roundup from our portfolios
The threat posed by African swine fever (ASF) to CPI, inflation and trade is now clear, as MARA’s own estimates predict pork prices will rise over 70 percent this year to historic highs. Listed companies in the sector have seen stock values rocket, but some may not survive the crisis. Despite the ASF outbreak, Q1 economic data painted an upbeat picture with PMI, CPI, and PPI all increasing after months of contraction. Massive tax cuts are the primary driver of recovery in consumption and production, but deflationary risks remain as the data masks poor long-term growth prospects, particularly given high household debt and structural unemployment. NDRC’s ‘2019 key tasks for new urbanisation’ called attention to shrinking cities, relaxing hukou restrictions to help boost local economies. State Council also issued a ‘28-measure plan’ to establish a multi-level aged care system and develop a robust market for care services by 2022.
Relations with the EU entered a new cycle in early April, with high level visits, including Li Keqiang meeting the EU Council in Brussels on 9 April. Italy became the first member of the G7 to sign an MOU on BRI cooperation. By month’s end, the second BRI Forum followed close on the 70th anniversary of the PLA Navy. Tension with the US rose over the South China Sea, arms sales to Taiwan, and trade war. As negotiations with the US inched forward, China struck terms with Japan on regional free trade agreement, RCEP, and third-party market cooperation, and pushed through another round of talks on the China-Japan-Korea free trade agreement. The World Trade Organisation despite its reform deadlock, ruled that China’s tariff rate quota management measures for grain are too opaque will be ‘seriously studied’ per an editorial published widely in state media.
National Energy Administration issued two draft wind and solar policies in one week, prioritising subsidy-free, grid-parity projects, provided that they do not lead to more renewable wastage. The regulations are largely consistent with industry expectations, but may carry different implications for on- and offshore wind power.
Higher education institutes (HEIs) are to bridge research with industry, suggests a draft ‘HEI original basic research action plan’. MoST and MoE also issued plans for universities to guide on-campus start-ups towards university sci-tech parks. But speakers at a symposium on revising the Sci-Tech Promotion Law argued a gap with industry will persist as long as HEIs and their personnel are judged solely on academic criteria. Personnel management continued apace in the Party as well, with revised regulations designed to clarify priorities and tighten rules for Party members. Meanwhile, lower-level governments continue with experiments in administrative reform, designed to bring local solutions to local challenges.
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april policy movers
policy professionals in and out of the establishment
Zhu Zengyong 朱增勇 | CAAS Ag Information Institute researcher, MARA livestock product trade chief analyst
Zhu’s research in livestock and poultry covers both the international market and trade patterns, as well as the domestic industry chain and pricing. He leads research on livestock products for China’s Ag Outlook, published annually in late April. He is not optimistic about the feasibility of slaughterhouses and farms launching ASF self-testing due to concerns that small-scale operators cannot afford the high cost. Amid increasing calls to relax transportation restrictions and facilitate pig circulation, Zeng insists on tight transportation regulation due to concern over poor inter-province ASF supervision and high risk of spreading ASF at a larger scale. He predicts pig prices will further rise in coming months as pig stocks fall through April.
Shi Jingli 时璟丽 | China National Renewable Energy Centre Policy Research Department director
Shi focuses on renewable energy policy. She helped draft the Renewable Energy Law and ‘Renewable energy mid- and long-term development plan’, and helped set on-grid prices for renewable power. The move to grid-parity renewables is not meant to be abrupt and disruptive, she says. Encouraging some grid-parity projects in 2019 will, argues Shi, allow solar and wind to compete with coal without state subsidies during the 14th 5-year plan. Grid-parity projects are likely to first emerge in renewable-rich regions with relatively high coal-fired power on-grid prices, says Shi.
