watching for

  • early release of special-purpose bond quota
  • support for domestic banks going global
  • more officials to fall in finance anti-corruption campaign

Central Economic Work Conference

‘Stability’ dominated both the Central Economic Work Conference (8–10 December) and a Politburo meeting on the economy leading up to it (6 December). The implications for 2022, particularly the 20th Party Congress, will attract hot discussion.

Weak demand, supply-chain issues and pessimistic expectations weighing on the economy were highlighted at CEWC. Candidate areas for state support were scouted to counteract the slowdown, painting a more optimistic outlook. Yet questions await, e.g. the ‘policy intensity’ of anti-monopoly, which remains hazy.

Monetary and fiscal policy are both to ease, especially the latter. The nominal fiscal deficit may not rise in 2022, according to CICC (China International Capital Corporation), with over 1.8 tn of unused 2021 funds carried over, opening policy space for infrastructure, transfer payments and tax cuts. However, CEWC also reiterated that officials must ‘tighten their belts’ and refrain from unnecessary spending. Fear of the top passing the buck down may induce local official inaction again. Expectations of strong fiscal stimulus should be tempered, advises Li Qilin 李奇霖 Hongta Securities.

The 2021 monetary policy statement yielded a mere 57 words, compared to last year’s 149, points out Li Zongguang 李宗光 China Renaissance. He argues that more effort is spent on other sub-categories, notably micro policy, regional policy and energy security, indicating better-rounded policy support in these areas.

Hot-button issues in real estate, anti-monopoly crackdown, common prosperity, etc. were also stressed. Common prosperity is to be a long-term process. Tax reform, social security and improved transfer payments will be the focus while more charitable giving will be encouraged.

The well-worn rhetoric of ‘housing is for living, not speculating’ was heard yet again; building new real estate models was also urged. Developers should pivot away from the high-turnover model whereby pre-sales are used to fund further construction, advised Xu Xiaole 许小乐 Homelink Research Academy. They should reduce leverage and create more sustainable business models.

On the regulatory crackdown front, while the phrase ‘unruly expansion of capital’ did not appear, its echo was heard in the CEWC’s call for ‘preventing capital’s wild growth’ and setting up ‘capital traffic lights’. This implies clarifying which behaviour is illegal and which legal, explains Zhang Chenying 张晨颖 State Council Anti-Monopoly Committee, hopefully bringing an end to the high-stakes game of red-light, green-light.

tags: Macroeconomy, SME, money supply

in other developments…

  • steel production has peaked and is now plateauing, claims the Metallurgical Industry Planning and Research Institute; they predict output will fluctuate around a billion tonnes in the coming years
  • Guangdong has sent a taskforce to Evergrande to control risk, while central agencies like PBoC say the default will be resolved by the market
  • SMEs remain in the policy spotlight as State Council urges SOEs to pay their arrears; the central bank reduced interest rates on relending to ag firms and SMEs

thermal power plants scramble to comply
thermal power plants scramble to comply

energy and environment

watching for

  • clarification on tax procedures for allowances
  • more firms cutting corners in compliance
  • CCER data for national market

carbon market: ‘tis the season to comply

CEA (carbon emissions allowance) trading volume in the first seven days of December hit 26 million tonnes, passing November’s total. Still, bureaucratic issues in tax, compliance and registration offset market efficiency, causing headaches. The trading flurry was expected: firms are scrambling to meet MEE’s (Ministry of Ecology and Environment) target of 95 percent of the over 2,150 market participants (all thermal power firms) complying by 15 December.

Prices have stagnated at some 43 per tonne for the last months of 2021, despite demand soaring prior to the deadline. The failure of the price to react to demand suggests one of the following

  • the true market price is lower than 43, but MEE has set an unrevealed and unofficial price floor, disclosed only to the SOEs that dominate trading
  • supply has been cut back by firms wanting to bank their surplus allowances for 2022
  • firms failed to grasp the principles of markets or trading

Some firms (e.g. Guodian Power) have said they intend to save their surplus allowances, but the lack of a price response is left unexplained.

