Final Year of Li Keqiang’s Premiership and China’s 2022 Economic Outlook: Defense Budget, Digital Currency Pilot, US Delisting, Yoon Suk-Yeol, Special Weekend Edition of 13 March
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A Letter from the Editor:
The People’s Republic concluded its shortest annual congressional session this week. It also marks the last year of the current administration under Premier Li Keqiang and the Winter Paralympics. Two curtains are drawn, and it is a good time to reflect on the decade shaped by Li Keqiang’s premiership.
Premier Li Keqiang is emblematic of a passing decade of pragmatism in comparison with his predecessors. Zhu Rongji’s era is marked by hasty and bold reforms. The urgency was to bring a socialist economy into the orbit of the WTO and globalization. Wen Jiabao carried the mandarin scholar’s haute ideal in an age of rising social disparity, when the administration was plagued by corruption from within.
Li Keqiang inherited a country that had already emerged as a global power. He sets the standards for what a future domestic administrator ought to be in an increasingly assertive country and system. Economics PHD from Peking University, he achieved career breakthroughs when he was appointed chief of the landlocked, agrarian, and populous province of Henan. During his term, he dealt with the eruption of the first truly global pandemic, ie. HIV/AIDS, within the agricultural heartland of China. Understanding the pandemic spreads on the enabling ground of unfavorable socio-economic conditions that led to the unsanitary blood transfusion practices, he adopted drastic and sometimes draconitic measures to halt the contagion from the basic administrative units, led the first provincial mass HIV/AIDS testing, something which might have inspired the administration as it battles the COVID-19 outbreak.
Li Keqiang is from the background of the reformist network of the “Communist Youth League” (共青团体系, 团派, interchangeably), from which the party leader Hu Jintao himself previously emerged. Complementing President Xi’s provincial appointment which focuses on the wealthier, coastal provinces of Fujian and Zhengjiang, Li’s provincial experience with underdeveloped economies prepared him with the necessary tools to make targeted breakthroughs and to think from the agricultural hinterland. It is now confirmed that the battle against abject poverty cannot be decisively won unless the inherent vices of a bureaucratic organization are overcome, the negligence, the ill-transparency, the unaccountability.
Besides the human knowledge and necessary administrative experience, Li is well-versed in Economics and can fluently converse in English, making his press conferences with foreign correspondents a highlight of the congressional sessions. As a former party head of the industrial but rustbelt province of Liaoning, Li Keqiang recommended his preferred alternative economic measurement to the then-U.S. Ambassador to China Clark Randt over dinner. The measurement index consists of the railway cargo volume, electricity consumption, and loans disbursed by banks. Likonomics began to take shape and was studied and emulated by officials and investors alike. It remains till now a necessary complement to the official GDP figures.
As we enter the final of Li’s premiership and reflect on the decade of economic pragmatism, we must heed the warning he issued for the year ahead. China announced its economy is projected to grow by 5.5% in 2022, despite widely felt glooms that the Chinese growth continues to slide into the 5% range. Still 5.5% increase “would be equivalent to growing a middle-sized economy in a year” on an economy that is now nearly $18Trillion in size, said Premier Li Keqiang at this year’s congressional press conference. He aims to Increase the annual inflation to around 3%, which now hovers at less than 1%. Disinflation is China’s worry.
If the Ukrainian crisis has taught us one lesson, it would be for the West not to discredit the seriousness and the determination of the world’s authoritarian leaders. When the West denies the moral worth of some countries’ leaders, it often tends to discredit the credibility they hold within their own borders with their own people.
China is faced with mounting economic challenges. Soaring commodity prices creep into the Chinese supply chain, squeezing manufacturing margins.
Covid-19 spreads to 20 provinces and regions in China this week. Shanghai and Beijing are experiencing soft lockdowns. Hong Kong has seen the highest death rate per capita globally. The sluggish consumption will suffer another blow in the coming two months.
The 5.5% growth is not as unrealistic as some ridicule that China is drafting policies from the Moon. China is firing strong ammunition in the monetary, fiscal, reform realms to arrest the economy from falling.
If Ukraine casts geopolitical darkness in many people’s minds, an economic disaster for the world would be if the Chinese economy hits a hard landing. If China were not able to produce products due to an exacerbated COVID-19 surge, we could reasonably expect the price index to rise to more inflated levels. If China stops growing, which economy is big enough to lend a helping hand when the US economy points to stagflation?