Wang Xin 王信 | PBoC Research Bureau director
Wang moved from PBoC’s currency, gold and silver bureau to its research bureau on 3 Apr 2019, replacing vocal predecessor Xu Zhong 徐忠. (see cp.signal: a problem dealing with real problems) After receiving a Harvard Kennedy School MPA in 2001, Wang became an assistant to renowned reformist Wu Jinglian 吴敬琏 on the China International Capital Corporation research team before working in policy research at State Administration of Foreign Exchange and PBoC. Writing on balance of payments, exchange rates, and financial stability, Wang supports tightly regulating virtual and digital currencies and e-payment tools to safeguard the state’s legal tender status. He thinks PBoC should speed up issuing its own digital currency to cut costs in the currency system, improve payment safety, and enhance the state’s authority in currency issuance.
policy ticker highlights
gems from our feed of policy releases and domestic debate
Anti-Secession Law is stronger deterrent than Taiwan Relations Act
Global Times | 10 April
context: Marking the 40th anniversary of the Taiwan Relations Act, the PLA sent 24 aircraft and five ships into space claimed by Taiwan. This action, according to Taipei, reinforces its resolution to defend itself while Beijing accused Taipei of misleading the public to provoke confrontation.
The Taiwan Relations Act, passed in 1979, notes the Global Times, provides a ‘legal basis’ for US intervention in the Taiwan Strait, including arms sales, thereby stimulating independence forces.
When the Act was passed, the likelihood of enforcement was high, given the overwhelming military and economic superiority of the US in the Asia-Pacific region. As China’s military presence and strategic deterrence increased in the Taiwan Strait, claims the Global Times, the Act lost its power as an instrument of intervention.
Passed in 2005, the Anti-Secession Law gained credibility from China’s rise in military power and ‘comprehensive national strength’, according to the Global Times. In the past, protecting the ‘One China’ principle largely depended on China-US cooperation whereas China today has increasing power to independently ensure observation of the principle.
Compared to non-peaceful means of curbing Taiwan independence forces cited in the Anti-Secession Law, the Taiwan Straits Act, providing ambiguous promises to Taiwan, generates much less deterrence force. Thus, predicts the Global Times, if the Act is used by the US to confront Beijing’s Law, it will definitely be doomed.
massive tax cuts to boost consumption, CPI, profitability, stock markets
21st Century Business Herald | 7 April
context: In the Chinese capital market, April and beyond sets the tone for yearly economic performance as most data is not released during the Spring Festival. Significant tax cuts, not monetary easing or infrastructure expansion, seem to bolster consumer confidence and inject energy for growth.
China’s A-share market surged after the Spring Festival this year—a nearly perfect start to the year. Moving forward, Jiang Chao 姜超 Haitong Securities lead analyst says five features are critical to understanding the 2019 macroeconomy, namely
- strong fiscal policy, weak monetary easing
- 2019 saw a C¥1.75 tn liquidity release through reserve requirement lowering; offset by suspension of open market operations recouping C¥1.9 tn, far less than the C¥4.00 tn net liquidity release in 2018
- currency oversupply is controlled with the shadow banking crackdown
- M2 growth is sitting at 8 percent, a near 20-year low
- reserve ratio in China is basically on par with major international economies, says Yi Gang 易纲 People’s Bank of China governor, foreshadowing a narrowed policy space
- by contrast, active fiscal policy featuring large-scale tax cuts is beyond expectation
- January 2019: six personal tax deductibles expected to cut C¥100 bn tax; small business inclusive tax cut program to reduce C¥200 bn tax
- April 2019: VAT cuts estimated to be C¥800 bn
- May 2019: employer pension submission reduction to alleviate their burdens by C¥300 bn
- C¥300 bn cuts in various administrative fee forthcoming
- C¥2 tn estimated tax cuts is much higher than C¥500 bn, C¥550 bn, and C¥1.1 tn goals in 2016-18
- consumption, not investment, to stabilise the economy
- investment unlikely to drive the economy because of insufficient monetary easing
- tightened regulation of local government implicit debt results in a lack of funding for infrastructure
- large-scale tax cuts could fuel consumption, which accounts for 55 percent of GDP already and almost five times the amount of real estate investment
- therefore, consumption growth is enough to hedge against declining investment and export
- stronger CPI performance than PPI
- VAT reduction will lower the price of industrial products and drive down PPI
- for CPI, tax cuts and fee reductions will increase disposable income
- profit growth will be ahead of GDP because strong tax cuts and reduction in social securities costs directly increase company profitability
- asset prices
- stock market valuation is low in history whereas housing market valuation is near its historical high
- currency oversupply benefits the real estate, but tax cuts will give hope to stock markets
context: MARA has already estimated pork prices will rise 70 percent in H2 2019 due largely to African swine fever. This estimate is likely conservative, and policymakers are now expressing some concern over managing CPI. Many pork-related stock prices have doubled, reflecting high expectations for large, publicly listed companies as smaller players are crushed by the disease.
