TIP SHEET
DRIVING THE DAY
1. Politburo signals more support for the economy, sort of
The Politburo convened yesterday for its quarterly economic review.
The meeting was highly anticipated – businesses and markets have been anxious to see how China’s leaders would respond to the further slowing of the economy.
The readout acknowledged that things aren't going well:
“Downward economic pressure has increased, some companies are facing relatively many operating difficulties, and hidden risks accumulated over time are starting to come to light.”The readout called for policymakers to be more proactive:“In response, [we] must attach great importance to and strengthen preventative and timely countermeasures.”But the real emphasis was on implementing already-existing policies, not rolling out a lot of new measures:"[We] must aggressively focus on implementation to make sure that already-released policy measures take effect as soon as possible.”So don’t expect a major new round of stimulus. Overall, the readout signaled policy continuity:Supply-side structural reform (SSSR) remains the overall policy framework.Fiscal policy remains "proactive."Monetary policy remains "prudent."The meeting reiterated a shifting balance between de-risking and investment:Deleveraging is no longer the main focus of SSSR.Instead, “shoring up weak spots” is now the dominant theme – that should lead to more infrastructure investment (see Entry 3).
But that shift is not new. It's been signaled since the summer.
Get smart: Most reporting on the meeting has touted it as signaling large stimulus. That's not our read – we don't see much new here.
Markets were unmoved by the announcement – most were more or less flat on the day. That seems about right to us.
The bottom line: The problem isn't that policymakers aren't doing enough to support the economy, the problems is that their policy levers are limited and not very effective.
CPC People: 中央政治局召开会议分析研究当前经济形势和经济工作 习近平主持
DRIVING THE DAY, CON'TD
2. The plenum wait continues
Perhaps the most important outcome from yesterday’s Politburo meeting – they did not set a date for a plenum.
To us, that’s a BIG DEAL (SCMP):
“'It’s the biggest story, or non-story, in China right now,' said Trey McArver, co-founder of Trivium China, a Beijing-based research consultancy."Some context:“The autumn plenum that comes a year after the party’s national congress is largely seen as the most important full meeting of the party’s roughly 400-strong political elite, who gather behind closed doors at least once a year.”“In recent decades, it was often an occasion when Chinese leaders revealed major reform programmes and new economic blueprints.”
But remember, this has already been a strange year. Xi convened an extra plenum in February to discuss the changes to the PRC Constitution.
So what is going on? There is speculation that the plenum has not been set because of a lack of clarity about what to do with economic policy.
Then again, it might signal that leaders are confident in the strategy laid out at the 2013 plenum, and see no need to take a different path.
One interesting theory kicking around: They will hold the plenum from Dec 18-22. That’s exactly 40 years after the landmark 1978 Third Plenum that kicked off reform and opening.
The bottom line: The lack of clarity around the plenum is increasing uncertainty at a time when the economy is already feeling fragile. That's not good for markets or business.
DRIVING THE DAY, CONT'D
3. State Council rolls out infrastructure plan
In a move that looks timed to coincide with the Politburo meeting, the State Council announced a big infrastructure plan yesterday.
The plan hits all the highlights, including:
RailwaysRoadsAirportsPower gridsHydroelectric plansNatural gas infrastructureBut this is not a spending free-for-all.
The document makes clear that local governments will remain under pressure to be fiscally responsible:"Local government construction investment should remain within means.”“Fiscal constraints [should be] strengthened.”"Financial institutions must be prudent in issuing credit...and consider the project’s cash flow…and the borrower's ability to service the loan"
Get smart: This is not so much about new projects. It's more about making sure that already planned projects are carried out in a timely manner.
The bottom line: We know we sound like a broken record, but we’re going to say it one more time – current supportive measures are all about cushioning the slowdown, not reversing it.
DRIVING THE DAY, CONT'D
4. Xi's AI dream
The Politburo identified one big reason that the economy is struggling:
“The external environment has experience profound changes.”What that means in plain English:We are in a trade war with the United States. And they are restricting us from buying technology or investing in high-tech companies abroad.
