China Macro Reporter

<table class="nl_card"><tbody><tr><td class="nl-post"><p>The National People’s Congress ended last Friday.</p><p>There was less drama than last year when prominently term limits were eliminated. Some have opined that the NPC ended with a whimper not a bang.</p><p>What transpired instead showed us China’s intentions. Things like boosting support for the private sector and eliminating forced tech transfer.</p><p>But, the NPC also raised questions, such as, does China really believe that the deleveraging campaign has met its goals? What mix of stimulants will China use to juice the economy. And, on and on.</p><p>As with everything about China’s government, its actions – not its words – count.</p></td></tr></tbody></table>

1. 'Foreign Investment Law': the level playing field

<table class="nl_card" id="19mar2301"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe width="720" height="405" src=""></iframe></td></tr></tbody></table><p class="caption"></p></td></tr><tr><td class="nl-post"><p><strong>On the new Foreign Investment Law</strong> in this <a href="" target="_blank">5m video</a>. ‘You could certainly say - line by line - this looks better than what was on paper before,’ says Fraser Howie, co-author of <em>Red Capitalism</em> and one of my favorite China analysts.</p><ul><li><strong>‘Those six</strong> bullet points or whatever sound great.’</li><li><strong>‘But, let's not forget</strong> - just a few weeks ago, China officials were denying there was any forced technology transfer in the first place.’</li><li><strong>‘And, now all of a sudden</strong>, something that didn't exist is now illegal.’</li></ul><p><strong>‘Foreigners</strong> and local companies being treated as equals?’</p><ul><li><strong>‘Local Chinese</strong> private companies aren't the equals of State-Owned Enterprises.’</li><li><strong>‘So, even</strong> within just the purely domestic sphere, it's an uneven playing field.’</li><li><strong>‘Saying that now foreigners</strong> are suddenly going to be treated the same – it’s very hard to see how that's going to happen.</li></ul><p><strong>‘But, you've got</strong> to put that in the political context.’</p><ul><li><p><strong>‘Under Xi Jinping,</strong> the era of reform is finished; you are now in some different sort of era.’</p></li><li><p><strong>‘He has made no secret</strong> of the importance of the Communist Party - an organization that sits completely outside the law - and the importance of this State controlling many of the key sectors of the economy.'</p></li><li><strong>‘So, you can have</strong> a better law on paper, but how it actually plays out is very hard to see.’</li><li><strong>‘What the law</strong> says and what actually happens on the ground are two very different things.’</li></ul><p><strong>You can read</strong><a href="" target="_blank">the draft 'Foreign Investment Law' here.</a></p></td></tr></tbody></table>

2. 'Foreign Investment Law': 'Tech transfer in China is no longer the main concern'

<table class="nl_card" id="19mar2302"><tbody><tr><th>2. 'Foreign Investment Law': 'Tech transfer in China is no longer the main concern'</th></tr><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe width="720" height="405" src=""></iframe></td></tr></tbody></table><p class="caption"></p></td></tr><tr><td class="nl-post"><p><strong>The NPC passed</strong> new Foreign Investment Law that, among other things, bans forced tech transfer.</p><p><strong>Here are some thoughts</strong> about the new law's IP protection and other issues from Nick Lardy of the Peterson Institute for International Economics (PIIE) in <a href="" target="_blank">this 2m 32s video</a>.</p><p><strong>Q:</strong> 'The new foreign investment law includes this focus on IP protection.'</p><ul><li><strong>‘Anecdotally,</strong> I’ve heard from several executives who say IP protection is no longer their top concern.'</li><li><strong>‘Some say</strong> they have already been ripped off.’</li><li><strong>‘They also say</strong> China has evolved so much they that they've adopted their own IP protection.’</li><li><strong>'So, what difference</strong> will this make to foreign investors on the margin here?'</li></ul><p><strong>Lardy:</strong> 'I think probably less than the Trump administration thinks for the reasons you allude to.'</p><ul><li><strong>'Most most ventures</strong> going into China now are wholly foreign-owned, so they can take steps to preserve their technology.'</li><li><strong>'The main concern</strong> for many investors is still regulatory uncertainty about how the rules are applied.'</li><li><strong>'That's more important today</strong> than the technology transfer issues.'</li><li><strong>'But,</strong> the Trump administration has not fully recognized that.'</li></ul><p><strong>But, for China industries</strong> that still require foreign firms to enter through joint ventures, the ban on forced tech transfers is a big deal for those that have yet to enter the market.</p><ul><li><strong>As with all else in China</strong>, how the ban is implemented, especially at the local levels, will show just how big a deal.</li></ul><p><strong>You can read </strong><a href="" target="_blank">the draft 'Foreign Investment Law' here.</a></p></td></tr></tbody></table>

