China Still Slowing

People's Daily: 李克强主持召开经济形势专家和企业家座谈会强调 围绕市场主体有效实施宏观政策 推进改革开放 保持经济平稳运行 韩正出席

　At the symposium, Wen Bin, He Jun and other experts and leaders of Datang Group, Wuxi Yimian Textile Group, and Shenzhen Jingfeng Medical Technology Co., Ltd. spoke about stabilizing foreign trade exports, promoting the development of small and medium-sized enterprises, and alleviating the pressure of rising raw material costs. Promote enterprise innovation and other suggestions. 　

　Li Keqiang said that since the beginning of this year, my country's development has encountered multiple challenges such as the spread of epidemics in many places, severe floods, rapid rise in commodity prices, and the once-tight supply of electricity and coal. Under the strong leadership of the Party Central Committee with Comrade Xi Jinping as the core, all parties have implemented the deployment of the Party Central Committee and the State Council, the market players have worked hard, and the overall economy has recovered steadily. This year's main goals can be achieved, and the annual task of employment can be completed ahead of schedule. The current situation at home and abroad is still complex and severe. With new downward pressure on my country's economy, we are facing many challenges in maintaining stable operation on a high base. We must adhere to the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, implement the spirit of the Sixth Plenary Session of the 19th Central Committee of the Party, and continue to do so in accordance with the requirements of a new stage of development, implementation of new development concepts, construction of a new development pattern, and promotion of high-quality development. To normalize the epidemic prevention and control, strengthen the "six stability" and "six guarantees", especially the market players in ensuring employment and people's livelihood, strengthen the forward-looking pertinence of macro policies, promote reform and opening up, do a good job in cross-cyclical adjustments, and promote the economy to climb. Hurdles to maintain economic operation within a reasonable range and overall employment stability.

No specifics no the new pressure, but I surmise high prices, supply chains and rising coronavirus cases/lockdowns are responsible. The solutions are the same boilerplate Li has been saying for 10 years.

State Council Heard the Lamentations of the SMEs, Li Keqiang Call for More Cuts to Taxes, Fees

This past week there was a panic among SMEs following passage of social security reform. It was a top story in the finance section several times. I covered it twice.

Chinese SMEs Can Only Survive Through Tax Evasion, Social Security Reform Could Be Killer
Social Security Change Could Cause Layoffs and Shave 1.5pc Off GDP in 2019

The big issue was collection of unpaid social security. Many companies pay the minimum and find ways to evade taxes such as under-reporting payroll (number of employees and wages) to the social security bureau. Their employees are tax-evading co-conspirators. Under new rules, the tax bureau will take over social security collections and merge the books. If the tax bureau has records of higher employee counts and higher wages, it will come after companies and workers for more taxes. Up to 70 percent of SMEs are evading or underpaying social insurance according to reports. If companies are forced to pay those back taxes immediately, many could go bust. Higher collections might also lead to layoffs, slower hiring, no wage increases, and higher social security payments from workers.

The State Council discussed the issue in their September 6 meeting.

iFeng: 个税社保将有大动作：让个人减负、企业总体不增负

Taxes and social security will have big moves. The State Council executive meeting held on September 6th determined the implementation of the newly revised tax law supporting measures to reduce the burden on the masses; at the same time, it was proposed to study and reduce the social security rate appropriately to ensure that the overall burden of the enterprise is not increased.

In other words, personal burden reduction, the overall increase in business, will affect everyone's money bag.

Pay close attention to research and appropriately reduce the social security rate

From January 1st, 2019, various social insurance premiums such as basic old-age insurance premiums, basic medical insurance premiums, unemployment insurance premiums, work-related injury insurance premiums, and maternity insurance premiums will be collected by the tax authorities.

Since the taxation department has mastered the salary data and has a strong ability to collect and manage, many individuals and organizations that have not paid social security in accordance with the actual wages are worried that the social security burden will increase next year. Even some organizations predict that after the reform of the collection and management system, enterprises and individuals will pay a total of nearly 2 trillion yuan.

Under this circumstance, many experts and scholars have suggested further reducing the social security rate to hedge the increase in the social security contribution burden.

To this end, the meeting stressed that the current cumulative balance of pensions in the country is large, and it can be ensured to be paid in full and on time. Before the reform of social security collection agencies is in place, all localities should keep the existing collection policies unchanged, and at the same time, study and reduce the social security fees appropriately. The rate ensures that the overall burden of the business is not increased, in order to stimulate the vitality of the market and guide the society to anticipate.