Wei Baigang 魏百刚 Ministry of Agriculture and Rural Affairs (MARA) development planning department director reiterated expectations that pork supply will be limited in H2 2019 and prices will rise significantly. Citing African swine fever (ASF) and other international and domestic economic factors, Wei notes live pig and breeding sow population has fallen over ten percent each month for three consecutive months. Though Wei insists the rate of new reported ASF cases has slowed, population is expected to continue falling. Wei notes pork is the largest food-related category in CPI, and policymakers’ attention has turned to ensuring supply capacity and controlling price increases within a manageable range.
Pig-related stocks have jumped substantially, reports Yicai, with an index of ‘pork concept stocks’ trading the highest of any domestic index. As of 21 April, the index was up over 95 percent y-o-y, while the Shanghai Composite index is up just over 31 percent. Ten of the 23 pork stocks that comprise the index have doubled in price y-o-y, with Xinwufeng up over 300 percent y-o-y.
The pig cycle’s turning point has passed, say multiple securities analysts cited by Yicai, and high prices may be expected for the next two to three years. Since 1995, there have been six rounds of the pig cycle in China, with the turning point usually taking place in Q2, and highest prices usually occurring in September. Swine fever has kicked off previous rounds of the cycle, reducing population and driving prices up.
recent hukou loosening may move less people than expected to cities
Southern Weekly | 18 April
context: Experts points out that the ‘2019 key tasks for “new urbanisation” initiative’ buys more grassroots supports than the real benefits it provides.
The plan provides nothing ‘unprecedented’ but simply legitimises the de facto relaxed hukou regime since the talent war broke out in 2017, argues Zhang Yi 张翼 CASS Institute of Social Development and Strategy.
Moreover, the smaller the city is and the less welfare its hukou is tied to, the easier to proceed with hukou reform. At the moment, the hukou of small- and medium-sized cities is already quite accessible, and obstacles lie mostly in large cities, which can hardly be resolved overnight, says Lu Yilong 陆益龙 Renmin University Sociological Theories and Methods Research Centre professor.
Zhang’s research also shows that more than 80 percent of migrant workers do not want to relocate their hukou to cities, worrying that they will lose their homestead land and contracted land. Rural migrants care more about access to jobs, schools and urban welfare, hence they prefer large cities over small ones, which are relatively hard to get into. Instead, university graduates’ demand for hukou is rather inelastic.
Lu Ming 陆铭 Shanghai Jiaotong University Distinguished Professor agrees that the relaxed hukou regime will not drive migrant flows into cities with populations of five million and less; instead, it will accelerate population agglomeration into first- and second-tier cities.
The policy may also not give a strong boost to the real estate market, as it extends the three-year-long property market stimulus, says Yang Hongxu 杨红旭 Shanghai E-House Real Estate Research Institute vice director. Demand seems weak because
- cities with populations of one to three million are usually not imposed with property purchase restrictions; migrants can buy houses regardless of their hukou status
- cities with populations of three to five million and other second-tier cities already lowered (or partially removed) hukou threshold in the past three years
Lu argues that the point-based hukou system is more equitable than a property- or education qualification-based regime, because it is less discriminatory against low-income and unskilled workers, and a city needs people from different background. Also, the point-based hukou system is tied with years of residency and social security payment, which is more favourable to ‘old’ migrants who spent a long time in a given city and integrated themselves better with local residents.
context: These regulations are part of an ongoing effort to institutionalise ideological and political standards into cadre management. The intention appears to be to make performance evaluations and promotion less subject to personal, political connections.
