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Tuesday, December 18, 2018

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"We will create new and even greater miracles."

- Xi Jinping, CCP General Secretary

Some context: In his big speech on Tuesday morning, Xi said that China's development over the past 40 years is a miracle. Xi promises more miracles to come. More in the Tip Sheet below.

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Got thoughts on Xi's big speech? Send 'em through  we would love to hear what you think!

UPDATE: There appear to have been some technical issues with the link to our Trade War Monitor (Entry 6) in the first email. They have been fixed. Apologies for overloading your inbox!



1. Xi takes a victory lap

Xi’s much ballyhooed and much anticipated speech to commemorate the 40th anniversary of Reform and Opening took place this morning at 10:40 am.

The overall message: The Chinese Communist party has done a great job.

The Party has led the Chinese people on a “soul-stirring journey” of  “epic accomplishments” that have “moved heaven and earth.”“In just a few decades, we have completed an industrialization process that took developed countries several hundred years.”“The Chinese people have achieved what was once impossible.”This is “an unprecedented miracle.”Xi’s tone was defiant:“What we have achieved in the past 40 years is not a godsend.”“Still less, a gift from others.”“It comes from the hard work, wisdom, and courage of all members of the Party and the people of all ethnic groups of China.”

What it means: Xi is doubling down on China’s authoritarian political system and state-led economic model, no matter how much criticism it comes in for abroad (or at home).

The bigger picture: For the past 30 years, democratic capitalism appeared to be the most effective way to organize a society. But China’s success (not to mention the current wobbles in the West) are calling into question the superiority of that system.

Xinhua: (现场实录)习近平:在庆祝改革开放40周年大会上的讲话
New China TV: LIVE: Xi Jinping attends conference celebrating 40th anniversary of reform, opening up


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2. Xi’s secret for success – change and adaptation

Xi is firm in his conviction that the Party’s leadership is central to China’s past and future success:

“We must persist in the Party leading in all things, and constantly strengthen and improve the Party’s leadership.”But – and this is key – the Party’s success is due to its ability to adapt and change.

The brilliance of reform and opening, according to Xi, was its ability to pivot away from the “shackles of Leftism” and other wrong policies of the Cultural Revolution. The past 40 years, Xi says, has seen the Party constantly updating its approach to governance.

Xi places himself in this tradition, characterizing his own tenure as one of great change. He brags about the “over 1,600” reforms that have been carried out under his watch, and applauds reforms in recent years to the military, disciplinary, national security, and other systems.

There will be more changes to come:“Only by following and proactively adapting to historical trends can we keep up with the times.”“Innovation is the lifeline of reform and opening up.”“There are no bounds to freeing the mind.”

Get smart: Anybody who has spent time in China knows that it is a fast-changing place. That will continue.


3. Xi signals shift towards more local reforms

Speaking of changes, Xi’s speech signaled a relatively major one, for those who were listening closely.

Xi said:

“We have ‘crossed the river by feeling the stones’ and at the same time strengthened top-level planning.”

Why that's a big deal: Five years ago, at the 2013 Third Plenum, Xi emphasized top-level planning over crossing the river by feeling the stones. Every word is labored over and debated heavily in speeches like these. By giving pride of place to crossing the river over top-level planning, Xi is signaling a shift.

What it means: We should expect local governments to have more latitude to design and implement their own reform policies going forward.



4. The PBoC gets back in the game

After sitting on the sidelines for 36 consecutive trading days, China’s central bank (PBoC) finally resumed open market operations on Monday.

The PBoC injected just RMB 160 billion, but the market took notice that the bank had become active again.

Given that lots of folks are looking for stepped up stimulus measures from Chinese policymakers, could this be an early indication of more monetary support?

We think not.

A nice piece by China Finance 40 – a group of pre-eminent Chinese economists – lays out the rationale behind the renewal of operations:

The deadline for peak tax payment season occurred on December 17, so there was especially large demand for liquidity on Monday.Recent government bond issuance also added to liquidity needs.Given that deposits tend to rise at year end, banks had to put more money aside for reserve requirements over the past few days.The central bank is also looking to head off broader liquidity demands that typically occur as the year comes to a close.

The bottom line: These are all normal developments that have converged to increase liquidity demand in the banking system, so we shouldn’t read too much into the liquidity injection.

China Finance 40: 打破最长“空窗”,央行重启逆回购意味深长


5. More property woes

China’s real estate sector is starting to struggle – we’ve highlighted that repeatedly in recent weeks.

The latest data show that further weakness is coming, as prices fall in the secondary housing markets of China’s biggest cities (Caixin):

“Four of China’s biggest cities have posted a drop in the average price of an existing home for the third straight month in November.”“Beijing led the drop. It saw a monthly decline of 0.6% in the average price of an existing home in November, compared to a 0.2% decline the previous month.”“Shanghai, Guangzhou and Shenzhen recorded monthly drops of 0.1%, 0.3% and 0.2% respectively.”

Get smart: Weakness in the secondary market is a harbinger of coming weakness in the primary market. That will further feed into slower investment by developers.

The big picture: In case you missed it the first few times we said it – the property market will be a drag on economic growth in 2019.

Caixin: Pre-Owned House Prices Drop Again In First-Tier Cities


6. Is China’s door opening again?

2019 is shaping up to be a year of cognitive dissonance.

And that should be good for foreign companies in China.

At least that’s what we argue in our most recent monthly Trade War Monitor, out today.

The positives:

“On one hand, we are cautiously optimistic that the temporary settlement in the ongoing trade negotiations between the US and China could lead to a more permanent solution.”“As part of the effort to strike a long-term deal, Chinese authorities are set to continue accelerating the pace of market opening.”The negatives:“On the other hand, geopolitical tensions are markedly on the rise.”“In addition, China’s domestic economy will continue to slow into 2019, adding further uncertainty.”What it all means:“The disconnect between geopolitical uncertainties (along with a slowing Chinese economy) and improvements in the domestic business environment in China will be unnerving.”“But companies that are able to see through the noise of heightened political tensions to suss out new market opening opportunities on the ground will be rewarded.”

Go deeper: We are opening up this month’s monitor to all Tip Sheet readers, so if you want to take a gander just click the link below.

Stay smart: If you are interested in this service, shoot us an email at for pricing details on a discounted trial for Q1 2019.

Related: We made a similar argument in a Bloomberg op-ed today – see the link below.

Bloomberg: China's Gates Are Open Again
Trivium: December 2018 Trade War Monitor


7. Legislature to allow local governments to issue bonds earlier in 2019

The national legislature begins its bi-monthly session on December 23 (see yesterday’s Tip Sheet).

One item on the agenda: 

A proposal to authorize a portion of the annual local government bond quota in advance of the legislature’s March session.

Some context: The National People’s Congress approves the annual quota for local government bonds at its March session. That means that local governments can’t issue bonds in the first two months of the year.

Get smart: Local governments need to spend NOW to cushion the economic slowdown, and bonds are a critical source of funds.

Get smarter: This doesn’t necessarily mean a big jump in the overall local government bond quota for 2019.

Yicai: 加速发债!地方政府债务限额有望提前下达
Caixin: 2019年地方债部分新增限额拟提前下达 发行或提前


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