Breaking: China’s Communist Party to hold long-delayed third plenum, a key meeting for economic strategy
Exclusive Insight: What does China's Reintroduction of Central Bank Bond Trading Signify?; Goldman Says Funds Likely Selling Japan Stocks to Buy Hong Kong
Welcome to this issue of The China Brief. Today is April 30, 2024. Here at The China Brief, we bring you the latest news on China's politics, economy, and society from global media sources, along with exclusive expert analysis. If you find our content helpful, please subscribe to our newsletter.
Exclusive Insight: What does China's Reintroduction of Central Bank Bond Trading Signify?
Li Weijun
In late October 2023, during the Central Financial Work Conference, Xi Jinping emphasized the need to enhance the monetary policy toolbox, suggesting that the People's Bank of China should increase its buying and selling of government bonds in the open market. This statement came shortly after an article in the People's Daily from the Ministry of Finance's theoretical learning center group called for stronger coordination between fiscal and financial policies and supported an increase in central bank operations in the bond market to deepen financial structural reforms.
Central bank trading of government bonds is common in Western economies. For example, if the U.S. Federal Reserve wants to lower the interest rate from 10% to 5%, it buys one-year treasury bonds, pushing their price up and the yield down, effectively increasing the money supply and lowering interest rates. This rate reduction leads to adjustments in economic behaviors among households and businesses, influencing the overall economy.
However, this approach has been absent in China for over twenty years. Its reintroduction indicates two main implications:
Short-term implications: Many local governments in China are facing fiscal crises, prompting the central government to issue significant long-term special government bonds. These bonds absorb liquidity from the market, which could have a contractionary effect on the economy. By purchasing short-term and medium-term bonds, the People's Bank of China could release money back into the market, reducing the yields of these bonds and thereby lowering short and medium-term capital costs. This action would support the issuance of long-term special bonds and stabilize the bond market.
Mid to long-term implications: The People's Bank of China has historically not used bond trading as a primary monetary tool due to the lack of responsiveness of many enterprises and institutions to interest rate changes. For example, state-owned enterprises and local governments can undertake projects with state backing irrespective of economic outcomes. Also, China’s bond markets have been primitive and inefficient, embedded within an interbank market where liquidity is limited. These factors have previously restricted the central bank's ability to use bond trading effectively to influence monetary policy.
The current focus on enhancing the monetary policy toolbox includes:
a) Plans to reform the bond market to improve liquidity and scale, enabling direct economic injections from household savings, bypassing financially strained banks.
b) A shift toward modernizing monetary policy to adopt more market-responsive tools that adjust capital costs, influencing economic behavior and thereby affecting the money supply and economy.
c) Preparations for significant market-oriented reforms to make monetary policy more responsive to market dynamics and interest rate changes.
This pivot in policy aims to tackle immediate financial challenges and signals a move towards a more integrated and responsive financial system, aligning China’s monetary practices more closely with global standards.
How China’s third plenums have reshaped its economy – and what to expect this year
South China Morning Post
China's Communist Party will hold its third plenum in July, where leaders are expected to release a reform plan to address economic difficulties and chart a sustainable growth path. The third plenum, held roughly one year after the selection of new leadership, tends to draw more attention as it often unveils policies that could change the direction of the Chinese economy.
China’s Communist Party to hold long-delayed third plenum, a key meeting for economic strategy
South China Morning Post
China's ruling Communist Party will hold its long-awaited third plenary session in July, a meeting that is expected to provide insight into the country's economic direction and key party appointments. The meeting is traditionally seen as the most important of the seven party gatherings held over the Central Committee's five-year cycle, and sets economic strategy for the next five to ten years. Investors will be looking for signs of whether China will switch its priority from security back to economic development, with clear policies in areas such as the housing market and financial regulation.
Goldman Says Funds Likely Selling Japan Stocks to Buy Hong Kong
Bloomberg
Global macro hedge funds are beginning to unwind their long Japan, short Hong Kong equity trades due to the widening gap between valuations in the two markets, according to Goldman Sachs Group. The Hang Seng Index is the best-performing major global equity gauge this month, climbing more than 7%, whilst the Nikkei 225 Stock Average narrowly avoided entering a technical correction after a 22% rally in Q1. The reason for the switch away from Japan may also be the weakening yen, according to Guo Chen from CSC Financial, who said: “The yen has depreciated more than expected, eroding the returns from investing in the Japanese market.”