This undoubtedly set companies' minds at ease.

iFeng: 李克强：要因时而动、不失时机推出更大“减税降费”举措

Li Keqiang pointed out that considering the current accumulated balance of pensions in the country, it can ensure that the social security collection rate will be maintained in full and on time. Before the reform of the social security collection mechanism is in place, all localities should keep the existing collection policy unchanged, and at the same time, study and reduce the social security rate appropriately. Make sure that the overall burden is not increased.

He stressed that under the conditions of a market economy, "tax" is one of the most important levers for regulating the economy. Adjusting the tax burden is closely related to the life of the enterprise and the people, and at the same time has a huge impact on the overall economic and social development.

"In the current complicated economic situation at home and abroad, we must take the time to move and take the opportunity to launch a larger 'tax reduction and fee reduction' initiative to send a positive signal to the society. This is an important measure to reduce the burden on enterprises and improve China's economic competitiveness. It is also the meaning of deepening the reform of the 'distribution suit' and transforming the government's functions." Li Keqiang said, "In the future, we can only further strictly control the government's 'three public' funds, and reduce taxes and profits for the masses and enterprises. I have said many times that the government will have to live a tight life to let the people live a good life.

Li has been very supportive of SMEs for years, but the burden on them (financing costs in particular) only increased.

Reuters: China vows tax reforms won't boost corporate costs

Counting safety net contributions, the World Bank reckons China’s effective corporate tax burden rate was 67.3 percent last year, much higher than in the United States.

China announced in July that the powerful tax bureau will take over social security collection from the social security bureau in 2019, a move seen enforcing greater compliance by companies as the government frets over an aging population and rising pension deficit.

However, the change has sparked concerns that many companies - especially small- and medium-sized enterprises - subject to stricter tax scrutiny will struggle to stay afloat.

Only 27 percent of Chinese companies comply with the social security requirement and pay the correct amount for their employees, according to a private report published by 51shebao in August.

China's SMEs Cannot Obtain Low Cost Credit, Can Li Keqiang Finally Save Them?

Improving financing for SMEs was a reform goal during Xi's first term. High financing costs squeeze small- and medium-sized firms. Private finance fills the gap, but this is often black and gray market financing. When combined with speculative bubbles in real estate, steel trading or the asset du jour, the result was a collapse in the local economy. One example from 2014: Handan Residents Afraid to Buy Homes; Market Frozen With Developers on the Brink

Li Keqiang was out front pushing this issue in prior years. He didn't have much success. From 2014: Li Keqiang Losing War on Financing Costs; 70% of SMEs Have Seen Financing Costs Rise in 2015

On effect in terms of policy, lowering interest rates played a role in real accurate. People's Bank of China data show that as of the end of June 2015, the weighted average interest rate of the new loans was 5.97 percent, over the previous year fell 64 basis points, down 101 basis points over the previous year; the central bank on the real economy through loans, bonds, stocks and other Comprehensive assessment of all types of financial instruments and financing costs showed overall financing cost of 6.32 percent, over the previous year fell 68 basis points, down 85 basis points over the previous year.

However, Zhang Chenghui's research shows that although the central bank cut interest rates and RRR several times, 70% of the loan interest rates went up, only about 10% of the loan interest rate declined, and the remaining 20% ​​of the loan use the benchmark interest rate.

"I figure a bit based on the Wind database, since the end of September 2013 to the end of May 2015, average loans from financial institutions dropped from 6.65% to 6.56%, P2P net loans fell 12.75%, Wenzhou's private lending interest rates fell 1.69 percentage points. Figures show non-formal financial institutions outside the system of financial institutions, the central bank lowering quasi reflect much faster than formal financial institutions, formal financial institutions interest rates fell an average of only 0.1 percent." Zhang Chenghui said.

While banks generally believe that easing monetary policy can reduce financing costs, it's not a permanent solution. Minsheng Bank Shenzhen Branch President Wu Xinjun said its SME lending rate fell from 7.8% at the beginning of the current year to 6.8% presently, if there is further easing of monetary policy, SME lending rates could fall further, but based on cost factors, the room to fall is limited.

