September: safe as houses
Concern has returned to real estate, with recent data showing the government again resorting to property markets to support growth. Tier-2 are following tier-1 cities in restricting housing purchases, as usual based on hukou. The state has abandoned talk of deleveraging, aiming instead to stabilise the skyrocketing debt to GDP ratio. PBoC is using more open market operations to increase liquidity. Longer-term instruments like 28-day reverse repos were introduced for the first time since February to control a bond market rally.
Seven agencies issued ‘Guiding opinions on developing a green financial system’ in the lead up to the G20. The US and China ratified the Paris agreement. Debate erupted over industrial policy: an open letter by a former deputy Minister of Housing and Urban-Rural Development claims ‘macro-management’ was never serious, saying ‘now is the time to get real’. Overcapacity is spreading to emerging industries, with robotics struggling to escape a low-end production trap.
Discussion continued over the plan to recentralise some expenditure responsibilities, with some noting murkiness on education and social security. CCP Central Committee and State Council launched a series of long-awaited pilots to concentrate environmental authority at the provincial level, circumventing local protectionism and vested interests. Following a murder-suicide in Gansu, the state announced a plan for mass relocation of people from poor areas, with criticism of current anti-poverty efforts running thick and fast. The GMO industry was hit by a safety scandal at the top testing centre, and a crackdown on illegal crops in Heilongjiang and Xinjiang.
Internationally, the UK finally gave the go-ahead to the Hinkley deal, helped, no doubt, by the Brits’ attempts to stay friendly with France after Brexit. This win was offset by a loss, with North Korea detonating its largest device yet. Occupying DPRK to preempt a US invasion is being openly discussed by the commentariat.
featured analysis
compliments of our cp.signals service
big green overcapacity machine
Seven agencies released ‘Guiding opinions on building a green finance system’ on 31 August 2016, setting a framework for financing green development goals and COP21 commitments. full post open access →
september policy movers
policy professionals in and out of the establishment
Sun Liping 孙立平 | Tsinghua Department of Sociology Professor
An academic whistleblower, Sun and his team revealed years ago that the budget for ‘stability maintenance’ exceeded that for national security. With centrally planned social justice abandoned, its replacements have increasingly led to social dysfunction, he says. Growing class gaps and power struggles among political and financial elites threaten social stability, Sun argues, and only social justice, and ‘Rooseveltian’ reform, can mitigate risk of crisis. Sun's enduring contribution to social policy is the term ‘social decay’, which he argues is more likely than upheaval in an uncertain future.
Xu Xiaoping 徐小平 | Zhen Fund Founder
Xu Xiaoping is a venture capitalist and co-founder of NYSE-listed New Oriental Education Group, ranking 94 on Forbes’ 2016 Midas list. The mainstream view that capital flight can trigger a national crisis reflects an undeveloped country’s victim mentality, he says. As with the 1990s’ ‘brain drain’, capital flight will recede with globalisation, Xu argues, believing that capital should go to the most lucrative global assets.
Liu Peng 刘鹏 | Renmin School of Public Administration and Policy
Specialising in healthcare policy, Liu is an expert on food and drug regulation. Since 1998, regulation has been mired in a debate between ‘professionalism’—separating out FDAs for their technical superiority—and ‘capacity’, calling for FDAs to be merged into broader market regulation bureaus, says Liu. Long term, Liu prefers separate FDAs at the provincial level and above, and combined market bureaus in cities and counties. But the primary concern, he argues, should be stable regulation and defined central-local responsibilities, rather than chaotic reforms. To regain effective regulation, give localities discretion to try either regulatory model, he says.
policy ticker highlights
gems from our feed of policy releases and domestic debate
finance
urban development funds: debt in disguise?
Shanghai Securities News | 9 september
Urban development funds may provide a channel for localities to maintain off-balance sheet debt, reports Shanghai Securities News. These funds, which draw money from banks, local government financing vehicles and SOEs (which function like limited partners in a private equity fund), are meant to finance urban construction, including basic infrastructure and housing, says the paper, adding that they are growing in popularity. Financial institutions are given priority in repayment over other investors if a project turns unprofitable, reports the paper, and localities can indirectly guarantee a fixed return by mortgaging their land transfer revenue to financial institutions.
trade and industry
promote exports to solve manufacturing overcapacity
21st Century Business Herald | 21 september
Export promotion can more effectively reduce overcapacity in manufacturing than forcing factories to close or relocate overseas, says Mei Xinyu 梅新育 MofCOM International Trade and Economic Cooperation Research Centre, as long as the enterprises remain competitive and meet environmental regulations.
De-capacity efforts should focus on the domestic primary industry, which lacks global competitiveness, says Mei, while giving full play to the manufacturing industry's export potential, as this will more effectively maintain and promote China's position in the global economic system in the medium to long term. China should import other countries' higher quality, lower cost raw materials and use domestic manufacturing advantages to export finished products, says Mei, emphasising the benefits of free trade.
Compared to cuts in manufacturing, de-capacity efforts in resource exploitation and primary production also put less pressure on bank loans and reduce loss of human capital, as their collateral, mainly in resources below ground, maintains its value more reliably and workers require fewer skills and networks, adds Mei.
geopolitics
growing risk of 'strategic overdrawing'
Phoenix International Database | 22 september
China is building its influence in Asia and the Western Pacific, comments Shi Yinhong 时殷弘 Renmin University School of International Studies professor. It pursues this, he says, through policies labeled 'strategic military' and 'strategic economy'.