Microsoft will invest $1.7 billion in AI and cloud infrastructure in Indonesia
Associated Press
Microsoft has announced it will invest $1.7bn over the next four years in cloud and artificial intelligence (AI) infrastructure in Indonesia. The country is seen as a growing market and a potential location for AI product development. Microsoft CEO Satya Nadella said the investment would include AI training for 840,000 people, as well as support for Indonesia's growing community of tech developers. A study by consulting firm Kearney has said that AI could contribute almost $1tn to Southeast Asia's GDP by 2030, of which Indonesia is expected to capture $366bn.
South China Morning Post
Venture capital investment in China fell to levels not seen since early in the Covid-19 pandemic during Q1 2024 as the country's funding landscape slowed down due to market challenges and geopolitical uncertainties, according to a report by KPMG. Despite the overall decline, the AI, electric vehicle and clean energy sectors experienced strong investment activity. China secured eight of Asia's 10 biggest deals, including Moonshot AI's $1bn deal in February. Overall VC investment in China fell 30% quarter on quarter to $11.5bn, the lowest since Q1 2020.
Singapore jails Chinese national 15 months for role in US$2.2 billion money laundering case
South China Morning Post
A Chinese national has been sentenced to 15 months in jail in relation to Singapore's largest money laundering case. Zhang Ruijin pleaded guilty to two counts of forgery-related offences and one of failing to satisfactorily account for property reasonably suspected to be benefits from criminal conduct. Zhang was one of 10 individuals arrested during an island-wide raid in August 2023 as part of the authorities' crackdown on suspected money laundering activities. More than SGD 131m ($96m) worth of assets were seized from Zhang.
How the TikTok Law Could Intensify the US-China Tech Spat
Bloomberg
TikTok influencers are increasingly concerned about the future of the platform in the US. The app has about 170 million users in the US and has become a key source of income for many content creators. The ban on TikTok has seemed unlikely in the past, but the recent inclusion of a provision in an emergency bill authorising foreign aid to Ukraine, Israel and Taiwan has raised concerns. The provision would remove TikTok from US app stores within nine months unless its Chinese parent, ByteDance, sells it to an American company. TikTok influencers are now posting more frequently on other platforms such as Instagram, Snapchat and YouTube. There is likely to be a legal challenge to the ban on First Amendment grounds.
South China Morning Post
China's largest property developers have reported mixed results for 2023 amid regulatory moves to rescue the country's slumping housing market. Poly Property Group reported a 77% YoY jump in profit, while Longfor Group Holdings saw a 50% drop in profit and CIFI Holdings Group narrowed its loss by 31%. Homebuyer confidence remains weak despite stronger policy support for the property market, with the developers striking cautious tones about any potential recovery in 2024.
China investigates former senior justice official and Interpol committee member Liu Zhiqiang
South China Morning Post
Former vice-justice minister Liu Zhiqiang is under investigation for corruption in China, according to the country's top anti-graft agency. The Central Commission for Discipline Inspection did not provide further details on the investigation. Liu served as vice-minister at the Ministry of Justice from January 2016 to June 2023 and previously held various positions in police-related foreign affairs. The investigation into Liu comes as President Xi Jinping continues his crackdown on corruption within the country's security and law enforcement apparatus. Hundreds of senior officials have been implicated in Xi's anti-corruption campaign.
South China Morning Post
Hong Kong stocks have become popular with global investors due to their depressed valuations and signs of China's stabilising growth. The Hang Seng Index has risen almost 8% over the past month and is valued at 6.3 times realised earnings, the lowest in the world. The Hang Seng gauge is currently almost halved after four annual declines from a peak set in 2018. Sentiment around Hong Kong stocks has improved as China's growth has gathered pace and earnings might have bottomed out. In addition, regulatory support is adding to the upbeat mood.
China’s factory activity remains in expansion in April as economic recovery gathers pace
South China Morning Post
China's factory activity remained in expansion territory for the second consecutive month in April, with the official manufacturing purchasing managers' index (PMI) standing at 50.4, compared with 50.8 in March, according to the National Bureau of Statistics (NBS). The figure remained above the watershed level of 50, indicating expanding activity, however, new orders dropped from 53 to 51.1. The production sub-index increased to 52.9 in April from 52.2 in March.
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