China’s growth is a great thing for itself and the world. This is a piece to remember the decade of Premier Li and the decade of China’s growth he has been administering.
Summary of Articles:
Digital RMB Expands Pilot Testing, Not Ready for Full Adoption
Central Bank Transfers RMB 1 Trillion Profit to the Treasury
7 Policy Areas to Support Economic Growth in 2022
Credit Expansion Slows, Lifting Expectations for Rate Drop
Government in Action
NDRC Highlights Five Areas of Significant Reforms 2022
China is Sanguine about Defense Budget Hike in Fastest Pace in 3 Years
Chinese Stocks in New York May Face Systemic Delisting
China’s Capital Market Reform Viewed through the Annual Government Work Report
China’s Growth Driver Reverts to Infrastructure, with a Digital and Renewable Twist
Real Estate Developer SOHO China Sells Mega-sized Properties with 30% Discount
Omicron Surges across Chinese Cities
EU-China Rift Widens over Ukraine Crisis
Conservative People Power Party Candidate Yoon Elected President Of South Korea
China’s Major Foreign Policy Highlighted at the Congressional Session
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1. Digital RMB Expands Pilot Testing, Not Ready for Full Adoption
The third wave of sovereign digital RMB ( DC/EP) pilot test is planned for more regions in China, including Tianjin, Heilongjiang, Henan, Fuzhou, and other cities.
Despite the successful testing of the operability and applications of the DC/EP, the full adoption of the DC/EP is still not ready. The barriers to the full adoption include user experience, technological infrastructure, data privacy, and a legal framework surrounding its use.
Pilot regions continue to expand.
In February, Heilongjiang Province, Henan province, and Fuzhou city all included the pilot testing of the digital RMB into its government plans.
By the end of 2021
The digital RMB has been tested in 8.08Million application scenarios. The cumulative used digital wallets reached 261 million, and transaction value reached RMB 87.5 Billion ( Over $13 Billion).
DC/EP’s APP appeared in the smartphone stores ( beta version) and has been downloaded over 10 million times. Over the Winter Olympics, a total of 9.6 Billion RMB has been processed via DC/EP.
The next pilots
The next testing phases will shift the focus from consumer applications to business and government applications with the DC/EP, particularly in industrial IoT, cross-border trade, smart cities, and public services settings.
The wholesale banks appointed for the DC/EP distribution have expanded to include China Merchant bank, 6 state-run banks, and 2 neobanks, including WeBank and Mybank.
数字人民币试点不断推进的同时，其运营机构亦有所扩容，在中、农、工、建、交、邮储六大国有银行基础上，已新增了股份制银行招商银行(45.480, -1.28, -2.74%)以及微众银行、网商银行两家民营银行。
2. Central Bank Transfers RMB 1 Trillion Profit to the Treasury
On March 8th, the PBOC issued a short statement on its decision to transfer more than RMB 1 trillion profit to the Ministry of Finance to support its fiscal stimulus, primarily used for corporate tax rebates and increasing the transfer payment to regional governments.
PBOC says that the RMB 1 Trillion is mainly earned from foreign exchange operations in the past few years, and this transfer does not contribute to further budget deficit. PBOC’s profit will be handed over monthly while maintaining a stable monetary balance sheet.
According to the Law of the People’s Republic of China(2003), PBOC’s profit after expenses and reserves set by the State Council shall be all handed over to the Ministry of Finance. However, the Ministry of Finance’s representative explained that PBOC halted this practice since the Covid-19 pandemic broke out to be prepared to meet any potential monetary shocks and challenges, which resulted in PBOC harboring a large sum of profit yet to be handed over to the central government.
Analysts from CICC believe this will have a very similar effect as decreasing interest rates. It is predicted that the decision will increase the money supply equivalent to lowering the RRR ratio by 50 basis points. Therefore, the possibility for the PBOC to announce further RRR rate cuts is significantly lowered for the short term.
3. 7 Policy Areas to Support Economic Growth in 2022
The Chinese government uses proactive policies in 7 areas to ensure stable economic growth. The 7 areas are macro, micro, structural, technological, reform and opening-up, regional, and social.
