Actual Reform has materialised
this is not a drill
(visions of Reform)
When I started writing my thoughts on here, I was more or less thinking if I average a post a month I would have done well. But this was in the Before times. Now it seems like the landscape is shifting so rapidly that nearly daily commentary is warranted. I can not guarantee that it will be thus, at least not yet, but I will certainly address any meaningful policy changes that are either confirmed or are on the horizon.
Which gets us nicely to today as we have a huge announcement by the PBOC, and even bigger one form the Ministry of Finance. But I would argue both of those will in the long run be less important than the Ministry of Justice and the NDRC joint releases of the draft law on private companies. Let’s dive in!
I will start with the PBOC. China’s central bank today launched the Securities, Funds, and Insurance Companies Swap Facility (SFISF) with an initial scale of 500 billion RMB ($71 billion) to boost market liquidity. What’s notable is how quickly this new program was rolled out—just 8 working days after its announcement. Normally, new initiatives must navigate through several bureaucratic layers before reaching implementation. This time, however, it appears that lower-level bureaucrats were already prepared, simply waiting for approval from the top leadership before moving ahead.
I also note that the market ripped on announcement in September and is up over 20% YTD. It was up a further c.4% on this news. I’ll put a pin in this for now and come back to this point in the end.
Secondly, we are seeing activity in and around the Sanlihe District, where the Ministry of Finance (MOF), headquartered in the area, will hold a briefing this Saturday, where we hope to gain clarity on the size of the upcoming fiscal stimulus. For the real estate inventory issue alone, we estimate it could cost around 2.6% of China’s GDP (RMB 3.38 trillion) to repurpose vacant units for uses like affordable housing. To make a significant impact, we would likely need a stimulus package in the range of RMB 2-4 trillion, assuming the problems are addressed gradually.
The Ministry has also set up a special account for Treasury bond revenue and expenditure, signalling a strong possibility of increased bond issuance. In addition, some special bond quotas may be released early before the year’s end, and their use could be expanded into other sectors.
I note that again the market has been moved by the possibility of bond issuance, and now the swiftness of the bureaucratic reaction is driving a second wave of optimism. Another pin.
On to the main event. The Ministry of Justice and the NDRC have put out the draft of the Law on Private companies, or to give it’s full name, People's Republic of China Private Economy Promotion Law. And it’s really good one. One cannot help but wonder thought, why the lovely people of the NDRC did not spoil any of its content for us at the presser yesterday. But we proceed. I have the full text (9 chapters, 79 articles) for anyone who wants to read it, but the brief summary is that he law seeks to create a more supportive environment for private businesses, ensuring they align with national goals and socialist principles. It emphasizes innovation, technological advancement, and participation in strategic industries, while also providing improved legal protections and equal treatment to address longstanding concerns. In return, private businesses are expected to follow Party leadership, contribute to national development, and operate in compliance with laws and regulations.
More specifically, here is the breakdown by theme:
Investment and Financing Support:
• Participation in Major Projects: Private businesses are encouraged to participate in key national strategies and large infrastructure projects, especially in emerging industries such as technology and innovation. This includes investments in strategic industries and modern infrastructure.
• Government and Private Partnerships: Private businesses can partner with the government on public projects (often known as Public-Private Partnerships, or PPP). These partnerships will be set up with clear agreements on profit-sharing, risk allocation, and investment returns.
• Financial Services and Policies: The government will promote financial tools that help private businesses get access to funding. For example, banks are encouraged to offer loans to small and medium-sized private businesses. Financial institutions will be given more flexibility in handling loans and managing risks.
• Asset Management: Private businesses are supported in finding ways to manage and improve their existing assets, including re-investment and increasing efficiency.
Access to Resources:
• Private businesses will have equal access to resources like land, technology, labour, data, and public services. This access will be supported by national policies designed to foster growth in the private sector.
• The government will provide favourable conditions for businesses to access government-backed investment projects that align with national priorities.
Public Services and Administrative Support:
• Efficient Services: Local governments are required to provide efficient and convenient services for private businesses. This includes offering support during project planning, approval processes, and access to resources (like land or technology).
