Chinese government steps up the effort to support growth - Takeaways of China’s state council executive meeting
On 23 July 2018, China’s state council executive meeting hosted by Premier Li Keqiang announced the fiscal and monetary policy will be further fine-tuned to boost domestic demand. And the meeting reiterated that China will strike a balance between “easing and tightening” and keep liquidity “reasonable and sufficient”. It was also stressed that China will not resort to outright stimulus.
Here are some key points to come out of the state council executive meeting:
More tax incentives to support technology upgrading:
On top of 1.1 trillion yuan of reductions in levies and fees in the pipeline of 2018, the State Council announced that it will further expand the promised R&D tax credit (75% of cost) from small to mediumsized companies to all companies, which will bring additional tax cut worth of 65 billion yuan.
The government requested to finish the refund of 113 billion yuan of the drawback of the withholding tax to the qualified enterprises in advanced manufacturing and modern service industry.
The state council also requested to accelerate the issuance of 1.35 trillion yuan of special local bonds and fund for the infrastructure projects.
Prudent monetary policy to keep sufficient liquidity:
It was stressed to keep the appropriate total social fund, “reasonable and sufficient” liquidity and smooth capital transition mechanism.
The government requested the implementation of the various incentives to small and micro enterprises (SMEs). It was instructed that the financial institutions to support SMEs and the initiative of debtto-equity swap by the specific funds with RRR reduction. China also encouraged the commercial bank to issue financial bonds for SME with the waiver of the requirement of consecutive profit of the issuer.
The meeting also set up the target to increase 140 billion yuan loan for around 150 thousand SME every year.
Faster investment growth:
The government boosted the private investment in the projects in transport, oil and gas, and telecommunications.
The statement also seeks to guide financial institutions to guarantee reasonable funding to Local Government Financing Vehicles so that essential projects aren’t held up, to facilitate construction and planning of a number of large scale projects that will meet development purposes and public demand.
Furthermore, it was also mentioned to clear “zombie enterprises” - companies that require government support in the form of subsidies and bank loans to operate - and related invalid capital.
In general, Chinese government stepped up the effort to support the growth, confirming from consolidation to a more neutral stance amid the economic headwinds. And it seemed like Chinese financial markets are recovering an appetite for risk not seen in months, taking cues from the government’s push to invigorate the economy. We have seen a 2.8% rally of S&P China 500 in first three days of the week.
Given the 726 billion yuan deficit in first half of 2018 versus around 2.38 trillion yuan as budgeted full-year deficit (2.6% of 2018 GDP), together with 5 trillion yuan in fiscal deposits and robust land sales revenue, there is still ample room for further fiscal easing.
As for the monetary policy, below-target inflation and a stabilizing debt mean that the government can afford to further lower the Required Rate of Return (RRR). This can increase lending funds to facilitate the corporate development. Market players expects additional cuts of RRR rate in the second half of 2018.
Source of all data: The state Council of The People’s Republic of China, 24 July 2018. http://www.gov.cn/xinwen/2018-07/24/content_5308679.htm
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Quality over quantity: China's Economic Growth Focus in 2018
The Central Economic Work Conference (CEWC) was held in Beijing on 18-20 December, 2017. As the first CEWC after the 19th Party Congress, it set the tone for China’s central government’s economic policies in 2018. They are crucial to the long-term development of the world’s second-largest economy.
Highlights of the CEWC
(1) High-quality development over GDP targets
CEWC emphasized the quality of the economic development over specific GDP targets. The government will likely unveil its GDP growth target at “around 6.5%” during the National People’s Congress in March 2018 instead of “6.5% or higher if practically possible” in 2017. The government will follow its previous guideline of “making progress while maintaining stability” and keep economic growth within a “reasonable range.”
(2) Three key focuses: prevention of major financial risks, poverty alleviation, and pollution reduction
– Preventing major financial risk. The government will focus on containing major financial risks to form a “virtuous cycle” among the financial, real and property sectors, as well as within the financial system.1 There will also be increasing efforts to crack down the illegal activities in the banking, securities and insurance sectors as well as online finance.
– Poverty alleviation. President Xi pledged to lift all rural residents above China’s poverty line by 2020. The central government will also step up its supervision of local government bodies while allocating more fiscal resources to welfare, education and healthcare as well as public services in rural area.