The macroeconomic policy is prone to be loose monetary and loose fiscal.
The announced proactive fiscal policies include RMB 2.5 Trillion of tax rebate, 2.8% fiscal deficit, RMB 1.5 Trillion fiscal payment transfer from the central to the local governments, additional RMB 3.65Trillion local government special-purpose debt budget, RMB 2 Trillion state-owned bank profit transfers to state budget stabilization funds to support fiscal strength.
Monetary policy will facilitate the expansion of the credit market overall and direct the flow of funds towards the vulnerable and strategic sectors.
In Microeconomic policies, the government will focus on driving down the borrowing costs for corporates. The corporate borrowing rate reached 4.61% in 2021, the lowest in over 40 years. The policy will aim to lower the corporate’s borrowing cost even further this year.
The government will continue to focus on supply-side reform to enable economic self-reliance and enlarge the domestic economic circulation.
Technology policies will focus on optimizing the overall technology ecosystem building.
Reform and opening-up policies will attract FDI and further liberalize key factors in the labor, land, and capital markets.
Regional coordinated development offers China’s central and western regions faster than average growth prospects. This also optimizes China’s supply chain mapping within its vast territory.
Social policies will continue to tackle unemployment, the aging population, and other social agendas.
4. Credit Expansion Slows, Lifting Expectations for Rate Drop
The Central Bank released February’s financial data.
In February, the total RMB-denominated credit market expanded by RMB 1.2 trillion, lower than a year ago. Despite strong liquidity expansion (M2), the slowdown in corporate borrowing activities indicates the weakness in corporate investment confidence in the current environment.
mid-to-long term borrwoing in the residential sector contracted by RMB 46 Billion from a year earlier. The mid-long-term credit contraction in the residential sector can be largely attributable to the sluggish real estate market demand.
Even though the mid-long-term corporate borrowing expanded in February, it only grew half as much compared to a year earlier.
M2 grew 9.2% in February, down slightly from 9.8% growth a month earlier.
M2 continues to expand at near double-digit levels. The central bank’s position to support a loosening monetary environment is consistent from a policy perspective.
The weakness in corporate credit demand raises the expectation that the PBoC may further lower the RRR ratio or even the policy rate ahead of the Fed rate hike.
Government in Action
1. NDRC Highlights Five Areas of Significant Reforms 2022
Three Deputy Directors of the National Development and Reform Commission framed five major reform policies at the State Council’s Press Conference during the annual congressional session on March 7.
The 5 key areas of reforms for 2022 include:
Reforms that stimulate the market participants
Reforms that establish a high-standard market system
Reforms that stabilize growth and expand domestic consumption
Reforms that induce high-level opening-up
Reforms that promote the low-carbon energy transition
Reforms that stimulate the market participants (companies)
Complete China’s three-year SOE reform due in 2022. The SOE reform aims to enhance the allocation of SOE’s resources and deliver structural adjustment in the national economy. Deepen mixed-ownership reforms. Expedite private corporate reforms to achieve high-quality growth. Support wider presence of SOEs and construct world-class companies through entrepreneurship.
Reforms that establishes a high-standard market system
Break barriers to market competition, and complete the reform to build a market-based system. Reform the market for factors in production, including land, labor, capital, technology, and the emerging data. Construct a nationwide unified electricity market and a unified LNG market.
Reforms that stabilize growth and expand domestic consumption
Enhance the access to capital for companies and leverage private capital to invest in strategic projects. Enhance the size and standard of consumption and the consumption environment. Enhance the income level for the middle class in society.
Reforms that induce high-level opening-up
Adopt equal treatment for foreign companies with domestic counterparts. Enable wider market access, and implement a negative list for cross-border services. Expedite the Hainan Free Trade Port construction.
Reforms that promote the low-carbon energy transition
Avoid a radical or unified decarbonization strategy. Design an incentive/punishment mechanism for decarbonization efforts. Implement electricity futures and a green energy transaction market pilot scheme.
2. China is Sanguine about Defense Budget Hike in Fastest Pace in 3 Years
China plans to increase its defense spending by 7.1% to $229 billion in 2022, according to the Ministry of Finance’s annual report at the start of the National People’s Congress.
