record month 2014 economy september 2014 1 economy september 2014 september position this month's themes The banking sector shuddered at troubling signals from fiscal policy 财政政策 credit markets at the end of Q3. Accelerating NPLs suggest —PPP to serve as litmus test economic transition is a false start. new Budget Law disappoints 3 In theory, ameliorating credit market risk and redirecting economic activity should be mutually reinforcing processes. In monetary policy 货币政策 practice, banks’ heightened risk protocols are a tourniquet on —SMEs failing to thrive targeted stimulus. mid-year credit growth drop does not sway PBoC 5 Impervious to pleas for more liquidity, the centre is determined pledged supplementary lending: too indirect to guide not to resort to a proven but short-sighted formula of interest rates broad stimulus and investment. But the 'new normal' is a 资本市场 destination, not a roadmap. Monetary policymakers and capital market economic planners have few ready alternatives. —insurance fund investment goals contradict 'ten opinions' lend official endorsement to insurance 8 New strategies are being tested. PBoC's cautious experimentation with intermediate monetary tools, and banking 银行业 CBRC's conservative multi-pronged approach to disposing of —tight credit preventing structural shift toxic assets, are unlikely to have a marked effect short-term. non-performing loans prompt asset price worries 10 Mid- and long-term, economists are divided. 垄断 Ambitious reform plans for the fiscal system and insurance monopoly industry stay tentative, if not vague, leaving open the —anti-monopoly will not always insulate SOEs possibility for an easy exit. The new Budget Law will prompt a anti-monopoly campaign stirs domestic debate 12 pickup in infrastructure projects. To be executed via carefully scrutinised franchise operations, this is still policy-driven, fixed-asset investment—a far cry from endogenous innovation aspired to in the 'new normal'. 2 economy fiscal policy 财政政策 september 2014 new Budget Law disappoints The Budget Law amendment meets key objectives but is less stringent books, but still permits 'special use accounts'. It enhances budget review, than some hoped. It lifts the ban on local bonds and imposes sharp con- affording local legislatures more power and enabling easier cancellation of trols on local debt management, but is vague on bond use; sets stricter dubious items, but fails to demand detailed budgets. Whether it has the accounting standards, putting more government expenditure on the desired effect, awaits interpretations from SC, ministries and localities. Six highlights of the new Budget Law; nine Whose interests do the Budget Law amendments Budget Law amendments pass fourth reading: restrictions for local bonds target? setting up unified national accounts People's Daily Online 1 Sep 2014 National Business Daily 1 Sep 2014 21st Century Business Herald 2 Sep 2014 GU Shengzu 辜胜阻 YE Tan 叶檀 YANG Zhijin 杨志锦 The original Budget Law... had a distinct planned econo- ... Representatives... complained these budgets are hard The issue right now is how to comprehensively include in my feel... The revised law clearly proposes 'regulating gov- to understand, and if people's representatives [find them each budget all types of income. Apart from SASAC-con- ernment revenue and expenditure'... This indicates more confusing], then how can the People's Congress hope to trolled assets, most revenue from government-managed emphasis has been placed on restricting the government's supervise? Local governments need fiscal power appropri- funds, e.g. income from state-owned concerns, never ap- budget-related behaviour, with the Budget Law transitioning ate to their responsibility, [but] this should be premised on pears in the budget. from a law that reinforces control to... confining its power. setting up an open and detailed budget, he says GU Shengzu 辜胜阻 JIANG Hong 蒋洪 XU Shanda 许善达 NPC Financial and Economic CPPCC National Committee, State Administration of Affairs Committee SHUFE School of Public Taxation (former) Economics and Administration Vice chairman Gu regularly comments on fiscal,hukou and An advocate of government budget disclosure, Jiang ar- Former director Xu remains active in fiscal policy discussion. SOE reform. Gu admits SC must clarify vague terms in fol- gues the law's passage was premature: bond use provi- He argues NPC cannot effectively supervise budgets: they low-up regulations. Set a red line for local government bor- sions too vague, itemised lists neglected; state agencies have little say in tax legislation; its members lack fiscal rowing, he says; establish early warning mechanisms, and left too much discretion. Localities gain regulation but not policy experience. Budget categories ought not neglect develop contingency plans for heavily indebted regions. authority. government revenue currently off the books. NPC Financial and Economic Affairs Committee State Council State Administration of Taxation Reviews macroeconomic plans and draft laws. Published Issues further implementation regulations following passage Set up as part of the 1994 tax-sharing system. Focused on the final Budget Law amendment, seen as a rare show of of laws. It will quickly respond to Budget Law amendment redirecting tax revenue to localities; its function and structure political clout by the NPC given conflicting agency interests. concerns to maintain fiscal reform momentum. is a key target for interim fiscal reform. 