China Macro Reporter

<tr><td class="nl-post"><p>‘Over the past few months, the central bank stopped calling its monetary policy "prudent and neutral."Now it's just calling it "prudent."’</p><p>‘Markets have been, and still are, desperate to paint the change as proof of imminent monetary loosening. But on Sunday, Yi Gang was clear that the monetary stance has not changed: ‘"The meaning of prudent monetary policy has not changed."’</p><p><em>(This from the ‘trivium china’ daily Tip Sheet, published by ‘trivium china’ consultancy. You should <a href="" target="_blank">subscribe to the Tip Sheet</a> – terrific and free.)</em></p><p>Yi Gang may be clear in his mind. But, his colleagues are sending out signals. And the NPC has only contributed to the confusion.</p><p>So, be cautious in taking any NPC official or sideline statements as the final word.</p></td></tr>

1. China's increased State role is reason for slowing economy, Lardy Says

<table class="nl_card" id="19mar1301"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe width="720" height="405" src="" allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe></td></tr></tbody></table></td></tr><tr><td class="nl-post"><p><strong>‘The major reason</strong> China's economy has slowed down by several percentage points is the increased role of the state over the last five six years,' argues Nick Lardy of the Peterson Institute in the <a href="" target="_blank">5m interview</a>, above.</p><p><strong>China now has</strong> 'a very state-directed economy that has moved away from the market orientation that was characteristic of earlier years,’</p><ul><li><strong>‘Xi Jinping </strong>says that the Party must be in control of everything everywhere all the time.’</li><li><strong>‘So, we've seen a resurgence</strong> of the role of the Party particularly in the economy.’</li></ul><p><strong>At the NPC,</strong> 'we're seeing a little bit of a pullback from the emphasis on the State; a recognition that the private sector is important'</p><ul><li><strong>'But that's a direction</strong> they've been moving in for several months, so it's not a revolutionary change.'</li></ul><p><strong>‘If they don't go back</strong> to market-oriented reform, China could slow down even more.’</p><ul><li><strong>‘China should allow</strong> the market to have a greater role to have a more efficient allocation of capital.'</li><li><strong>‘They should have real bankruptcy </strong>for firms, which the Chinese even admit are "zombie firms" that lose money continuously.'</li><li><strong>‘They need more merger and acquisition</strong> activities so that more efficient firms can take over the assets of inefficient firms.’</li></ul><p><strong>‘If China went back</strong> to market-oriented reform, they could be growing at 8% or even more.'</p><p><strong>The rub.</strong> After 35 years of market-oriented reform, the Party had lost a good deal of its control - not just of the economy but of the people.</p><ul><li><strong>Xi Jinping</strong> was put in charge, not to maximize GDP, but to reassert Party control - and to eliminate threats to the survival of the Party.</li><li><strong>As distasteful </strong>as many of his actions are to some (read, me), he's doing a pretty good job of achieving those goals.</li><li><strong>And, it's only cost him</strong> a few percentage points of GDP.</li></ul><p><em>(for links to Nick's long video presentation and a podcast, please go to the last post)</em></p></td></tr></tbody></table>