Central Committee released ‘Work regulations on assessment of Party-government leading cadres’, effective 7 Apr 2019. A People’s Daily commentary interviewing the head of the Organisation department notes that this is the first time overall standards for assessment have been issued in the form of regulations, noting that documents issued in 1998 and 2009 cannot fully meet the new era’s requirements. The representative explained that more than 100 leaders of provincial, municipal and county-level Party committees were interviewed individually and opinions from institutions extensively solicited. Main features include
- close focus on thoroughly implementing Xi Jinping Thought on Socialism with Chinese Characteristics for the New Era, including Xi’s thoughts on
- Party building
- organisational work
- 19th Party Congress’ strategic plan
- Central Committee requirements for leading cadres
- political standards come first—valuing both ability and political integrity
- vetoes for those that are politically unqualified
- highlighting implementation of Central Committee decision-making and Xi Jinping’s instructions
- clarification of assessment methods into regular, annual, special and tenure assessment so as to enhance their integrity and systematised nature
- improvement of methods, examining cadres comprehensively, using democratic assessment, public opinion and other methods
- improvement of application
- assessment responsibilities are clarified to prevent duplication of work, cut red tape, and reduce the load on the grassroots
The commentary notes problems which the regulations intend to address through regular assessment, including cadres
- promoted in spite of corrupt behaviour
- not replaced or assessed
- being too content following promotion
- valuing appointments to positions over management
The regulations state that
- assessment content and indicators should be adapted to the new era’s requirements
- promotion of economic, political, cultural, social and ecological civilisation construction
- solving problems of uneven development
- actual results of meeting the people’s growing needs for a better life
- indicators and weighting for socio-economic development in accordance with local conditions
- assessment content will be tailored to different regions, departments, types and levels of leading bodies and cadres
- assessment content for leading cadres
- moral conduct and political quality
- loyalty to the Party
- respect for the Party’s constitution
- following of political discipline and rules
- degree of ideological and political consistency with the Central Committee with Xi Jinping as Party core
- integrity in building clean and honest government and strictly requiring relatives and staff to oppose the ‘four winds’ of formalism, bureacratism, hedonism and extravagance, and privileged ideas
- capability, particularly in dealing with emergencies and mass incidents
- performance, particularly increasing the weight of Party building
- integrity in building clean and honest government
- moral conduct and political quality
- guard against simplified rankings based purely on GDP, growth rate, democratic assessment or public opinion
- in general, proportion of ‘outstanding’ grades should not exceed 30 percent of total for leading bodies, and 25 percent for leading cadres
- proportion of ‘outstandings’ for individuals given ratings of the institutions to which they belong
- circumstances in which a leading body or individual should not be rated ‘outstanding’ include
- implementation of Central Committee decision-making has no obvious effect
- insufficient spirit, fear of serious problems, lack of shouldering responsibility and action
- targets for criticism from high levels and inspection orders
- unsatisfactory grassroots Party-building
- circumstances in which a leading body or individual should be rated ‘poor’ include
- violating political discipline and rules
- lack of implementing democratic centralism, unprincipled disputes between leading cadres
- incapable of fulfilling responsibilities
- poor work style, going through the motions
- leaving a post without permission
- discipline should be observed in assessment
- concealing or distorting facts is forbidden
- results should not be divulged
- cadres should not be assessed based on personal preference or dislike
- using assessment for personal gain is forbidden
- retaliation against cadres who identify problems is forbidden
China-EU joint statement mentions subsidy for the first time
Yicai | 10 April
context: developed economies have been pushing China to address its opaque and discriminatory subsidy policies through multiple channels, including China-US trade talks, WTO reform proposals and the US-EU-Japan joint statement. The inclusion of the subsidy issue in the China-EU joint statement signals China’s willingness to respond to the EU’s demand for reciprocity and its pledge to competitive neutrality.
China and the EU released a joint state after the summit on 9 Apr 2019, covering much-discussed issues like the bilateral investment treaty, government procurement, intellectual property protection, WTO reform, competition policy, 5G and dispute settlement mechanisms for investments.
