Caixin Insight: ‘Six Guarantees’ Instead of Six Percent

Chinese Premier Li Keqiang addressed the world’s media on May 28 following the closing ceremony of the National People’s Congress, the country’s top legislature, in Beijing. The two sessions this year became a memorable one when it abandoned the GDP growth target for the first time, and shifted the focus to something called the six guarantees. Unsurprisingly the legislature also passed the country’s first civil code, pledging more protection for property and personal rights.

Two Sessions

The Two Sessions have just ended. This year’s meetings were particularly notable for a handful of reasons, and marked the first time China dropped its GDP growth target since 2002.

Key points included:

- Abandonment of the GDP growth target

- Xi Jinping said in a speech on the sidelines that if not for Covid-19, the target would have been set at 6%, but overwhelming uncertainties forced China to abandon the target

- Increase of the fiscal deficit ratio to >3.6%

- rising 1 trillion yuan y-o-y

- 1 trillion yuan of special treasury bonds

- significantly below market expectation for 3 trillion

- does not seem like it will be monetized, despite all the debate

- 3.75 trillion yuan of special-purpose local government bonds in 2020

- 1.6 trillion yuan increase y-o-y

- priority given to new infrastructure and “new-type urbanization” including the renovation of old neighborhoods initiative

- Strong emphasis on the “six guarantees” and “six stabilities”

- especially employment

- Further tax and fee cuts to come, projected to save businesses 2.5 trillion yuan in total

- SME loan payment extension extended through March 2021

If you’ve been reading this newsletter every week, you should have expected roughly all of these things, and our publication schedule means you probably knew about most of them already unless you live under a rock. So we won’t spend too much time here unpacking all the details.

But it’s worth looking more closely at the package being rolled out to support the small and midsize businesses that are the backbone of China’s private sector and provide most of the country’s jobs.

Focus on the Six Guarantees

The two sixes were the primary focus this year. (See our definition in the April 25 Caixin Insight for a refresher.) Of those, safeguarding employment is the top priority, and one could argue that it has effectively taken the place of the GDP target for this year. Most of the efforts to safeguard employment will be indirect, via measures to help sustain the micro, small and midsize businesses that employ the majority of China’s workforce. In total, these measures should provide savings of about 2.5 trillion yuan for the year. They include greater than expected general tax and fee cuts, measures to lower energy, internet, logistics and rent costs, and more direct financial support in the form of

- loan repayment extension through March 2021

- exemptions from pension, unemployment insurance, and workman’s comp payments

- postponed corporate income taxes (also for self-employed individuals)

- interest relief on commercial bank loans

- subsidizing interest payments on guarantee loans for startups

- 300 billion yuan of financial bonds to fund micro and SME lending

- large commercial banks to increase inclusive lending to micro and small businesses by over 40%

- efforts to ensure businesses are actually paid, and don’t sit on piles of IOUs

- net corporate debt financing secured on trust to increase by 1 trillion yuan y-o-y, and micro and small businesses to realize 800 billion yuan of accounts receivable financing this year

In addition, the central government is expanding more direct measures such as unemployment insurance coverage and has set aside 53.9 billion yuan for employment subsidies and over 100 billion yuan for vocational skills training. The priority groups are recent graduates, veterans, and migrant workers, who will be eligible for a one-time startup subsidy payment if they return to the countryside to set up a business. More than 35 million people are meant to receive skills training over the next year, with enrollment in vocational colleges targeted to grow by 2 million.

Central Bank Keeps the Liquidity Steady

After atwo-month hiatus, the central bank resumed open market operations by injecting (link in Chinese) 130 billion yuan ($18.2 billion) into the money market via two batches of seven-day reverse repos. Yet the central bank defied market expectations by leaving the interest rates on those reverse repos unchanged.