How bad is it for SMEs in China? From 2014: SMEs Wonder Not How to Live, But How To Die As Borrowing Costs Spike

Credit remains tight for SMEs. One borrower says their interest costs will climb from 6.6% to 8%, enough to cut 1% off their 10% profit margin. Owners describe it as plucking the feathers from the goose as banks raise interest rates and fees in a search for profit.

One SME says the bank told him if he wants to borrow ￥8 million, he needs to first deposit ￥8 million into a savings account. He says in order to borrow ￥1, SMEs have to pay ￥0.16 in costs.

Another SME will borrow ￥150 million at 12%, or ￥18 million in annual interest costs. However, with fees to trust intermediaries, costs rise to ￥33 million annually, or 22%.

Banks aren't making loans with no collateral, so borrowers using credit guarantee firms see their costs rise 2% to 5%. So probably not good that Credit Guarantee Firms Go Down Like Dominoes.

Clearly there's a very good reason to move SME financing into official channels and out of the gray and black markets. There appears to be some success in this area simply for the fact that we're focused on bond market and trust defaults in 2018, not credit guarantee firms and private lending networks as was the case in 2014 and 2015. Back then investors were buying copper for collateral to borrow from banks at low interest and lend to developers at high interest who then ran out of cash before finishing construction. Some of them rehypothecated the copper and that blew up at Qingdao Port.

SMEs aren't benefiting yet though. Once again, the government's reform and credit tightening efforts are choking off their credit channels. Hence the expansion of MLF in June and increasing focus on SMEs.

Times of India: China eyes reserve cuts, other policy measures to aid small firms

China will use targeted cuts in banks’ reserve requirement ratios (RRR) and other policy tools to boost credit support for small firms and keep economic growth steady, state radio on Wednesday quoted a cabinet meeting as saying.

...“We will use targeted RRR cuts and other monetary policy tools to enhance the ability to provide credit for small and micro firms,” state radio quoted the cabinet as saying.

The cabinet pledged measures, such as raising rediscount quotas and cutting relending rates, to channel more loans to small firms and reduce their funding costs, it added.

From September 1 until the end of 2020, interest income from credit up to 5 million yuan ($772,546.78) for eligible small firms and households will be exempt from value-added tax, it said.

iFeng: 国务院常务会：部署缓解小微企业融资难、融资贵

Li Keqiang presides over the executive meeting of the State Council

Li is still fighting the good fight.

Premier Li Keqiang of the State Council presided over the State Council Executive Meeting on June 20 to deploy further mitigation of financing difficulties for small and micro enterprises and continue to promote the cost reduction of the real economy; to speed up the examination and approval of new drugs listed overseas, to implement price cuts for anti-cancer drugs, and to strengthen shortage drugs Supply protection; adoption of the Regulations for the Prevention and Handling of Medical Disputes (Draft).

The meeting identified measures to further ease the financing difficulties of small and micro enterprises financing: First, increase support for small and micro enterprises and "three rural" refinancing, rediscounting the amount of credit, and lowering the interest rate of small and medium-sized loans. The assessment mechanism was perfected, and the year-on-year growth rate of loans for small and micro enterprises with a total credit amount of RMB 10 million or less per single household was higher than that of all loans. The number of households with outstanding loans was higher than the level of the same period of last year.

Since shadow and informal lending is being squeezed, it's not clear how much of this is lending moving on-balance sheet and how much is growth.

Second, from September 1st to the end of 2020 this year, the interest income from loans for eligible small and micro enterprises and individual industrial and commercial households will be exempted from the VAT single line credit limit, which will increase from 1 million yuan to 5 million yuan. The total amount of guarantees supported by the National Financing Guarantee Fund for financing of small and micro enterprises is not less than 80%, of which the amount of guarantees for small and micro enterprise loans and individual industrial and commercial households that support single-family credits of 5 million yuan or less, and small and micro-enterprise owners’ operating loans Not less than 50%.

Third, financial institutions are prohibited from charging commitment fees and fund management fees for loans to small and micro enterprises and reducing the additional financing expenses.

The fourth is to support banks in their efforts to explore the market of small and micro enterprises, and to use such monetary policy tools as directional RRR cut to enhance the ability to provide small and micro credit, and accelerate the landing of signed debt-to-equity conversion projects. Banks that have not established the Financial Inclusion Department are encouraged to establish additional communities and small micro branches.