– Pollution reduction. The CEWC targeted to “significantly reduce” the gross emissions of major pollutants with a specific focus on air pollution control. Previous measures such as reducing industrial activities during the winter heating season will continue. China will also examine its industrial structure, energy structure and transportation structure in order to achieve eco-friendly development.
(3) Monetary and fiscal policies
- Monetary policy. The CEWC said China will implement prudent and neutral monetary policy2. However, following the Fed’s rate hike decision in December, the PBoC raised interest rates on MLF and reverse repo operations by merely 5bps. The move was pre-emptive but it indicated that the PBoC is ready to use interest rates and other measures to ensure financial stability if volatilities are triggered by external factors.
- Fiscal policy, the government will implement a proactive fiscal policy in 2018. In particular, the CEWC said the government will improve its supervision over local government debts. That being said, strategic projects related to government-led regional integration plans (such as the Guangdong "Bay area" blueprint, Xiong'an new district, and the Yangtze River Delta city-clusters) will still be supported by government budget spending and debt issuance.
The CEWC confirmed that China will maintain stability of the RMB exchange rate at a reasonable equilibrium level. Although the global financial market volatility and the interest rate hike of the Federal Reserve will weigh on the RMB exchange rate, the growth of Chinese economy and the ongoing RMB internationalization will offset the impact. We will expect two-way fluctuations of the RMB’s exchange rate in 2018
The CEWC repeated that the government will establish the “long-term price mechanism” for the property market, with “equal emphasis on rentals and sales.” It will encourage the professional and institutional participation in the rental market. We do not expect loosening of existing restrictions on purchase and resale to curb the property price. The development of private rental and public social housing may pick up. Going forward, the uncertainty on the property sector has somewhat increased.
To achieve high-quality development, the government will promote consumption and private investment to drive growth. Rural reform targeting to alleviate the poverty such as restoring land use rights to farmers could also unlock rural land wealth of US$20trn and hence boost rural consumption.
The government has recently selected 31 central and local SOEs as the third batch of the mixed ownership reform pilots program. SOE reforms, especially SASAC (State-owned Assets Supervision and Administration Commission of the State Council) reform, will accelerate in 2018.
New energy and eco-friendly firms will gain from anti-pollution initiatives. “China going green” is a government-led initiative for investment in the medium term. Investment in rural infrastructures (roads, access to water, power and Internet, etc.) and industries will likely emerge as a new growing area of fixed asset investment.
S&P China 500 Index consists of 500 largest and most liquid Chinese companies listing globally. It covers almost all the potential China-related investment opportunities. Broad based strength in Chinese equities propelled the S&P China 500 to a 44% total return for the year of 2017. The index had notably consistent performance during the year as well recording positive returns in all 12 months.
Figure 1: Comparison of industry distribution
By GICS1sectors weight (%)
1:The Global Industry Classification Standard (GICS®) was developed by and is the exclusive property and a trademark of S&P and MSCI. Please refer to index disclaimers and index performance disclosure at the end of this presentation
Source: Bloomberg, FTSE, MSCI, China Securities Index, Hang Seng Indexes, S&P Dow Jones Indices; As of Dec 31, 2017; Please refer to index disclaimers at the end of this blog.
Benefited from its diversification in markets and sectors exposure, S&P China 500 has demonstrated better risk-adjusted returns (Figure 2). During the period from 31 Dec, 2008 to 31 Dec, 2017, the S&P China 500 generated an annualized return of 13.0% and Sharpe ratio of 0.59, both are the highest among the major China indices.
Figure 2: Performance comparison1: SPC500 vs. major China indices
1:Calculation starts from 31-Dec-08 to 31-Dec-17. “No of Stocks” data as of 31 Dec 2017. All data are converted to USD.
2: S&P China 500 (USD), based on back-test performance, annualized net total return. Source: S&P Dow Jones Indices LLC. Data as of Dec 30, 2017. Index performance based on net total returns USD. Charts and graphs are provided for illustrative purposes. Past performance is not an indication or guarantee of future results. These charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
Source: Bloomberg, FTSE, MSCI, HSI, CSI, S&P Dow Jones Indices; Please refer to index disclaimers and index performance disclosure at the end of this document
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