finance

watching for

  • growth, tax cut, and fiscal deficit targets at the Two Sessions
  • relaxation of real estate market and shantytown renovation restrictions
  • Property Tax Law legislation

tight local budget for economic expansion

Xi Jinping 习近平 chaired a 22 Feb 2019 Politburo meeting to discuss the Two Sessions, to begin 5 Mar 2019. He reiterated that 2019 priorities are still market reform, economic restructuring and stability. State-led infrastructure expansion continues as the means to stabilise growth. National Development and Reform Commission (NDRC) project approval database shows planned real estate growing by 32.8 percent, manufacturing by 24 percent and infrastructure project numbers by 5.3 percent, respectively. All local projects must be approved and recorded in the database so we are ‘confident that investment prospects are bright as these projects enter the execution phase’, says Wu Yaping 吴亚平 NDRC Investment Research Institute director.

However, local governments will struggle to finance an increasing number of projects going into the implementation phase in 2019, with fiscal budget tightening given the general economic slowdown, tax cuts, and industrial upgrading spending. Tianjin and Xinjiang were explicit that they only made 94 percent of their 2018 revenue targets. Chongqing and Jiangsu barely met theirs, even after downward adjustment earlier in the year. Wealthier areas like Guangdong, Shanghai, and Beijing met their original targets. Localities will need to seriously tighten their belts given bleak land finance prospects. Given slow sales and decelerating shantytown renovation, land finance is unlikely to reach 2018 levels, says Luo Zhiheng 罗志恒 Evergrande senior researcher. While 2018 saw 6.5 tn in land concessions account for 25 percent of budgets, many localities have lowered their 2019 land revenue estimates by a third.

Reduced mortgage loan interest, relaxed price control, and fewer purchasing restrictions foreshadow an upcoming property market relaxation, reports a 21st Century Business Herald editorial. The state hopes to support the real economy with structural monetary easing, but liquidity tends to flow back to the real estate sector due to poor investment opportunities in the real economy. Monetary policy should remain neutral to avoid further asset bubble inflation and speculative investment, adds the editorial. The touted transformation to a high-quality economy cannot be completed, argues Li Yige 李一戈 noted property market columnist as long as real estate remains the key growth engine.

tags: growth model, local budget, housing prices, property markets, money supply

in other developments…


evaluating rapeseed in Yunnan, targeted for promotion in 2019 No. 1 Doc

agriculture

watching for

  • domestic response to Trump’s tweeted demands to drop all ag tariffs
  • signals on or announcement of initial ruling in Australian barley anti-dumping case
  • moves to protect crop and machinery IP, expand investment access at two sessions

No. 1 Document published

CPC Central Committee and State Council released the 2019 No. 1 Document on 19 Feb 2019. Traditionally the central masthead for rural and agricultural policy, this year’s sets out to win the siege on poverty, ensure supply of key agricultural products like soybeans and dairy, improve rural living environments and public services, and address gaps in rural governance (largely through support of grassroots Party organisations). The No. 1 document agenda usually delivers impact—last year’s Document called for better coordination between rural development efforts and ag sector regulation. One month later, institutional reforms created the new Ministry of Agriculture and Rural Affairs.

A soybean revitalisation plan, aims to expand domestic supply of a crop impacted by trade tensions. Wu Hongyao 吴宏耀 Central Rural Work Leading Group Office secretary says soybean revitalisation will both expand planting area and promote R&D and vertical integration to support more efficient production. Revitalisation notwithstanding, China will remain dependent on international markets to satisfy most domestic soybean demand in the long term, says Han Changfu 韩长赋, Ministry of Agriculture and Rural Affairs (MARA) minister.

The rhetoric of self-sufficiency was largely dropped in 2017; the 2019 document calls for food security based on ‘use of both domestic and international markets.’ Experts continue to highlight the critical role of the Belt and Road Initiative in efforts to diversify import partners and develop homegrown multinational agribusinesses.