2. Addressing the crisis of confidence - what Premier Li said and didn't say

<table class="nl_card" id="19mar1302"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9" poster=""><iframe width="720" height="405" src="" allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen poster=""></iframe></td></tr></tbody></table></td></tr><tr><td class="nl-post"><p><strong>‘China is going through a transition period</strong> from an investment-driven economy to a consumption-driven economy, says Yichen Zhang, Chairman & CEO of CITIC Capital and Chinese People's Political Consultative Conference (CPPC) member, during his<a href="" target="_blank"> 5m interview</a>, above.</p><ul><li><strong>‘During this period companies </strong>need to find ways to upgrade themselves.'</li><li><strong>‘So, there is a general confidence </strong>issue simply because things are not so easy anymore.'</li><li><strong>‘People are so used to </strong>building up new capacity and producing more and then serving an ever-expanding market.'</li><li><strong>‘Now, they have to adjust </strong>and learn a way to upgrade their products and focus more on serving a more discerning consumer market.’</li></ul><p><strong>‘Three factors </strong>that contributed decreasing business confidence last year were addressed or alluded to in Premier Li’s Work Report to the NPC.’</p><p><strong>‘First and foremost </strong>was deleveraging.'</p><ul><li><strong>‘That happened </strong>all at the same time across many different financial markets.'</li><li><strong>‘It was not as coordinated </strong>as the government would have liked.'</li><li><strong>‘This was reflected </strong>in the Premier Li’s Work Report – he did not want to highlight that, but he clearly indicated the government could have done this better.’</li></ul><p><strong>‘Second, </strong>there were doubts about the role of the private owned enterprises, the POEs.'</p><ul><li><strong>‘Premier Li, </strong>in his Work Report, was trying to reassure entrepreneurs that they're very much needed and encouraged to build their business.’</li></ul><p><strong>'Third, </strong>the U.S.-China trade war.'</p><ul><li><strong>‘This had a major psychological impact </strong>on the market.'</li><li><strong>‘But, obviously, </strong>I don't think they want to openly comment on that during in the government Work Report.'</li><li><strong>‘Still, </strong>the good progress made so far in trade negotiations will remove a lot of overhang.’</li></ul><p><strong>'With those three factors </strong>addressed, I think this year will be fairly steady.'</p></td></tr></tbody></table>

3. Is China looking for 'good' shadow banks?

<table class="nl_card" id="19mar1303"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe width="720" height="405" src="" allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe></td></tr></tbody></table></td></tr><tr><td class="nl-post"><p><strong>If you watch </strong>a lot of coverage of the financial sector at the NPC, you will be surprised - not unexpectedly - that only a partial picture emerges.</p><ul><li><strong>Not to say that what Yi Gang, </strong>Governor of the PBOC, and the others cover in, for example, the <a href="" target="_blank">90m+ news conference </a>, above, isn't important, just incomplete.</li><li><strong>For reference, here's </strong>the <a href="" target="_blank">statement </a>by China Banking and Insurance Regulatory Commission (CBIRC)'s statement in Chinese.</li></ul><p><strong>One thing of note </strong>, Governor Yi announced that the structural deleveraging campaigned had achieved its goals.</p><ul><li><strong>'China’s macro-leverage ratio </strong>, or the ratio of its total debt to its gross domestic product, has stabilized since last year, reversing the trend of previous years in which the ratio rose by an average of more than 10 percentage points,' reports <a href="" target="_blank">Caixin.</a></li></ul><p><strong>But, is this </strong>a case of, as a <a href="" target="_blank"">WSJ </a>headline noted, 'Chinese Deleveraging is Dead, Long Live Chinese Deleveraging!'?</p><ul><li><p><strong>'Investors </strong>would be forgiven for being confused by the messages coming from the Chinese government this week. Don’t worry, the authorities are probably a little confused too.'</p></li><li><p><strong>No more so than </strong>the current attitude toward shadow banking.</p></li></ul><p><strong>The government </strong>has cracked down on shadow banking, putting the small businesses that depend on it in a bind.</p><ul><li><strong>And, since banks </strong>couldn't be strong-armed into filling the gap, maybe shadow banking isn't looking so bad.</li></ul><p><strong>"Regulators are trying to distinguish </strong>between good and bad shadow banking operations, and would tighten oversight of "unhealthy shadow banks" whose lending "doesn’t enter the real economy but only results in adding leverage,"' Wang Zhaoxing, vice-chairman of the China Banking and Insurance Regulatory Commission told the <a href="" target="_blank">South China Morning Post</a> on the sidelines of the NPC.</p><ul><li><strong>'We need to have </strong>an accurate understanding of shadow banking.'</li><li><strong>'For those </strong>[institutions] whose financing benefits the real economy and which have good internal risk controls, we may continue to allow them to exist and support them.'</li></ul><p><strong>This seems </strong>to have been under consideration for a while - with the same confusion. 'Ambivalence toward the nascent shadow banking rebound [in January] is also obvious' wrote the WSJ's Nathaniel Taplin in <a href="" target="_blank">'Beijing Risks Choking Recovery Before It Begins: Are banks and shadow banks free to lend again? Don’t ask Beijing.'</a></p><ul><li><strong>'A statement</strong> on the topic by China’s bank regulator called for promoting financial intermediation by businesses who “operate cautiously in accordance with regulations.”'</li><li><strong>'The same statement, </strong>however, resolved to go on “blocking the side door and opening the front door,” official-lese for forcing lending back on bank balance sheets.'</li><li><strong>"The regulator </strong>also said “structural deleveraging has hit its expected target.”'</li><li><strong>'But the day after,</strong> a central bank representative called for “pushing forward structural deleveraging.”'</li></ul><p><strong>All by way of saying, </strong>we can't tell whether China has decided to deleverage more - or, more likely, to releverage.</p><ul><li><strong>But, if if the credit </strong>begins to flow, keep an eye open for those "good" shadow banks, and, of course, the changing definition of good - it will get broader if the private sector gets in more trouble.</li></ul></td></tr></tbody></table>

