JT’s Insights

Chinese government sent out more loosening signals

By support@jt.capital / November 1, 2018

There were three notable policy announcements in China . One is the Politburo meeting on economic policy. The politburo then held a session on artificial intelligence (AI). A third item was an announcement of a State Council document — the document was sent out internally on October 11th but just made public today.

The State Council meeting announced recommendations to improve the underperforming parts of the economy and contain financial risks.

For improving the underperforming parts of the economy, there should be stronger guarantees on financing needs, to prevent problems such as “uncompleted projects”. In order to stimulate infrastructure spending, private investment and Public-Private-Partnership are encouraged, while reforms on investment-related procedures should be deepened.

For containing financial risk, there should be more stringent control on the budget of local governments. In particular, control on special bond issuance should be strengthened to avoid the rise of implicit debt. Debt issuance in the name of government investment funds or PPPs should also be strictly prohibited. However, normal financing needs from LGFVs should be well accommodated to prevent the possible break of funding chain or the burst of implicit debt.

In addition to it, State Council also reaffirmed its stance on development of higher quality rather than growth rate. Fiscal policy should be proactive and monetary policy should be stable to stabilize key economic variables. There should also be more support to SMEs and more market-oriented reforms to unleash the market power in fostering growth.

In addition to the State Council meeting, President Xi chaired the Communist Party Politburo meeting today on economic policies. Overall, the Politburo meeting highlighted the challenges facing economic growth and policies should be more “proactive” in dealing with the challenges.

Key points from the Politburo meeting statement include:

  • The current economy is turning from high growth to high quality amid “profound” changes in external conditions, and policy support effects are yet to be realized.
  • Committing to structural reforms: in face of dilemmas and challenges, the government reaffirms its stance to solve the issues via supply side reforms and further opening up policy. At the same time, fiscal policy should be proactive and monetary policy prudent. The government will try to stabilize employment, finance, external trade, foreign investment, investment and expectations.
  • Supporting the private enterprises: the government would explore ways to help the private enterprises and solve the difficulties faced by private enterprises and SMEs.
  • Promoting a healthy development of the capital market: the government would focus on reforms and institutional improvement in capital markets to unleash market forces and foster the long term healthy development of capital markets.
  • Further opening up: the government will more efficiently utilize foreign capital, and protect foreign companies’ legal rights in China.

What’s worth noting is also what is not in the announcement. This is because when the Chinese government intends to do something a document is often issued — but when a previously issued instruction is no longer desired the same document is not revised or withdrawn; the superseded goal simply disappears from the new document. Notable omissions include:

  • No mention of “deleveraging”. The concern about rising leverage has been a main constraint on the effectiveness of policy loosening. The last politburo meeting statement in July was hawkish as before that meeting the tone since official comments April was mostly “stabilizing” or “controlling” leverage instead of deleveraging. The lack of emphasis gives more room for loosening. This does not mean there is no concern on leverage anymore, but it’s less of a priority.
  • No mention of the property market. July announcement was very hawkish on this and changed the goal of preventing “excessive price increase” to “price increase”. This signaled a change in property market policy. This is because the property market has been cooling down in recent months. Additional tightening measures are unlikely to be rolled out, at least at a national level. But nationwide loosening is not likely either because of fears of a price rebound. Local loosening by local governments seeing falling prices and transactions has already started in places such as Xiamen and more cities are likely to follow.
  • No mention of the 4th Plenary of the 19th Party Congress while other meetings such as the 40th anniversary of the reform were mentioned (to be held in December). This practically means the plenary is unlikely to be held the year end.
  • No mention of tax cuts. This does not mean tax cuts that were widely expected to be released at the conference will not happen. Minister of Finance Liu Kun recently clearly indicated further tax cut measures will be rolled out in the near term. VAT is the potential cut which is likely and potentially significant in magnitude. Other measures to support consumption are also possible though less certain, especially tax breaks for car purchases.

The State Council document was released on 11th October and therefore strictly doesn’t present a new change in policy direction. The government has become clearly more dovish since the last RRR cut, which happened slightly before the issuance of this document. The heightened concerns are a response to worsening economic and market performance as well as a more grim outlook for the trade war, especially after the speech made by US Vice President Pence. We expect the government to continue with this round of policy loosening, at least until the trade dispute is resolved. The earliest likely timing is the G20 summit at the end of November. Expectations on both sides are low, but a partial deal should not be ruled out in our view either. We expect infrastructure investment growth to show a rebound in the fourth quarter.

In a separate Politburo meeting on AI, Xi also emphasized the importance of AI in driving growth. The positive externality brought by AI technology will be essential in raising productivity and upgrading the industries. The government will also promote the use of AI in various sectors, such as medical care, housing and transport.

The emphasis on AI development shows the focus of the top leadership on this. The desire to build self owned technology likely became stronger because of the trade war. But the language used is clearly very carefully crafted to avoid aggravating the trade dispute.

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