The call to prioritise agriculture and rural development is a reference to the four priorities, notes Kong Xiangzhi 孔祥智 China Renmin University Rural Development School professor, predicting the document will underpin ‘three rurals’ policy for the foreseeable future. It also includes substantial rural land reform policy agendas. Pilots on marketisation of collective construction land are underway in 33 localities; they will complete this year. Translating those results into broader policy moves will prove critical—Feng Kui 冯奎 China City and Town Reform and Development Centre secretary general says reforms will both increase land supply and constrain local governments’ ability to generate revenue through abuse of land conversion processes. Both are expected to result in more and better quality development.

tags: ag industrialisation, grain, collectively owned land, three rurals, food security strategy, ag trade policy, migrants, ag R&D, anti-corruption, property rights, ag subsidies, aquaculture, farmland, poverty alleviation

in other developments…


US$78 bn Bytedance invited to launch IPO on Shanghai’s sci-tech board

science and innovation

watching for

  • support for 5G in the 2019 government work report
  • MoT and PBoC to issue ‘Management regulations’ addressing ofo’s inability to refund deposits
  • MoST ‘Guiding opinions’ to make high-tech zones more professional, financially sustainable and autonomous

markets to direct support for cutting edge technology, but not unfettered

China should not waver in its pursuit of industrial upgrading and high-quality growth, opines People’s Daily, noting its political system is strong enough to push through painful measures against overcapacity and debt even as economic growth slows down. Localities and state-owned enterprises should be subject to more transparent audit and competition investigation, says Wei Jianing 魏加宁 State Council Development Research Centre (DRC). This includes asking whether subsidies are justified when the private sector can provide comparable services without them, says Wei. Industrial policy relies too heavily on subsidies, agreed Wei’s DRC colleague Li Yan 李燕 at a separate event, arguing tax breaks are more effective. The state should ensure fair competition, says Li, targeting specific sectors with an ‘administrative measure + technology standard’ formula rather than broad policy documents. Zhang Weiying 张维迎 Peking University China Centre for Economic Research disagrees, arguing as he has for many years that the state should not guide industry at all, as innovation is inherently unpredictable. Wang Yong 王勇 Peking University Institute of New Structural Economics agrees markets are better at directing resources to the cutting edge; but favours state intervention to ensure markets function in the long-term interest of all layers of society.

A high-tech board on the Shanghai Stock Exchange (SSE), announced by Xi Jinping 习近平 in November 2018, will free up capital markets. Yi Huiman 易会满 prioritised the initiative in his inaugural speech as chair of the China Securities Regulatory Commission in January 2019, adding ‘I am a new recruit for capital markets’. Registration rather than approval-based, the board will accept firms making little or no profit, and will allow stock to fluctuate up to 20 percent per day, according to draft regulations. Given domestic financial institutions’ lack of experience valuing startups, Yi called for caution as the board moves towards opening.

These risks, as well as the economic and political rewards of a domestic IPO, motivate state agencies to safeguard their role as gatekeepers. Some ten provinces are working on inventories of high-tech companies for the new board, with Shanghai’s Xuhui district offering grants up to 20 million to any startup located in the zone which launches an IPO. The board is likely to ration entry carefully to build momentum. R&D-intensive sectors like next-generation information technology, biopharma, high-end manufacturing and new materials will provide the bulk of listings, says Huang Hongyuan 黄红元 SSE chair.

tags: Made in China 2025, strategic emerging industries, growth model, equities

in other developments…


waste dumped along Yangtze River

energy, industry and environment

watching for

cleaning up Yangtze River

In a 27 Feb 2019 video conference, Li Ganjie 李干杰 Minister of Ecology and Environment (MEE) admitted that despite continuous improvement, protecting the Yangtze River will be challenging: pollution remains high and degradation is severe. In 2019, MEE will crack down on sewage outfalls, illegal storage, solid waste disposal, phosphate pollution, and more. MEE will be supported by other agencies in this campaign, four of which issued a joint statement with the Supreme People’s Court (SPC) on 20 Jan 2019, strengthening penalties for such environmental crime as cross-provincial discharge and dumping of harmful waste in the Yangtze River economic belt. More profitable than incineration, cross-provincial dumping is prevalent along the Yangtze, and municipal solid waste incineration plants in more developed regions cannot keep up with demand.