4. PODCAST (12m 22s) | Analysing China’s Two Sessions and the influence of tech company chiefs

<table class="nl_card" id="19mar1304"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><iframe src="" width="100%" height="78px" frameborder="0" allowtransparency="true" allow="encrypted-media" style="background-image: linear-gradient(to right bottom, rgb(128, 7, 16), rgb(0, 0, 0)), linear-gradient(transparent, rgb(0, 0, 0) 50%); height:120px; padding:20px;"></iframe></td></tr></tbody></table></td></tr><tr><td class="nl-post"><p><strong><a href="" target="_blank" rel="nofollow noopener">In this podcast</a>,</strong> South China Morning Post's Zen Soo and Shenzhen-based tech reporter Celia Chen talk about China's largest annual political meetings, the Two Sessions.</p><p><strong>They delve </strong>into the tech founders who are present this year (and the one notable absentee), and discuss the technology proposals submitted by these technology heavyweights.</p><p><strong>They also share </strong>tips on how to get called on to ask questions to delegates and representatives at the meetings.</p><p><strong>And, they take a look </strong>into Made in China 2025 - and the conspicuous absence of the term in this year's government work report (spoiler: <em>wear red</em>).</p></td></tr></tbody></table>

5. Explaining the seating plan at China's Two Sessions

<table class="nl_card" id="19mar1305"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe width="720" height="405" src="" allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe></td></tr></tbody></table></td></tr><tr><td class="nl-post"><p><strong>Never gave a thought</strong> to how deputies to the Two Sessions are seated.</p><p><strong>But this</strong><a href="" target="_blank">1m 13s CGTN video</a> is pretty interesting.</p><p>Here's the transcript:</p><p><strong>'The approximately 3,000 deputies</strong> to the National People's Congress - the country's top legislature - occupy seats inside the Great Hall of the People.'</p><p><strong>'So where</strong> does everyone sit':</p><ul><li><strong>'In the front row</strong> sit the executive chairs of the Presidium, who are also the main moderators for all the meetings of the Two Sessions.'</li><li><strong>'In the auditorium,</strong> all the 35 delegations rotate their seats each year allowing them the chance to sit in the middle of the venue.'</li><li><strong>'Within the delegation,</strong> deputies rotate from back to front each year, so that everyone gets to sit in the front of the meeting.'</li></ul><p><strong>'No matter where</strong> a deputy sits his or her vote counts equally.'</p><p><strong>Of course.</strong></p></td></tr></tbody></table>

6. IN DEPTH | More Nick Lardy on 'The State Strikes Back: The End of Economic Reform in China?'

<table class="nl_card" id="19mar1306"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe width="720" height="405" src="" allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe></td></tr></tbody></table></td></tr><tr><td class="nl-post"><p><strong>Want to learn</strong> more about Nick Lardy's views?</p><p><strong>Watch</strong> this 1h 10m video presentation.</p><p><strong>'Lardy, the finest analyst of China’s economy outside China,</strong> believes that China’s future could be equally bright as its recent past but that policy choices by China’s leadership are preventing that continued success, and contributing instead to the current downturn,' says the Peterson Institute.</p><p><strong>Or, </strong><a href="" target="_blank"><strong>listen</strong></a> to PIIE's 'Trade Talks,' with a 30m podcast, 'Nicholas Lardy on the Chinese Economy.'</p><p><strong>And,</strong> get his book, <em><a href="" target="_blank">The State Strikes Back: The End of Economic Reform in China?<br></a></em></p></td></tr></tbody></table>