The interpretation of the move has been polarising. On the one hand, western media outlets are tempted to interpret the move as an aggressive response to Biden’s new Indo-Pacific policy and growing conflict in Ukraine, citing the military budget growth is higher than its projected GDP growth.
A more balanced view posits that the projection merely continues the steady defense budget increase over the past decade. According to Drew Thompson, a senior fellow at the Lee Kuan Yew School in Singapore, the budget’s official figures are “less important than the overall trend which is steady growth, expansion, and consistent improvement of the PLA (People’s Liberation Army) capabilities.”
On the opposite spectrum, Chinese media quickly justifies the reasonable budget increase as a share of total GDP. Assuming China does achieve its 5.5% GDP growth target, the budget will bring that figure to 1.2% of total GDP. According to the Stockholm International Peace Research Institute, the average military expenditure/GDP ratio in 2020 is close to 2.4% globally. The Chinese Global Times speculates that Biden will ask congress for a military budget exceeding $770 billion, representing 3.7% of GDP.
Here, we note that actual military spending will likely exceed the official figure, most notably because relevant R&D expenditures are not included in the defense budget.
1. Chinese Stocks in New York May Face Systemic Delisting
In a recent interview, Chair of SEC Gary Gensler offered an update on the new information disclosure requirements for Chinese companies listed in the US, following the Holding Foreign Companies Accountable Act (HFCAA) passed in 2020. (Source)
Gensler says, “We’ve had some good discussions with our counterparts from China,” but also points out that “it’s really up to the officials in China.”
The process of trading prohibition is straightforward in that companies identified by the SEC which fail to provide the auditing and other information as required by the HFCAA for three consecutive years will have their stock trading banned.
If China does not change its tack, the trading prohibition of about 250 Chinese companies could start as early as 2024.
The HFCAA requires more vigorous auditing requirements for foreign companies, and it also requires them to disclose whether any foreign government owns or controls them. The law was seen as specifically targeting Chinese companies as some of its articles come with very pointed requirements, such as disclosing “the name of each official of the CCP who is a member of the board of directors.”
Chinese listed companies’ responses
Of the top 20 Chinese listings in the US, all except two have opted to seek dual listings and delisting/relisting in Chinese stock exchanges. By now, 14 out of 20 top Chinese companies listed in the US have completed listings in China (4 in Shanghai and 10 in Hong Kong), while some others are in the inactive discussion phase for HK dual-listings. The speed of return to the Chinese home turf has been voluntary and anticipatory.
1. Alibaba Group Holding Ltd – HK
2. JD.com Inc -HK
3. NetEase Inc - HK
4. Baidu Inc - HK
5. Pinduoduo Inc - Discussion
6. NIO Inc – close to HK listing
7. Li Auto Inc - HK
8. XPeng Inc - HK
9. BeiGene - SHA
10. DiDi Global Inc - Discussion
11. ZTO Express - HK
12. Trip.com Group Limited - HK
13. KE Holdings Inc – preparation
14. China Petroleum & Chemical Corp - SHA
15. Huazhu Group Limited - HK
16. Lufax Holding Ltd
17. China Life Insurance Co Ltd - SHA
18. PetroChina Co Ltd - SHA
19. Bilibili Inc - HK
20. Kanzhun Ltd
Chinese security regulator’s reactions
The official attitude of the CSRC of the change in information disclosure requirement for Chinese companies in the US has been that China remains an open and cooperative approach to the issue and is always ready to enter into further discussion with the US. (Source)
In previous press conferences, officials from the CSRC also asserted that Chinese regulators are still open and respect the decision made by domestic companies who seek foreign listings. However, the new regulations regarding Data Security Law introduced in 2021 certainly created more obstacles for Chinese companies to access offshore markets.
2. China’s Capital Market Reform Viewed through the Annual Government Work Report
The 2022 Government Work Report expressed that the Chinese capital market will continue to support the equity and de’ equity and debt financing needs, implement a comprehensive registration-based IPO system and enable overall stable economic growth. (Read more)
An overview of China’s capital market reform through the government work reports in the past decade.
November 2013, at the third plenum of the 18th Party Congress, China passed the resolution to establish a multi-tiered capital market system, begin to adopt a registration-based IPO system, promote multi-channel equity financing platforms, regulate the capital market, and enhance the share of direct financing in the capital market.