On the same day, MEE, Ministry of Transport and Ministry of Housing and Urban-Rural Development issued a joint plan to address illegal transfer and disposal of vessel pollution. The policy requires local governments to set up a inter-agency mechanisms to coordinate supervision and enforcement, and clarifies agency responsibilities. Regulators are ill-equipped to cope with rampant pollution of inland rivers, above all the Yangtze, and coordination across agencies falls short, according to Caixin. For instance, patrols, especially at night, are insufficient due to few patrol vessels. Maritime, transportation and environment agencies fail to agree on what goods are ‘hazardous’.

National Energy Administration convened a meeting on 18 Feb 2019 to consult industry opinions on solar power regulations. The proposed measures are a clear departure from past practice. Excluding certain specified ones, new solar projects are expected to compete for construction quotas. Ministry of Finance estimates that 2019 solar subsidy levels will be set around 3 bn, excluding solar poverty alleviation projects. Li Chuangjun 李创军 NEA new energy department vice director projects that 2019 capacity installation will exceed 2018’s 44.26 GW. New measures are expected by end March 2019.

tags: water, environmental protection, renewables

in other developments…


profiles

Wei Jianing 魏加宁 | State Council Development Research Centre researcher

Leading projects on deflation, financial regulation, and pension development, as well as international monetary systems, Wei frequently comments on competition policy, which he considers to be a key component of a new round of market reform. Current measures to deal with market failure are ineffective, says Wei, pointing to unethical corporate activity, race-to-the-bottom market environment, and government intervention disrupting normal market functions. He also suggests consolidating bureaucracies under the State Council in the interest of better policy implementation, above all anti-monopoly supervision.

Wu Hongyao 吴宏耀 | Central Rural Work Leading Group Office secretary

Appointed to the MARA Party Leadership Group during institutional reforms in March 2018, Wu has been an active participant in drafting the last five No. 1 Documents. His other responsibilities included speech-writing for high-level leaders. Wu is also an active commentator interpreting policies in the mainstream media. At a recent briefing, he called for tightening management of farmer professional cooperatives, cracking down on non-functioning ‘shell’ cooperatives. He praises Zhejiang’s practice of cooperatives combining the functions of ag production, rural credit building and ag product processing and sales.

Wang Ruijun 王瑞军 | Guangdong Sci-Tech Department director

A PhD in engineering, Wang was promoted to direct the Guangdong Sci-Tech Department in September 2017. Hong Kong and Macau researchers have received 580 million from a variety of provincial and national research funds, which will increase as hurdles for project applications and money transfers are removed, says Wang. Although Hong Kong universities have set up 72 scientific research centres in Shenzhen and collaborate on cross-border technology transfer, Hong Kong and Macau graduates are not launching startups on the mainland, says Wang. Guangdong will encourage them with its 901 incubators and 7.1 bn mass entrepreneurship and innovation fund, leveraging 25 bn of social capital, says Wang. The GBA plan will also make it easier for scientific equipment and data to travel between territories, and improve Hong Kong researchers’ access to the China Spallation Neutron Source and other large pieces of scientific equipment, says Wang.

Li Chuangjun 李创军 | National Energy Administration New Energy Department vice director

Solar power has shifted from high-speed to high-quality growth, says Li. NEA will continue to support the sector’s development in 2019 and ensure it grows at a ‘reasonable’ rate. Li expects 5GW of solar poverty alleviation projects to be approved in 2019. Discussing central targets increasing the share of non-fossil fuel in China’s primary energy mix to 15 percent by 2020 and 20 percent by 2030, he argues they will be difficult to meet given unbalanced and inadequate renewable power development.


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