This has China’s top leaders freaked. They are now determined to develop core technologies domestically and reduce dependence on foreign technology.
So it came as little surprise that the Politburo held a study session on artificial intelligence yesterday.
Xi sees AI as core to China’s future:“Artificial intelligence…will have profound and far-reaching effects on the international political economic structure.”“Accelerating development of next-generation artificial intelligence is an important strategic starting point for our winning the initiative in international technological competition.”Xi told his fellow Politburo members that they all need to do their part:“Leading cadres at all levels…must strengthen policy support.”Get smart: Xi Jinping is absolutely determined to make China the world leader in AI. Don’t expect the Party to spare any resources in trying to make that happen.
CPC People: 习近平：推动我国新一代人工智能健康发展
FINANCE & ECONOMICS
5. Testing the waters for a new kind of currency intervention
Last week, China’s FX administrator Pan Gongsheng made a very thinly veiled threat to burn anyone shorting China’s currency (see October 26 Tip Sheet).
He’s already looking to make good on the threat.
Next week, China’s central bank (PBoC) will issue its first ever central bank bills in Hong Kong, as it seeks to soak up some offshore RMB liquidity.
Some context: The PBoC announced an agreement with the Hong Kong Monetary Authority to issue these bills back in September (see September 21 Tip Sheet).
RMB 10 billion of three-month notes will be issued.RMB 10 billion worth of 1-year notes will be issued.
Get smart: That’s small potatoes. But the PBoC is clearly testing the waters in case it needs to sop up more offshore RMB liquidity in a hurry some time soon.
Managing offshore liquidity will help the PBoC keep onshore and offshore exchange rates from diverging too much. And it will also make it very expensive to short China’s currency.
As we said last week, the CNY is set to continue depreciating, but Pan and company will make it sure it happens on their own terms – they won’t let short-sellers drive the process.
21st Century Biz: 央行发行200亿离岸票据 稳定汇率预期
FINANCE & ECONOMICS
6. Solid export growth in China's eastern provinces...for now
The 21st Century Business Herald is out with an interesting and important look at the state of export growth in China’s eastern coastal provinces.
The piece highlights the obvious divergence between industrial performance, which is bad and getting worse, and export growth, which is booming – even in the face of the US-China trade war.
September showed especially strong performance:
September export growth in Guangdong, Zhejiang, Jiangsu, and Shandong accelerated by 0.8, 2.8, 0.9, and 2.7 percentage points, respectively, over growth in the first eight months of the year.That put Shandong's export growth in September alone at 27.1% y/y.
Get smart: The solid export growth is all about buyers and sellers trying to get ahead of tariff implementation in the US-China trade war.
Get smarter: Because of their tiered nature, there is always another round of tariffs coming. So US importers are still incentivized to frontload purchases from China.
What to watch: The US is considering broadening the tariffs to include all Chinese goods. If that happens, the new tariffs would likely go into place in early February. At that point, there will be nothing left to frontload, and the great export numbers now will turn into awful export numbers then.
21st Century Biz: 前三季度东部出口逆势加快 外需回暖还是抢出口？
POLITICS & POLICY
7. PBoC branches to get an overhaul
The July 2017 National Financial Work Conference decided to reconfigure the central bank’s regional branch network.
The plan: Replace the nine regional branches with branches in every province.
Caijing reports that the restructuring got under way last week, and will be completed in 2020.
Some context: China set up nine regional central banks, similar to the US Federal Reserve system, in 1998. The goal was to keep prevent provincial authorities from messing with monetary policy.
But things did not go smoothly. In 2004, the central bank added sub-regional branches in each province to appease local governments. Those branches basically functioned as arms of the provincial government.
The current restructuring acknowledges the reality that the regional banks had little sway over their provincial sub-branches.
The bottom line: Practically, this will have little impact on monetary policy or financial regulation.
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