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Thursday, January 10, 2019

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"We also want to avoid an unrestrained flood [of liquidity]."

- Yi Gang, People's Bank of China Governor

Some context: Yi said that in an interview with state television that was broadcast last night. Yi’s interview is part of a push to control the narrative on the economy, and he was certainly on message. Yesterday’s State Council meeting also vowed that there will be no large-scale stimulus. More in the Tip Sheet below.

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1. Yi Gang wants more precision

Monetary policy needs to be “precise.”

That was the key word that jumped out at us from central bank governor Yi Gang’s media blitz on Wednesday.

Yi used the term several times, but the most interesting was when he said (The Paper):

  • “We should be precise in assuring overall liquidity and prevent credit from quickly contracting and shocking the real economy.”
  • “But we also want to avoid an unrestrained flood [of liquidity that could] adversely affect structural deleveraging.”
He went on to say:
  • “The growth rate of M2 and social financing should stay roughly in line with the growth rate of nominal GDP.”
  • “At the same time, we should keep the macro leverage ratio basically stable.”

Yi’s meaning: The PBoC will continue to step up liquidity provisions to banks and help them to secure funding through other means. But there is a very fine needle to thread, and the bank has to be careful not to overdo it.

The bottom line: Economic support measures will be gradually stepped up throughout this year, but authorities are proceeding cautiously.

The upshot: It will take longer than usual for these support measures to have an impact on the economy.

The Paper: 易纲:防范各种黑天鹅事件,保持股市债市汇市平稳健康发展
Caixin: China’s New Lending for Small Firms to Start This Month



2. Will the PBoC start buying stocks?

Should China’s central bank (PBoC) start making direct stock purchases to shore up the domestic equity market?

This is the question that Chinese financial analysts and regulators have been hotly debating over the past couple of days.

The debate was kicked off by senior researchers at several of China’s major securities brokerages. Their argument:

  • The PBoC should follow the Bank of Japan and roll out direct equity purchases as part of its monetary policy tool kit.
  • This would stabilize the stock market, which would thereby buoy sentiment, support consumption, and filter through to the real economy.
But detractors say:
  • The BOJ’s policy is controversial and hasn’t worked well.
  • There’s not a real correlation between China’s stock market and economic performance.
  • It’s not clear that the PBoC has legal authority to make these purchases.

Get smart: It’s highly unlikely that the PBoC will undertake this policy. A small minority of folks are arguing for it, and they are self-interested – the stock market slump has really hurt liquidity at securities brokerages.

Get smarter: Still, the debate has captured the attention of financial officials throughout China – highlighting both increased anxiety around the economy and the search for new, perhaps unconventional, policy solutions.

Caijing: 央行直接买股票?正反方激烈交锋!


3. Data dump – inflation

The stats bureau released inflation data for December on Thursday morning.

The details:

  • CPI grew by 1.9% y/y – down from 2.2% in November and below expectations of 2.1%.
  • PPI grew by just 0.9% y/y – down from 2.7% in November and the slowest pace of growth in two years.

Quick take 1: The tame CPI numbers mean that the central bank doesn’t need to be concerned about upward inflationary pressure when designing any expanded liquidity support – but it’s not a license to go full bore on monetary stimulus, like headlines seem to indicate.

Quick take 2: The PPI number will make policymakers nervous. They really need to keep the economy away from upstream deflation.

But, but, but…The huge falloff in PPI from November to December was partly a seasonal issue, thanks to an acceleration in prices in December 2017, so regulators don’t have to hit the panic button just yet.

CNBC: China’s slowing inflation leaves ‘plenty of room’ for central bank to cut rates, analyst says


4. Li Keqiang sits down with Elon Musk

In yesterday’s Tip Sheet, we wrote that authorities are keen to attract big, marquee foreign investments.

That desire is underscored by the fact that foreign companies that ink big deals are getting some love from the top-most Chinese officials.

Executives from both BMW and ExxonMobil got one-on-one sit downs with Chinese Premier Li Keqiang when they announced big investment deals last year.

Now it’s Tesla’s turn (Caixin):

  • “Chinese Premier Li Keqiang met with Elon Musk, the CEO of electric carmaker Tesla Inc., Wednesday afternoon in Beijing after Tesla broke ground for its $5 billion factory in the world’s biggest auto market.”
  • “Li congratulated Musk on the planned factory in Shanghai, where construction starts Monday, and observed that the project is China’s first wholly foreign-owned electric auto project after the country eased controls on foreign investment in the sector.”