3. Yi Gang: 'China has deleveraged' | Michael Pettis: 'No. Debt has gone up'

<table class="nl_card" id="19mar2303"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe width="720" height="405" src=""></iframe></td></tr></tbody></table><p class="caption"></p></td></tr><tr><td class="nl-post"><p><strong>At the National People's Congress</strong>, Yi Gang, Governor of the People's Bank of China reported that the goals of the deleveraging had been met; Michael Pettis of Peking University disagrees.</p><p><strong>‘I don't really think</strong> there has been any deleveraging in China, says Michael in <a href="" target="_blank">this 5m 13s video.’</a></p><ul><li><strong>‘According to</strong> China’s own numbers, debt continued to grow faster than a nominal GDP.’</li><li><strong>Instead of deleveraging</strong>, ‘there has been an increase in China’s debt burden.’</li><li><strong>‘The rate</strong> at which things have gotten worse has improved slightly, but debt itself has continued to get worse.’</li></ul><p><strong>‘The main reason</strong> for the growth in debt in China is the unbalanced nature of demand.’</p><ul><li><p><strong>‘For a large economy,</strong> such as China, there are basically two main sources of demand: consumption and investment.</p></li><li><p><strong>‘In China</strong>, household income is low and so is consumption.’</p></li><li><strong>‘So, by definition,</strong> investment growth must be high to keep the economy growing.’</li></ul><p><strong>‘But, China</strong> long ago reached the point at which most of the needed investment has been completed.’</p><ul><li><strong>‘So, now</strong> a lot of investment in China is really non-productive.’</li><li><strong>‘As a result debt</strong> is growing much faster than debt servicing capacity.’</li></ul><p><strong>To rebalance,</strong> consumption has to go up. And, ‘there are two ways you can raise consumption.’</p><ul><li><strong>‘The sustainable way</strong> is with growth in household income.’</li><li><strong>‘The unsustainable way</strong> is with growth in consumer debt.’</li></ul><p><strong>‘In the last three</strong> to four years, we did see consumption growth pick up.’</p><ul><li><strong>‘But, we also saw China</strong> go from one of the countries with the lowest amount of household debt to, by some accounts, one of the countries with the highest amount of household debt.’</li><li><strong>‘So the growth</strong> in consumption in recent years has not been sustainable growth.'</li><li><strong>‘It's been the wrong kind of growth,</strong> and it's already stabilizing.’</li></ul></td></tr></tbody></table>

4. 'China can't create growth- or jobs - out of tax cuts'

<table class="nl_card" id="19mar2304"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe width="720" height="405" src=""></iframe></td></tr></tbody></table><p class="caption"></p></td></tr><tr><td class="nl-post"><p><strong>At the National People's Congress,</strong> Premier Li Keqiang 'declared that economic policy would have an “employment first” focus: the government would strive to keep the unemployment rate below 5.5% and provide training for those out of work,' reports <a href="" target="_blank">The Economist</a>.</p><ul><li><strong>'The official jobless rate</strong> has remained steady at about 5%, but manufacturing and tech firms have recently started laying off employees.'</li><li><strong>China has pledged</strong> to create more the 11 million new jobs this year.</li></ul><p><strong>To do that</strong>, China needs stronger growth. But how?</p><ul><li><strong>'For months</strong> Mr Li has sworn off what he calls “flood-style stimulus”, (ie, deluging the economy with cash as if irrigating a rice paddy).</li><li><strong>'He repeated</strong> that phrase in his NPC speech.'</li></ul><p><strong>'But the Communist Party</strong> is still looking for ways to pep up the economy.'</p><ul><li><strong>'Conveniently</strong>, there is one policy tool that does not involve building yet more bridges, and that has the added benefit of being popular: reducing tax.'</li><li><strong>'Mr Li unveiled cuts</strong>, mostly for firms, that should total nearly 2trn yuan this year, or more than 2% of forecast gdp'.</li><li><strong>'Economists at hsbc</strong>, a bank, called it China’s most sweeping corporate-tax cut in a decade.'</li></ul><p><strong>Not so fast</strong>. ‘There were mixed signals at the NPC regarding stimulus.'</p><ul><li><p><strong>'But, frankly speaking</strong>, I don't buy them,' says Alicia Garcia Herrero, Senior Fellow at the Bruegel think tank, in a <a href="" target="_blank" rel="nofollow noopener">3m 11s video</a> interview.</p></li><li><p><strong>‘I think</strong> they're going to stimulate the economy.’</p></li><li><strong>‘At the end of the day</strong>, they care for the short term, and they can't simply see an economy doing poorly, especially on the employment side.’</li><li><strong>'So, we will see more stimulus</strong> than we were told we would see at the NPC meeting.'</li><li><strong>‘That will be good</strong>, of course, for employment data down the road.’</li><li><strong>‘But, it will be artificial</strong> because this is just about stimulating the economy with no structural change.'</li></ul><p><strong>‘We heard</strong> at the NPC that there will be tax cuts, especially, on the manufacturing sector, which is the hardest hit because of the trade war and trade developments.’</p><ul><li><strong>‘Frankly,</strong> I don't think China can create growth out of tax cuts.’</li><li><strong>‘We saw tax cuts fail</strong> to stimulate the economy last year.’</li></ul><p><strong>'The stimulus</strong> is going to come mainly from massive bank credit again to the private sector.'</p></td></tr></tbody></table>

5. 'The manufacturing sector, mired in a crisis of confidence, needs more than this tax cut.'