As firms scramble to balance their accounts, several issues emerge. For one, they are unsure whether CEAs will be taxed as financial or intangible assets, report insiders. The choice has reportedly created volatility in block trading prices. Official reports leave this unclear; block trading prices are not disclosed.

Further, few firms understand the carbon market, argues Lai Xiaoming 赖晓明 Shanghai Environment Energy Exchange: only 10 percent took part in local pilots before venturing into the national market in 2021. A mere 20 percent have actually completed trades at the national level, most of them central SOEs. Few others have carbon asset management teams, procedures or know-how, Lai points out.

Plants in Shandong are indifferent, poorly managed and misread policy, lamented a provincial spokesperson; they have not yet even tested their coal for its carbon content. They hence are seriously short of CEAs. Hoping to avert mass non-compliance and MEE’s wrath, Shandong authorities stepped in to redistribute CEAs among firms, ensuring all were compliant by the deadline, suggest unconfirmed reports. Such intervention would, if true, erode confidence in the market, dampening firms’ desire to strive for higher efficiency.

As the 2021 cycle concludes, planners hope to expand and refine the market in 2022 and beyond. According to Lai, to form a primary market a few CEAs may be auctioned rather than handed out. Financial institutions will become players, improving liquidity and pricing, forecasts Liu Jie 刘杰 Shanghai Energy Environment Exchange. In subnational carbon markets, such players are the driving forces, notes Lai, making two out of three trades. Only a few will try their hand at first, most likely state-owned banks. Hurdles lie ahead, say analysts: markets and rules must first be improved to fully leverage the role of investors, according to Zhu Yaming 朱亚明 Ernst & Young Greater China. Lin Boqiang 林伯强 Xiamen University Energy Policy Research Institute agrees; investors are hesitant to bet on future carbon prices.

Aluminium, steel and cement manufacturing are, according to many, set to be added to the market in 2022. Methodologies for emissions accounting, monitoring, reporting and verification are currently being hammered out by industry associations. Non-ferrous metals (e.g. aluminium) producers will likely be allocated allowances using a baseline method similar to that used at present by thermal power plants. Petrochemicals will be included in late 2022 or 23, forecasts S&P Global Platts.

tags: electricity, climate

in other developments…

  • price volatility highlights need for gas market reform
  • as fertiliser prices balloon, localities have been urged to prioritise coal, gas and electricity for its production
  • new lithium battery standards for battery capacity and lifecycle impose stringent requirements on the NEV industry
  • stressing carbon peaking neutrality as the long-term goal, CEWC highlights energy security for 2022: China is to implement strategies on ‘national [resource] saving’, ‘traditional energy must only be phrased out when new energy is safe and reliable’ and ‘the integration of coal and new energy given the basic coal-based reality’

cropping giant Beidahuang stocking up on fertiliser
cropping giant Beidahuang stocks up on fertiliser


watching for

battling rising ag input costs

Localities must prioritise supplying coal, natural gas and electricity to chemical fertiliser companies, instructed the NDRC (National Development and Reform Commission) in early December. Local economic bureaus must ‘guide’ energy producers to sign long-term supply contracts with fertiliser manufacturers, shoring up domestic production. Transport capacity from major coal-producing provinces to key fertiliser manufacturers in Inner Mongolia, Henan, Shandong and Yunnan will be strengthened.

On an upward trajectory since early 2021, fertiliser prices reached a ten-year high in Q3. Soaring prices for raw materials, high energy costs and skyrocketing global demand are to blame, Meng Wei 孟玮 NDRC spokesperson told journalists at an October media briefing. Rising fertiliser prices threaten to cut into farmers’ profit margins. With production costs escalating year on year—to the point of driving some farmers off their land—food security is at risk.