The Government Work Report 2015 added that the government promotes the Small and Medium-sized and regional equity and commodities markets and develops equity-based crowdfunding pilots, credit-back securitization, and financial derivatives market.
Government Work Report 2016 expanded the capital market reform agenda to include opening the Hong Kong-Shenzhen Connect, leveraging Hong Kong’s global financial center status to enable Chinese stock access to global capital.
The 2017 Government work report further stressed the development of the multi-tiered Chinese capital market, including the Shenzhen Sci-tech board, the new Third Board, and regional stock and commodities exchanges. This period also focused on perfecting the major stock exchanges' legal infrastructure and regulatory framework.
The 2018 Government Work Report further included the expansion of the debt and commodities markets. It mentioned for the first time “inclusive finance.” It also called to deepen capital market opening-up, grant foreign companies wider market access, and introduce innovation support as a key objective of China’s capital market reform.
In November 2018, at the Shanghai Import Expo, Chinese president Xi announced the establishment of the Shanghai STAR Board, a Chinese version of NASDAQ and began adopting a registration-based IPO system on the STAR Board.
The 2019 Government Work report expanded the horizon of capital market reform to include financing support for the new economy, IP-based lending, and development finance for tech start-ups. The focus increasingly shifted towards financing support for the new economy, new technology, new business models, and new ecosystems.
The 2020 Government Work Report announced deepening reform in the factors of production market for the first time, synchronizing capital market reform with a tech-driven economic growth model.
The 2021 Government Work Report called to further adopt the registration-based IPO system, normalize corporate delisting procedures, and expand the financing channels for corporates.
November 2021, Beijing Stock Exchange was formally unveiled to support SMEs’ equity financing needs.
In 2022, China aims to fully adopt a registration-based IPO system, completing a major step towards capital market liberalization.
3. China’s Growth Driver Reverts to Infrastructure, with a Digital and Renewable Twist
The overarching priority for 2022 is to ensure the “six stabilities,” i.e., stable growth, trade, employment, FDI, investment, and growth expectations.
Infrastructure and manufacturing will return as China’s reliable growth drivers in 2022.
Trade remains highly uncertain, and consumption remains weak so far in 2022. Infrastructure will be the only reliable driver of growth. Infrastructure includes traditional and digital infrastructure, renewable energy infrastructure, telecom infrastructure, and the services industry related to digital infrastructure.
Infrastructure expansion is also supported by China’s pivot towards loose monetary and proactive fiscal policies.
The risk of real estate market collapse has been largely arrested with the recent loosening measures in the overall credit market and the lifting of market control measures placed to restrict consumer demand. Without reversing the real estate policy at 180 degrees, the current loosening measures are designed to ensure a soft landing of the real estate market and possibly growth at a low speed, contributing to the 5.5% GDP growth target.
Technology continues to play a key role in economic growth.
The Government Work Report declared the government would strengthen the overall digital economic structure following the launch of the East-West Digital Computing Roadmap. The technology sector will benefit from the capital market reform agenda, including the addition of the SPAC listing options in Hong Kong, the opening of the Beijing Stock Exchange, and the soon system-wide adoption of the registration-based IPO system.
1. Real Estate Developer SOHO China Sells Mega-sized Properties with 30% Discount
According to SOHO China’s press release, the company’s founder and chairman, Pan Shiyi, announced in a small conference with real estate agencies from Beijing and Shanghai that the company will sell some of its best properties measured at more than 32,000 sqm at a 30% discount. The proceeds will not be paid out as dividends. It will be used to ease pressure on the company’s cash flow and improve its debt structure. (Source)
This large-scale sale covers a wide range of office, commercial and residential properties from some of the most famous SOHO China’s complexes, including Galaxy SOHO and Sanlitun SOHO.
Pan Shiyi also shared that the income accumulated from this sale will be purely used for reducing the company’s debt ratio. By mid-2021, the company’s net debt to asset ratio was reported to be 43%.
The company may be in urgent need of cash, shared by professionals in the real estate industry, as the commission rate was raised to 4% for these properties, much higher than the industry standard of around 1%.
SOHO China reached an acquisition deal with Blackstone to sell a portfolio of prized assets, including properties currently for sale, for HKD 23.6 billion in 2021. However, the deal was halted as Chinese regulators stepped in.
SOHO is traded on the HK stock exchange.