One reason for the cautious attitude is that the People’s Bank of China thinks liquidity is relatively abundant for now. The central bank may also be concerned about loose monetary policy driving down the yuan’s exchange rate and increasing financial institutions’ leverage. The other reason is that the central bank is passing the baton to the fiscal side in terms of stimulus provision. The debate for fiscal deficit monetization saw an end when Chinese policymakers announced its stimulus plans at the two sessions. Most of the burden of economic stimulus fell upon the fiscal side, with no mention of monetization. The central bank is free to return to “normal monetary policy” now that no monetization is in sight.

Of course, the central bank will continue to keep the liquidity supply steady, and might conduct more open market operations to accommodate for the entire stimulus package, but the unchanged repo rates gave a signal that it will not ease much further. Zhang Jiqiang, an analyst of brokerage Huatai Securities Co. Ltd. wrote that “It is estimated that the time of the loosest money supply (mid-April) has passed.”

No Easy Day for Meituan in 2020

On May 25, Meituan Dianping held a conference call, announcing better than expected Q1 results and warned for a tough year ahead. For the three months through March, the company posted a net loss of 1.58 billion yuan ($221 million) on revenue of 16.8 billion yuan. The loss was lower than analysts expected and the company’s revenue beat an average analyst forecast of 15.6 billion yuan. Despite the better than expected results, CEO Wang Xing warned for challenges and uncertainties.

As we mentioned in our April 15 issue, Meituan is facing considerable headwinds this year. In addition to the disruption caused by the coronavirus outbreak, Meituan also faces backlash from caterers for charging high commission rates and forcing exclusive contracts. During the conference call, Meituan also addressed the concern, saying it has launched support programs for affected vendors, as a result, it’s “monetization rate” — the ratio of revenue to total transaction value — for the takeout business dropped by 0.9 percentage point to 13.3% in the quarter.

After reporting its first annual profit in 2019, Meituan suddenly found itself in a “make or break” situation in 2020. Besides merchant backlash, it is also facing a dwindling cash flow and increasingly fierce competition from Alibaba-controlled delivery units. The competition picked up partly because Meituan was forced to ditch some of its exclusive contract practices, and partly because the rival Alibaba has made more efforts to highlight food delivery services on its platforms.

How Chinese Companies Can Get Off Social Credit Blacklists

China’s corporate social credit scoring system is designed to improve the country’s business environment by tracking unscrupulous companies. Companies that violate certain laws and regulations will be “named and shamed” on an online blacklist for a period ranging from months to years, depending on the severity of the violation. But there exists some uncertainty regarding how companies can make amends and come off the blacklist early.

Theoretically, Chinese policymakers did intend to give the companies a chance to right the wrongs and restore their credit standing, as a 2019 State Council document suggested. But the current removal process was, as some suggested, too easy and potentially against the original intention for establishing such a social credit system.

For example, companies that had “records of major illegal activity in the past three years,” and thus should be on the online blacklist, will not be eligible for government procurement bids, as dictated by article 22 of China’s government procurement act. But if they are able to come off early and expunge their record, then the article 22 will no longer be relevant.

In a sense, China’s current social credit system is not anywhere near the all-encompassing leviathan that devours personal privacy as some observers suggested, it is only a business credit system that still needs much improvement.

More Fund Managers for Chinese Banks

Regulators have encouraged banks to set up their own mutual fund managers recently, in a bid to pump in new blood for the mutual fund industry. Since 2005, when banks were first given the regulatory go ahead, 15 fund management units have been established with commercial banks as controlling or participating shareholders. Among China’s current 126 mutual fund managers, bank-affiliated enterprises manage 1.9 trillion yuan in assets, or about 23% of the industry, according to Citic Securities Co. Ltd.

But bank-affiliated mutual funds stopped their fast-paced advance in 2016, when the last of such funds were approved. The recent comments by Yi Huiman, chairman of the China Securities Regulatory Commission (CSRC), signal that more banks may enter the mutual fund sector for the first time in nearly four years. Analysts point out that banks will take a slow and steady approach to this, to accommodate their also newly established wealth management subsidiaries.