Beijing has in recent months used both one-off subsidies and economic planning to battle runaway ag input costs. More heavy-handed than earlier interventions, NDRC’s latest ‘Notice’ resorts to direct price-setting of energy. Liberalising power markets imposes steeper price increases on high energy users than on other customers to encourage more efficient use of energy. However, new regulations greenlight the treatment of fertiliser producers as non-energy-intensive companies, thus locking in electricity supply at below-market prices. Exempting fertiliser manufacturers from market discipline suggests that food security trumps power sector reform.

Curbing exports is the second plank in the battle to boost domestic fertiliser supplies. Among the world’s major fertiliser exporters, the PRC has seen a further boost in exports amid global shortages and rising demand. Across January–October 2021 alone, fertiliser exports registered a 25 percent increase over 2020, according to GAC (General Administration of Customs) data. New export restrictions imposed 15 October by GAC to shield the domestic market from global demand will likely bring down prices and bolster domestic supplies, say industry insiders. However, price shocks in an already tight global fertiliser market will be the downside of such policies.

tags: food security strategy, ag trade policy, gas, coal, electricity

in other developments…

  • NBS (National Bureau of Statistics) reported record-high grain output for 2021, up 2 percent from 2020; revival of corn planting and strict control of cultivated land are among the reasons cited
  • to minimise the risk of African swine fever resurging, six provinces in eastern China (Shanghai, Jiangsu, Zhejiang, Anhui, Shandong and Henan) have jointly issued measures to ban imports of live pigs from other regions
  • ahead of the festival season and the Winter Olympics, a joint notice from 11 agencies calls for ensuring fresh food supply and stable prices

facial recognition AI firms under close watch in new draft data security regs
facial recognition AI firms under close watch in new draft data security regs

science and innovation

watching for

  • energy security shift following CEWC
  • rules constraining tech companies’ overseas listings
  • NSFC guidelines for annual program application

a wave of industrial 5-year plans

In line with CEWC’s (Central Economic Work Conference) emphasis on manufacturing competitiveness, four industry 5-year plans—big data, digitisation, software and information services, and green manufacturing and industryhave emerged from MIIT (Ministry of Industry and Information Technology). Each just 20–30 pages, the texts spotlight supply chain security, energy efficiency and better industry-academia collaboration. They aim for globally competitive firms and research groups with solid synergies. PRC urban clusters—Jing-Jin-Ji, Yangtze River Delta and the Greater Bay Area—will become innovation hubs for these industries.

After years of wild and under-regulated growth, data rights must now be clarified and clear rules for transactions and asset valuations devised, stipulates the big data sector’s plan. The industry should explore larger and better aggregation to improve data use and its integration in government- and firm-level decisions.

Issued after the Personal Information Protection and Data Security laws came into effect, the new plan seriously steps up data security. In tandem with all-encompassing draft regulations issued in mid-November, the text displays a struggle to balance opening and security. As a result, AI and e-commerce firms will need to adjust their business models, as will overseas companies, now obliged to store data inside PRC borders.

Didi’s forced delisting is a case in point: transferring sensitive data outside the PRC is a violation. More generally, rules to limit foreign involvement in PRC firms are in the works, even as outright bans on overseas listings are ruled out.

The plan for the digitising industry recognises the explosive adoption of cloud technology. It calls for high-quality products and services for many industrial sectors, above all raw materials (steel, petrochemicals, etc.), equipment manufacturing and electronics. MIIT urges simultaneous development of appropriate platforms, ‘backbone’ enterprises that support IT, specialised SMEs and industry standards.

A lack of breakthroughs and talent continues to trouble critical software development. The new 5-year plan for the sector targets the shortfalls in the software industry, highlights the relevance of resource sharing and stimulates demand for domestic alternatives. A wide range of sub-sectors are covered: essential software, application research, software for emerging platforms, embedded software and IT services optimisation.

tags: science and technology, innovation, strategic emerging industries

in other developments…

  • scitech system reform, including a 10-year strategy for basic research and restructuring of state labs and research institutes, highlighted at CEWC
  • big tech is laying off thousands of staff following a year of regulatory crackdowns, largely in sectors under pressure like ride-hailing, social media and gaming, report social media
  • pilot reforms in research evaluation are to devise a model to make IPR secure for projects promising stable revenue
  • a plan for green data centres and new infrastructure has been issued: construction will be led by key localities, avoiding reckless investment and duplication