3 economy fiscal policy 财政政策 september 2014 mid-term outlook: PPP to serve as litmus test Local debt is State Council and MoF's top priority following the Budget special transfer payments, or were reduced to local government finance Law. Public-private partnerships PPP, MoF's favoured solution for financ- vehicles LGFVs. Provincial plans should establish strict oversight and ap- ing infrastructure, are explicitly encouraged in the law. Loosely defined praisal—via feasibility studies, open bidding processes, clear contracts— and unsupervised in the past, PPP projects have been a means to secure and ensure local legislatures ultimately wield these tools. august september october november december january february march april may june july august september november march april 30 jun 2014 18 sep 2013 13 nov 2013 6 mar 2014 2 apr 2014 Politburo adopts sweeping fiscal and tax reforms, calling for Liu Shangxi 刘尚希 MoF clarifies Prioritise regulation over trans- State Council extends tax Chaotic, volatile revenue-shar- transparent budgets and align- that 3P reforms will not end parency in budget reform, urges breaks for SMEs and raises ing system creates local ing central-local tax share with central-local tax-sharing, but will Gao Peiyong 高培勇 National qualifying upper limit as part of government financing problems, administrative responsibility argues Jia Kang 贾康 MoF rationalise administration and Academy of Economic Strategy targeted microstimulus expenditure, and leave localities director july 23 sep 2013 to develop specific fiscal policy may 6 mar 2014 6 jul 2014 Centre should rely on VAT and 15 nov 2013 30 may 2014 Liu Shangxi 刘尚希 praises Cementing expenditure through income taxes, while local gov- Li Keqiang 李克强 criticises Shi Zhengwen 施正文 China proposed shift from a binding to budgets is a highlight of refoms, ernments rely on consumption local officials for 'sheer inepti- University of Political Science an anticipatory revenue budget says finance minister Lou Jiwei and property taxes, suggests tude' due to their reluctance to and Law applauds 3P focus on and medium-term planning in 楼继伟 NDRC economist Chen Chang- spend on local GDP-boosting 陈昌盛 public finance new budget reform sheng investment projects august october 18 nov 2013 6 mar 2014 june 31 aug 2014 17 oct 2013 A nationwide property tax must Amend 1985 NPC decision be underpinned by legislation allowing State Council to deter- 14 jun 2014 NPC passes a Budget Law Constitutionalist Liu Jianwen amendment to take effect on and public consultation, agree mine and legalise existing taxes Cadres urged to spend more, 刘剑文 China Tax Law Soci- 1 January 2015. Key chang- Wang Yongjun 王雍君 University with NPC approval by 2020, but with no land financing have ety, says fiscal systems are es involve increased scope of Finance and Economics and urges Hao Ruyu 郝如玉 NPC less tax revenue, and are or- for redistributing income, not of budget, local government Qin Hong 秦虹 MOHURD dered not to increase local debt, macroeconomic control debts, and transfer payment observes China Times we are watching for officials scholars commentators - details of provincial and local PPP plans LOU Jiwei 楼继伟 WANG Xiaolu 王小鲁 MA Hongman 马红漫 - local legislatures rejecting budgets GU Shengzu 辜胜阻 LIU Shangxi 刘尚希 Tan Haojun 谭浩俊 - credit rating agencies appraising local governments XU Shanda 许善达 LIU Jianwen 刘剑文 HU Shuli 胡舒立 4 economy monetary policy 货币政策 september 2014 mid-year credit growth drop does not sway PBoC Weak credit growth figures for July and August triggered a concerned overcapacity and high-risk industries is part of its plan. Analysts baulk at discussion over causes and policy implications. Suggesting fluctuations banks' heightened risk protocols, worrying commercial lenders have lost are routine, PBoC will stay the course with prudent monetary policy. Low- confidence in the real economy; targeted stimulus will fail if loans to SMEs er numbers offset June's stimulus-led credit burst, and tighter lending to remain at 20 percent interest rates. Examining the credit nose-dive; are interest rate