Get smart: Chinese authorities are being straightforward – they want more foreign investment, and they are willing to offer full operational control to get it.

Get smarter: Despite increased global frustration with Chinese market access restrictions – or perhaps because of it – now is the best time in a decade for foreign companies to get a good deal done in China.

Caixin: Premier Li Keqiang Meets With Musk After Tesla Groundbreaking


5. Chinese policymaking made easy

Do you need more Trivium in your life?

If so – do we have a treat for you.

Two of our partners, Andrew Polk and Trey McArver, recently sat down with Jordan Schneider at SupChina to discuss how Chinese policy is made and our current thinking around the economy.

It was a fun and interesting discussion – we think you’ll enjoy it.

Just click the link below to listen.

Jordan has done lots of other interesting econ interviews lately – make sure to peruse them while you’re on the site.

SupChina: Chinese policymaking made easy


6. Small businesses to get a tax break

Wednesday’s State Council meeting repeated for the umpteenth time that there will be no large-scale stimulus.

Instead, the government is focusing on tax cuts for small businesses (

  • “Small and low-profit businesses with an annual taxable income of less than 1 million yuan and between 1 million and 3 million yuan will be eligible to have their tax calculated based on 25 percent or 50 percent of their taxable income, [respectively].”
  • “[The] VAT threshold on small-scale tax payers…will be raised from 30,000 yuan to 100,000 yuan [in] monthly sales.”
Local governments will also have discretion to reduce a range of taxes and fees by up to 50% -- on items like resources, land use, stamp duties, and education.

But won’t that tank local government finances? Don’t worry, the central government says it has things under control:
  • “Central government finance will provide stronger general transfer payment to local authorities to make up for possible funding gaps.”

The measures will be applied retroactively from January 1 and will stay in place for three years.

The impact: The government says these measures will save businesses RMB 200 billion a year. That helps, but it’s not a game changer for the economy.

READ MORE Larger-scale tax cuts to be introduced for small, micro businesses


7. State Council tells local governments to issue bonds

Wednesday’s State Council meeting also urged local governments to issue their bond quotas “as fast as possible.”

Some context: The bond quota currently stands at RMB 1.39 trillion. That is the initial allocation that the legislature gave to local authorities in a unique decision back in December (see December 18 Tip Sheet).

More context: The current quota appears to be just for H1 2019, though officials have not been explicit. The full annual quota will be released at the Two Sessions in March.

The government also wants to make sure that the funds from these bonds go towards projects that will have positive effects on the economy. That means no white elephants or bridges to nowhere.

  • Instead, the government is looking for shovel-ready projects in transport, hydropower, and environmental protection that will help to foster growth after they are completed.

The State Council called on monetary authorities and banks to do their part to support the issuance of these bonds – through liquidity provisions and underwriting, respectively.

But here’s the kicker: None of these bonds should add to local government implicit debt challenges.

Our take: Regulators are trying to have their cake and eat it, too.

READ MORE 李克强主持召开国务院常务会议 决定再推出一批针对小微企业的普惠性减税措施等


8. Oil and gas reforms to accelerate in 2019

Executive Vice Premier Han Zheng took a trip to the National Energy Administration (NEA) on Tuesday.

Han said he wants more supplies of oil and gas (People’ Daily):

  • “Based on medium- and long-term trends for energy demand, …[we will] increase oil and gas exploration efforts; accelerate the establishment of a system for of natural gas production, supply, storage, and sales; provide stable policy support; and strengthen our ability to ensure oil and gas supplies.”
Han did not mince words, calling out vested interests in the sector:
  • “Reform of the oil and gas system must be steadily carried forward.”
  • “[We will] resolutely smash obstructive forces, break through bottlenecks, and establish a scientific operational mechanism and policy system.”
Newly-appointed NEA head Zhang Jianhua recently said the oil and gas industry would be the agency’s “top priority” in 2019 (NEA).

In particular, Zhang wants to focus on:
  • Improving oil and gas exploration capabilities
  • Building out natural gas infrastructure
  • Marketizing natural gas prices

Get smart: China’s already high – and increasing – dependence on foreign oil and gas makes many officials uneasy. This is giving impetus to reform in the sector.

People's Daily: 全力保障国家能源安全 推动能源高质量发展 Vice-premier stresses energy security, high-quality growth
NEA: 访国家能源局党组书记、局长章建华


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