• Financial Incentives: Private businesses involved in strategic projects that meet national development goals are entitled to benefit from government financial incentives, such as tax breaks and subsidies.
• Registration and Legal Processes: Governments are tasked with ensuring that registration processes and administrative approvals for private businesses are simple and efficient, reducing bureaucracy.
Innovation and Technology:
• The law promotes private businesses to take part in national technological innovation projects. This includes support for businesses working on new technologies and industries.
• Digital Transformation: Private businesses are encouraged to engage in digital and data-driven technologies. The government will support their efforts in data utilization and technological development.
• Collaboration with Research Institutes: Private businesses are encouraged to collaborate with universities, research institutes, and public research facilities to drive technological advances and innovation.
Access to Public Resources and Equal Treatment:
• Public Tenders and Contracts: Private businesses are allowed to participate in public tenders for government projects on an equal footing with state-owned enterprises. Government procurement and public tenders must be transparent and cannot exclude private businesses.
• Protection Against Discrimination: Any policies or measures that unfairly restrict or exclude private businesses from public projects or resources will be removed. Private businesses are entitled to the same treatment as other economic entities in terms of access to government resources, such as public land and finance.
Legal and Institutional Support:
• Dispute Resolution: The government will establish mechanisms to help resolve disputes between private businesses and public authorities efficiently and fairly.
• Credit Systems: The government will enhance credit rating systems for private businesses, making it easier for them to secure financing based on their creditworthiness.
• Equal Rights Protection: Private businesses are guaranteed protection for their legal rights, including property rights, access to markets, and investment opportunities, ensuring a fair and competitive business environment.
The takeaway is that the private enterprises are now not discriminated against in the key project deployment. They will have similar cost of capital to the SOEs and will be able to supply most major national projects.
Chinese SOEs have been told to get more competitive earlier in the year, now the playing field is being somewhat levelled. The government, to my mind, is taking onboard the idea that employment is employment, whether SOE or not, and if a private enterprise can provide it, its fine.
I honestly think that this is the most consequential announcement, as it’s an example of a long-term reform that the government has committed to, and it is carrying out. This gives us hope for land and hukou reforms, as well as pension reform eventually. But also, this is a sign that there no decision to increase direct state participation in the economy but rather, assuming that companies follow guidance form the CCP, the more efficient actors, whether private or SOE, will drive the new policies.
And here is where I come back to the 2 earlier pins. I have mentioned this in the past that I believe the governments goal is to carry out an “immaculate stimulus”. I.e. a stimulus that actually requires as little spending as possible. This is not because of stinginess, though certainly some in the MoF are of that view, but from acknowledging that the issues in the economy are psychological in nature for the large part. IF it takes stimulus to wake up consumption so be it, if it takes the National Team buying to arrest the declines in the stock market, so be it. But the goal Is to breathe confidence back in to the market. I made a note of it yesterday but there is 320trn of savings that need to get channelled to productive use. And by productive, I mean they need to go to economically meaningful projects, and provide a return. If the population needs handholding through this process, this is fine, but the government understands that it’s the animal spirits that need to drive this, not expenditure. Ironically it may take government spending to be the first mover, but it need to be just that – the first move. Everyhting is done with a view to wake the investor class up. This takes leading by example but also reform, and the government understands that it is cheaper and more productive to deliver on reforms!
I hope this helps with formulating an understanding of what is being done. I don’t think I can sustain knocking out 1700 words on this every day, but then I don’t expect the big news days to persist with quite the regulatory they have taken to.
P.S. I have received some pledges over the course of the past few days, that I never expected, and I thank every pledgor personally. If this thing buys me a beer or a glass of claret, it would be most unexpected and very welcome, so I will ponder perhaps separating the analysis part from just a summary of events, for the benefit of those chipping in. But I do think that there’s value in just writing things down and making them public so at least a part of this will be public going forward. Either way if you are interested in that do bump up and pledge, and if enough people vote with their pledges, I shall absolutely oblige.