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Dear friends and colleagues,
I am trying to dash this one off in a hurry, so apologies in advance for any typos. I’m still on the road for a few weeks, and issues will continue to be delayed and/or abbreviated during that time.
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Beijing is busy this week now that Li and Liu are back from Europe and Yu is back from Fujian. With Li back in town the State Council held an executive meeting and the NPC and CPPCC are both holding standing committee meetings.
The sky is not falling…
Contrary to many of my bearish friends in Beijing, the investors, officials, analysts and economists that I have met with in the past two weeks while traveling in New York and DC are for the most part more sanguine on China’s economy. Every one agrees that the economy is slowing, but few think that anything disastrous is on the horizon.
The dropoff in the property sector is leading the slowdown, but underlying housing demand looks to remain strong. Local governments have been easing restrictions on purchases recently, and these should help to stabilize demand. The recent drop in prices has potential buyers holding off on purchases in the hopes that prices will fall even more; once prices stabilize we should see purchases pick back up.
Problems in the financial sector are real (see below), but the government appears to have the tools to keep things from getting out of hand, at least for now. Top officials have made it exceedingly clear in recent weeks that they intend to hit the GDP growth target for this year; bet against them at your own risk.
…probably…
Another observation from my trip is that nobody, no matter what their access or acumen, can confidently say that they know what is going on. Even Chinese government officials or businessmen often do not know what is going on in their policy area or industry. This is not because of incompetence. It is the result of poor data and an opaque system.
These problems are now exacerbated by the rapid pace of change with regards to policies, politics, laws and regulations. This has been the case for decades, but is even more so the case now as the economy increases in complexity and the government attempts to undertake large-scale economic restructuring.
This uncertainty hurts the business environment and increases risk. It’s more important than ever for China-focused businesses and investors to invest in intelligence and analysis that they can trust. Traditional channels for information should be assessed, as well as augmented by other sources and points of view. As growth slows, the margin for error will as well, and those who can read the tea leaves correctly are the most likely to succeed.
Law time
The NPC’s bi-monthly standing committee meeting is convening from Monday to Friday this week. Reviewing a revision to the Food Safety Law tops the agenda, an unusual move considering that the original law was passed only five years ago.
The review is evidence of an administration that is trying to respond to a public that is increasingly upset, and increasingly vocal, regarding quality of life issues. Food safety, pollution, a social safety net and affordable housing top the list of public concerns in China- expect further government action in these areas.
The Food Safety Law amendment includes penalties for officials who violate or fail to enforce the regulations. This government is making a lot of noise about the need for more and better enforcement while also looking to tighten regulations across a broad spectrum or areas. Companies used to operating in a comfortable grey zone need to make sure that they don’t get caught off guard by the new regulatory environment.
It’s under control, but we’ve got a problem
Also on the NPC’s agenda for this week is reviewing reports on government finances and the financial system presented by the Ministry of Finance (MOF), National Audit Office (NAO) and the People’s Bank of China (PBOC). Finance minister Lou Jiwei said that the central government is unlikely to meet its revenue targets, while PBOC vice governor Liu Shiyu reported that the financial system is looking shakier as risks from rising corporate debts, increases in NPLs and liquidity shortages all grow. The NAO reported all types of budgetary malfeasance.
The collection of these reports is like a Rorschach Test for China watchers. The bears will tell you that the problems are so bad they can’t hide them. The bulls will tell you that admitting the problems is the first step to solving them. The reasonable people can see that they’re both right.
This isn’t funny
At a recent press conference in London, Premier Li called on a female reporter “in the name of human rights”. It was awkward and weird. It also wasn’t the first time that a Chinese official traveling abroad has made awkward remarks when trying to go off-script. In Washington, DC last year for the US-China Strategic and Economic Dialogue (S&ED), Vice Premier Wang Yang blessed us all with this pearl: “In China when we say a pair of new people, we mean a newlywed couple. Although US law does permit marriage between two men, I don’t think this is what [US Treasury Secretary] Jacob [Lew] or I actually want.”
Amazingly (or perhaps predictably), the Chinese press has reported on both of these gaffes as evidence of the new leaders’ gift for witty repartee. For those of us not in the official Chinese media, these “new-style” Chinese politicians almost make us yearn for Hu Jintao.
Be careful
Don’t turn your back on the anti-corruption campaign. It’s still in full swing, as the recent detention of Su Rong shows. We still don’t know what the endgame here is.
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