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TRIVIUM CHINA: The Tip Sheet know china better


Friday, December 21, 2018


"The online rumor…has come to our attention."

- Office of the Financial Stability and Development Commission

Some context: On Friday afternoon, the Office of the Financial Stability and Development Commission took the unusual step of batting down rumors about economic policy. It’s a clear indication that policymakers are keen to control the narrative on economic policy. More in the Tip Sheet below.

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Happy holidays everyone! We will put out a special Tip Sheet on the Central Economic Work Conference tomorrow. And then we are out until January 7. See you in the new year! 



1. Economic Work Conference to approve tax cuts

The annual Central Economic Work Conference (CEWC) is wrapping up as we publish.

Some context: The CEWC is the most important economic meeting of the year. It’s where top leaders decide the economic policy priorities for the coming year. This year’s meeting is receiving particular attention because the economy is slowing and there is uncertainty about what, exactly, the government’s policy response will be.

We should get the official readout some time in the coming hours – maybe even sooner.

Get excited: Christmas comes early this year! We will have a special CEWC Tip Sheet tomorrow to give you our initial reactions to the meeting.

We already know one thing: They are going to continue to cut taxes and fees for business.

We know that because, a little before 3:00 pm, the Office of the Financial Stability and Development Commission (FSDC) issued this statement:

“The online rumor that the Central Economic Work Conference has decided not to cut taxes or reduce fees has come to our attention.”“This is contrary to the facts.”

This has us puzzled. It’s a rather unprecedented step, and we are still trying to figure out why the FSDC office did it.

What’s obvious: The authorities want to control the narrative on the economy. They seem worried that businesses and markets might think that the government will not offer supportive measures.

Think about that for a second. For years, everybody has always assumed that the government would stimulate at the first sign of economic weakness. But authorities have been so successful in their “no massive stimulus” messaging that they now feel they have to convince the public that they won’t abandon the economy.

Xinhua: 金融委:网上关于中央经济工作会议决定不减税不降费等传闻与事实相反


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2. NDRC rolls out rail project approvals

China’s main macroeconomic planner (NDRC) is trying to get infrastructure spending unstuck.

In the past few weeks, it has started rolling out new approvals for rail projects:

"Since the end of November, the National Development and Reform Commission has approved many urban rail transit projects, including in Shanghai, Hangzhou, Jinan, and Chongqing, with a total investment of nearly 500 billion yuan."

Some context: RMB 350 billion of the recent RMB 500 billion in approvals were for the Shanghai and Hangzhou projects alone.

More context: These approvals are part of a policy that was rolled out in July for strengthening construction and management of urban railways.

Get smart: It’s been five months since the initial regulations were rolled out, and the NDRC has only found a handful of projects to get going, so this isn’t about to unleash a torrent of rail spending.

Get smarter: These project will help infrastructure spending at the margin, but they aren’t enough to really juice growth.

JRJ: 城市轨交批复步伐加快 基建行业龙头备受关注(受益股)


3. Whither the CNY

Forecasting the Chinese exchange rate has been a fool’s errand over the past couple of years.

As we head into 2019, analysts’ outlooks for the currency are more disparate than we’ve seen in years (Bloomberg):

"The most optimistic forecaster sees the yuan climbing next year to 6.25 per dollar, while the biggest bear expects a slide to as weak as 7.4.""It was at 6.8955 in Shanghai Wednesday afternoon -- weaker than all but four of 43 projections as of a year ago for its end-2018 level."Everyone seems to have gotten the outlook wrong over the past couple of years:"The Chinese currency has tumbled 5.6 percent in 2018 -- making it one of the worst performers in Asia, though analysts had expected the exchange rate to remain largely flat this year.""In 2017, the yuan posted the biggest annual advance in nine years, while market watchers had foreseen a slide beyond 7."

Get smart: Forecasting the exchange rate has more to do with your view of the prospects for a resolution to the trade war and the path of US interest rates than it does with your view on China’s economy. 

So forecasters are basically trying to predict Donald Trump’s behavior. Good luck with that...

Bloomberg: China Watchers Split on Yuan Outlook; It Comes Down to Trade


4. More SOEs to become state capital investment companies

Over the past two days, several listed subsidiaries of central SOEs have announced that their parent companies are set to become “state-owned capital investment companies.”

Some context: These investment companies will run China’s industrial SOEs – instead of having the government do it. The idea is to create a buffer between government and SOEs.

More context: In 2016, the central government picked seven central SOEs to pilot the capital investment companies program. In July, the government clarified their thinking behind the investment companies (see July 31 Tip Sheet).

This second batch of state-owned capital investment company pilots includes 11 companies:

AVICChina ResourcesSPICSINOMACHCHALCOCOSCOChina General TechnologyXinxing Cathay International GroupChina General Nuclear Power CorporationChina National Building Material GroupNam Kwong Group

Get smart: We expect the investment companies will push for more consolidation in their sectors, both horizontally and vertically.

Xinhua: 航空工业集团成国有资本投资公司试点企业
China Securities Journal: 11家央企上榜第二批国有资本投资公司试点 中航系新一轮资本运作大幕开启


5. US-China tensions on the rise

Already tense relations with the US just got a bit more tense.

On Thursday, the US Department of Justice announced criminal indictments against two Chinese citizens (SCMP):

“Zhu Hua and Zhang Shilong, who the US says acted on behalf of the Chinese Ministry of State Security, were charged with conspiracy to hack into dozens of companies and government agencies in the US and around the world.”The Chinese Foreign Ministry was indignant:“The United States fabricated facts.”“The US made false accusations against the Chinese.”The hacking allegations come one day after the US passed a law on Tibet (NYT):“President Trump has enacted a law that requires the State Department to punish Chinese officials who bar American officials, journalists and other citizens from going freely to Tibetan areas in China’s far west.”China’s legislature was not happy with that (“China's National People's Congress (NPC) expressed strong indignation at and firm opposition to the United States on its signing into law of the Reciprocal Access to Tibet Act of 2018.”“The act…is against the basic norms of international relations and a gross interference in China's domestic affairs.”

Get smart: These aren't aberrations. Bilateral relations look likely to further deteriorate.

The big question: Will increased tensions derail the trade talks?

SCMP: US’ cyber hacking claims fabricated, says Beijing as Chinese duo face charges
NYT: Trump Signs Law Punishing Chinese Officials Who Restrict Access to Tibet China's top legislature expresses strong indignation at US act on Tibet


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