He Baohong 何宝宏 | China Academy of Science and Technology Institute of Cloud Computing and Big Data director

Digital transformation is more a cultural than a technical shift, argues He: industry—in part prompted by regulatory action—has moved from 5G, blockchain and other trending technologies to mature applications, improved infrastructure investment, data trade and privacy protection. Cloud computing, his area of expertise, is a highlight. Enterprises must shape their strategies to the cloud’s advantages: its efficient resource use and software design.

Heading one of the largest units at CAICT, He Baohong is a leading member of the DCA (Data Centre Alliance), the Cloud Computing Open Source Industry Alliance and CCSA (China Communications Standardisation Association) IP and Multimedia Technical Committee. In addition, he led the COVID-19 domestic travel ‘passport’ program.

Tang Renhu 唐人虎 | Sinocarbon Innovation and Investment general manager

Launched in July 2021, the national carbon market’s performance, argues Tang, has so far been neither fantastic nor dismal: some fixes are imperative.

  • State Council must introduce high-level legislation; current rules are set and enforced at ministerial level, dampening both severe penalties and confidence in the market
  • regulators should set absolute emission caps, rather than regulating emissions intensity, to encourage decarbonising
  • systems thinking is needed: clear rules, transparency and strict enforcement should engender long term stability
  • the role of renewable power projects must be clarified as CCERs; they may be carbon neutral, but not carbon negative, points out Tang, as is the case with carbon capture or afforestation: Treating them as emissions offsets muddles the goals of the carbon market with that of carbon neutrality

Low carbon pundit Tang has been a chief scientist on the National Basic Research Program and a member of the NDRC’s (National Development and Reform Commission) CCER Review Committee. Before joining Sinocarbon, he advised state agencies on scitech support and has consulted internationally.

Zhai Jidong 翟际栋 | Kingenta Group vice president

With soaring international energy prices and environmental concerns, winding down fertiliser production capacity and focusing on domestic demand are likely to be long-term tasks, Zhai forecasts. He explains that the shift should be seen above all as part of a long-term reduction of carbon emissions in the fertiliser sector, as China aims for carbon neutrality by 2060. Scaling down the energy-intensive fertiliser industry, a major polluter and CO2 emitter, is inevitable. Reducing exports provides a quick solution to energy and resource shortages and environmental issues.

A fertiliser industry veteran, Zhai is now a vice president of stock-listed Kingenta Group, a major producer and China’s top manufacturer of compound fertilisers. He is also an executive board member at IFA (International Fertiliser Association).

Han Wenxiu 韩文秀 Central Financial and Economic Affairs Commission deputy director

The CEWC’s stability focus refers not just to the economy, but political stability as well, points out Han. Baseline thinking is still needed as hidden risks abound. Financial risk deserves to be dealt with via market means, but local finance regulators are obliged to ensure it does not spread, he advises. The PRC’s long-term economic trajectory will remain unchanged, but spillover from other jurisdictions opting for ‘ultra-loose’ COVID-19 policies pose a short-term challenge to the economy. Officials at all levels must learn to distinguish short- from long-term trends and ensure policy timeframes align.

Han’s career began in the Economic Research Department of the State Planning Commission (NDRC’s predecessor) in 1989. Moving up, he held various positions in NDRC and State Council, taking a doctorate from Renmin University in 2010. He took up his current position at the Central Finance and Economics Commission in 2018.

in case you missed it…

cp.signals—domestic policy movement
real estate tax pilots revisited
post 6th plenum: can Xi reengineer public values?

cp.positions—audit of shifts across policy sectors
cp.position: governance, trade policy, society
cp.position: scitech, agriculture, energy and environment, macroeconomy—monthly roundup
november: settling into the new era
october: powering down