The joint statement is a win-win deal and strategic triumph under the current international circumstance, says Wei Jianguo 魏建国 former Ministry of Commerce vice minister, who observed the whole process in Brussels.
The two sides started negotiations on the joint statement quite early, says Wei, noting that president Xi’s state visit in March 2019 set the tone for the statement.
On the technical aspect, one key expression that appeared for the first time in such a statement is ‘intensification of discussions on strengthening international rules on industrial subsidies’, which is closely related to WTO reform, says an anonymous trade negotiation expert to Yicai.
China is trying to ease tensions on its subsidy policies by promoting the principle of competitive neutrality, notes Yicai. China’s fair competition review system tries to ensure that no discriminative price and subsidy policies will be imposed on imported products and services, says Gan Lin 甘霖 State Market Supervision Administration deputy director at a briefing on 9 April 2019.
China has substantially reduced market-distorting subsidies as it transitions from a planned to a market economy, says Zhou Xiaochun 周小川 former People’s Bank of China governor, stressing that the government is willing to speed up reform to eradicate the legacy of unreasonable subsidies; he explains that inconsistent and improper enforcement at the local level has weakened the effect of central government policies.
industry and environment
context: Although proposing grid companies and grid-parity project developers to sign a long-term contract (no less than 20 years) with fixed on-grid prices, the draft measures does not specify whether ‘fixed on-grid prices’ means that the prices will be equal to and fluctuate with on-grid prices for coal-fired power plants or if they will be fixed by the government.
On 10 Apr 2019, National Energy Administration is calling for comment on measures promoting subsidy-free (grid-parity) wind and solar project construction’, requiring provincial energy authorities to
- prioritise construction of projects that can reach grid parity and confirm a group of projects that can start construction in 2019
- decide on the first group of grid-parity projects before launching competitive bidding for projects that require state subsidy
- prioritise consumption of power from grid-parity projects
- encouraging projects approved prior to 2018 to switch to grid-parity projects
- cancel projects that were approved, but
- have not started construction for two years and have not applied for extension
- have applied for extension but have not started construction within extended period
While encouraging grid-parity projects, the draft measures still require provincial governments and power generators to ensure consumption of power produced by the new projects. The draft measures also ranked the wind and solar projects in terms of grid access priority
- projects approved in or before 2018 that are willing to switch to grid-parity projects
- 2019 newly constructed projects
- subsidised projects
As such, permitted installed capacity will be constrained for subsidised projects, says Peng Peng 彭彭 China New Energy Investment and Finance Alliance secretary-general. Also concerned about rising renewable wastage, many provinces remain cautious on submitting new grid-parity projects. Liaoning province already has a large number of solar projects that were approved or under construction, uninhibited approval of new projects might result in high solar power wastage, says Sun Yufang 孙玉芳 Liaoning Provincial Energy Department director.
science and innovation
MIIT drafts NEV industry 2021-35 vision
Economic Information Daily | 12 April
context: State policies have led to rapid NEV industry development but also low-end overcapacity and subsidy-abuse. The state remains committed to the sector’s consolidation, as 2019 NEV subsidy standards show. Its focus thus far has been electric vehicles, but there are signs that it is shifting support to include a broader range of technologies, such as methanol- and hydrogen-powered vehicles.
Ministry of Industry and Information Technology (MIIT) is working on a mid- to long-term new energy vehicle (NEV) industry plan for the 2021-35 period, says Xin Guobin 辛国斌 MIIT deputy minister. New challenges raise the need for fostering healthy development of the NEV industry healthy development into 2035, says Xi, noting the plan will include
- commitments to
- the NEV industry and its consolidation
- safety by clarifying industry stakeholders’ respective responsibilities and developing safety regulations covering the whole life cycle
- market-oriented growth driven by innovation in core technologies and business models
- talent development, including domestic training and foreign talent attraction
Xin made the comments during his tour to Foshan and Yunfu, two Guangdong municipalities developing hydrogen vehicles. Xin called upon the hydrogen vehicle industry to
- cultivate core technologies
- reduce costs and increase efficiency
- technical standards
- fuel supply chains
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