Launched at the Novermber 2012 18th party congress, reports Shi, 'strategic military' ran until mid 2014, focusing on
accelerated construction of strategic military power
comprehensive military competition with the US
fierce confrontation with Japan
assertive stances and intense military operations in the South China Sea (SCS) and East China Sea (ECS)
The measures, says Shi, advanced ‘hard power’ and widened the area of operation but hampered international ‘soft power’, increasing risk of confrontation with the US and Japan. Far more attention, says Shi, has been paid to 'strategic economy' since mid 2014, through Belt and Road, AIIB, Free Trade Area of the Asia Pacific (FTAAP), South Korean and Australian FTAs, and high-speed railway exports.
'Strategic economy' addresses excess capacity, states Shi, exporting it while deriving diplomatic benefits. In the near future, 'strategic military' will be increasingly pursued, above all on the SCS and ECS, he says, but the economy is on a downturn and overseas expansions are enormous, resulting in strategic overdrawing.
Shi points to a failure to understand that things needs to be done in sequence. Given the current general economic situation, he says, domestic reform should have priority over projecting power in Asia and beyond.
governance
inaction of local elites universal
Consensus Online | 8 september
Soft resistance to Xi Jinping’s 习近平 policies is nationwide, says Jin Canrong 金灿荣 Renmin University School of International Relations, in widely reported internal briefing remarks. Xi has departed from the orientation of Deng Xiaoping 邓小平, argues Jin, who allowed more domestic freedoms while deferring to the US externally.
society
more targeted anti-poverty efforts needed to reduce waste
China Economic Net | 13 September
Poverty alleviation plans should consider the long-term developmental trajectories of localities they target, says China Economic Net. Current efforts are detached from the real needs of local populations, resulting in immense waste, says the paper. For instance, extensive road systems and new elementary schools are often built in villages that are losing their young labour and school-aged children to cities, explains the paper, in order to meet official requirements on rural infrastructure coverage rates.
Future assistance efforts should be targeted at villages with stable populations and economic structures, says the paper, as well as at small towns with large numbers of newly settled rural migrants. Ultimately, poverty alleviation plans should be made in conjunction with close observation of urbanisation trends, argues the paper.
agriculture
MoF loses agricultural power to provinces
People's Daily | 14 september
New ‘National comprehensive agricultural development fund and project management measures’, effective 1 January 2017, shift approval authority from the Ministry of Finance (MoF) National Agricultural Comprehensive Development Office to provincial governments.&&& Supervisory and management roles will be localised, while the Office will determine support policies and annual key points. Local agricultural development institutions at all levels will establish project databases and conduct dynamic management.
The measures respond to increased needs to transform agricultural development modes, promote the integrated development of rural primary, secondary and tertiary industries, and drive forward sustainable agricultural development, said an MoF spokesperson. They simplify and standardise project application and approval, clarify responsibilities of agricultural development institutions at all levels, and link provisions related to land governance project management to the basic construction of a financial system.
The emphasis on comprehensive agricultural development should help optimise agricultural development distribution, with a focus on regions with strong resources and environmental capacity.
lexicon
short, graphic explanations of trending technical terms and jargon
total social financing 社会融资总量 shèhuì róngzī zǒng liàng
Total social financing (TSF) measures all loans made to the real economy. Introduced in 2011 by PBoC, it includes RMB and foreign currency loans, corporate bonds, stocks of non-financial firms, insurance benefits, as well as off-balance sheet activities like trust loans, entrusted loans and bankers’ acceptances. The measure was created to help regulators keep track of credit creation as direct financing grew, and stock and bond markets replaced banks as sources of credit. PBoC’s monthly TSF stock and flow values are, despite being an imperfect measure, increasingly a barometer for the size of the shadow banking sector. A TSF target was first set in the 2016 Government Work Report, reflecting its new prominence.
china policy in the media
mentions of our work elsewhere
China's Parliament expels 45 delegates in vote-buying scandal
Financial Times | 14 september
“Why would this be an issue now? It doesn’t look like a sudden spurt of interest in the integrity of the electoral process,” said David Kelly, research director for China Policy, a Beijing-based research and advisory group that studies Chinese politics. “There could very well be a standard price of entry to these positions. I don’t think a lot of promotions occur without a gift. This goes to endemic, system-wide features. If you don’t do it, you may be blacklisted. But if you do it, you're on a potential hit list.”
Climate change deal may help Chjina get US support on trade in G20
Voice of America | 7 september
Support for protectionism was evident during the Brexit debate in Britain, and in the ongoing presidential race in the United States. Parts of Europe, including Germany, have seen protests by jobless steel workers, blaming China for their plight.'China is worried about growing resistance to its goods in foreign markets. But its own protectionism is politically too costly for President Xi Jinping to alter,' David Kelly, head of consulting firm China Policy told VOA.
China Policy is a Beijing-based research and advisory company. Supporting our clients at multiple levels, from in-house research teams to CEOs and boards, we help them anticipate, understand and respond to China’s changing domestic policy and geopolitical environment. Contact us for more information on our services.[/highlight]