<table class="nl_card" id="19mar2305"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption"></p></td></tr><tr><td class="nl-post"><p><strong>The manufacturing sector</strong> needs something better than tax cuts announced by Premier Li Keqiang at the NPC. Ramping up government spending or monetary easing would be more effective.</p><p><strong>‘Tax cuts</strong> don’t solve the single biggest problem crimping China’s companies: longer working capital cycles,’ says <a href="" target="_blank">Bloomberg's Anjani Trivedi.</a></p><ul><li><strong>‘An ongoing liquidity squeeze</strong> continues to deprive private and, increasingly, state-backed companies of credit, which is affecting their everyday operations and ability to service debt.'</li><li><strong>‘Structures have weakened</strong>; short-term borrowings are becoming a larger part of firms’ total debt; receivables are ballooning, as are the number of days inventories are held.'</li><li><strong>‘Large swathes</strong> of the manufacturing sector are paralyzed.’</li></ul><p><strong>‘Beijing</strong> is beginning to acknowledge this.’</p><ul><li><strong>Premier ‘Li’s paper</strong> noted that various levels of the government must pay off at least half of the debt owed to businesses by the end of this year, and can’t pile on more account payables.’</li><li><strong>‘State-backed companies</strong> have been squeezing cash from their capital-starved suppliers and customers: SOEs owe the private sector 2.1 trillion yuan in the form of net account receivables, one of the many problems affecting companies’ liquidity.’</li></ul><p><strong>‘The manufacturing sector</strong>, mired in a crisis of confidence, needs more than this tax cut.’</p><ul><li><strong>‘These companies</strong> — mostly private — have long borne a disproportionate burden of taxes, contributing a third of the government’s revenue.’</li><li><strong>‘A cut to the top bracket</strong> will amount to a tax reduction of 400 billion yuan to 600 billion yuan.’</li><li><strong>‘That’s about</strong> 2 percent to 3 percent of corporate profits overall, or 5 percent to 7 percent for manufacturers.’</li></ul><p><strong>‘Meanwhile,</strong> their profits shrank between 8 percent and 14 percent every month last year.’</p><ul><li><strong>‘So even as the tax cut</strong> lifts profitability, it isn’t enough to restart the capital-expenditure and investing cycle.’</li></ul></td></tr></tbody></table>

6. With Streaks of Gray Hair, Xi Jinping of China Breaks With Tradition

<table class="nl_card" id="19mar2306"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption"></p></td></tr><tr><td class="nl-post"><p><strong>'Chinese leaders</strong> have long sported unnaturally black heads of hair. Mr. Xi is going gray as he builds his image as a man of the people,' reports the <a href="" target="_blank">New York Times</a>.</p><p><strong>At the NPC,</strong> 'Xi Jinping’s ‘latest attempt to shake things up may be one of his boldest moves yet: Mr. Xi is going slightly — though unabashedly — gray, in defiance of longstanding Communist Party tradition.’</p><ul><li><strong>'For decades,</strong> Chinese leaders have sported unnaturally black heads of hair, a look that symbolized unity and gave the party a youthful veneer.'</li><li><strong>'But Mr. Xi,</strong> 65, appears to be dispensing with vanity as he presents himself as a relatable and avuncular leader, part of his efforts to soften his hard-line policies.'</li><li><strong>'As Mr. Xi</strong> takes part in the annual meeting of China’s legislature this week, the silver streaks in his hair have been a hit with delegates and the public.'</li></ul><p><strong>'Mr. Xi</strong> has a history of making sartorial choices that underscore his image as a man of the people. He is often pictured in China wearing a navy blue, zippered windbreaker, a symbol of humility as he leads a campaign against corruption.'</p><ul><li><strong>'His salt-and-pepper hair</strong> further reinforces that image, as well as Mr. Xi’s desire to be seen as a paternal figure and live up to the nickname by which he is popularly known, “Uncle Xi,” experts say.'</li></ul></td></tr></tbody></table>

7. Another insight from 'The Relevant Organs'

<table class="nl_card" id="19mar2307"><tbody><tr><td><table class="multi-block"><tbody><tr><td><blockquote class="twitter-tweet" data-lang="en"><p lang="en" dir="ltr">Also, youthful, charismatic, possessed of a sense of destiny and pictured in rural reminds us of something...can&#39;t quite put our finger on it.</p>&mdash; The Relevant Organs (@relevantorgans) <a href="">March 14, 2019</a></blockquote><script async src="" charset="utf-8"></script></td></tr></tbody></table></td></tr></tbody></table>