The fifth is to include small and micro enterprise loans with a credit grant of 5 million yuan and below into the medium-term borrowing facility to facilitate qualified collateral.

Beyond government support, the market is stepping in with increased supply-chain financing.

SCMP: Supply chain finance tipped to become US$2.27tr market for Chinese internet firms by 2020

China’s supply chain finance sector is now being tipped to be worth a whopping 15 trillion yuan (US$2.27 trillion) by 2020, and the mainland’s booming internet-based businesses are lining up to grab their own share of it.

Here's a more in-depth article from JRJ: 供应链金融 链在风控

SMEs still report troubles though. Here three firms discuss their financing difficulties: 三个小微企业的融资样本：利率上浮、资产抵押已成拦路虎

Floating 20%-30% has become the norm

Pan Zicong believes that his company can always “find good fortune,” and is not unrelated to the history of the company’s continued existence and the industry it is engaged in. Pan Zicong is the "second generation of enterprises," and his father has started from scratch and built this company. Now the company has been established for more than 20 years.

“We mainly make electrical appliances for home appliance companies. Some large home appliance companies in Shunde are our customers. The overall development is relatively stable. But even so, the problems of financing difficulties and financing are still there.” Pan Zicon told 21st Century Business Herald reporter, “Bank financing is the most favorable price in all channels, but for small and micro enterprises, it is almost impossible to get the benchmark lending rate. As far as I know, it is generally 20% to 30% above benchmark. This is only superficial cost. If we count some hidden costs, this is not the limit.For example, on-lending is the so-called bridging loan. There will normally be more than ten days between the old and new loans. If you need cash flow, the cost will be very high. The cost of coming to heaven may reach 10%, some even 20% [above benchmark]."

Earlier this year, Pan Zicong's company was fortunate to receive 3.4 million credits through Guangdong ABC's “micro-loans”. "Equivalent to an enterprise's credit card, the biggest advantage is that it can be used to pay back and improve the efficiency of use. In the past if our business had a loan of 3 million, but in the short term it will only use 2 million, and the other 1 million will also have interest. This is small In the case of micro-enterprise, it increases the cost; how much borrowing is needed now will not result in the idleness and waste of funds, said Pan Zicong.

However, compared with Pan's fortunes, more small and micro enterprises still faced no money, especially small and micro enterprises engaged in low-end processing. “I have been driving toy factories in Dongguan for 16 years. I have never borrowed a penny from a bank in Dongguan. First, banks will never lend us; second, even if borrowed, interest will rise significantly, and we will be able to The interest rates borrowed are comparable,” Zhang Yongqiang, general manager of Dongguan Leqiang Plastic Toys Factory, told a 21st Century Business Herald reporter.

Zhang Yongqiang stated that he has been brushing news every day and felt that the state’s support for small and micro enterprises has been increasing year by year. However, these policies seem to be far away from themselves. “The policy is good, but the total amount of small and micro enterprises is too large. So far, I have not benefited my head. Take the loan, for example, I have ran across the bank in the past few years when the business was good, but I did not borrow money from a bank. The terms of the loan are all very harsh and need to be mortgaged, but effective. Collateral is what SMEs lack."

Zhang Yongqiang told the 21st Century Business Herald reporter that his funds were borrowed from friends or upstream and downstream companies. “Our factory in Dongguan, Dongguan, also has more than ten years of time, and credit has always been relatively good, so basically it can be obtained. Many financial institutions feel that small and micro enterprises have high business risks and bad reputation, so they are reluctant to lend us money. Actually, I really want to appeal to you. Our small and micro enterprises are truly trustworthy companies. For example, I am borrowing money from my upstream and downstream friends or making payments. Once I lose my credit, I may not be able to borrow any more money. Therefore, we especially cherish our own reputation. The reasons for borrowing money, deadlines, and interest rates will all be indicated. Once it is due, it may even be paid in advance."

Effective collateral secures small and micro business loans

The problems encountered by Zhang Yongqiang, in fact, are very common among small and micro enterprises in Dongguan. Chen Dong, who works as a furniture manufacturer in Dongguan, talks about the survival status of small and micro enterprises. “Especially in the past two years, it can be said that several heads were blocked. First, the shift in demand from upstream customers caused the lack of orders; secondly, the cost increased year by year, making people breathless. I was impulsive to the factory several times last year. It's off, but it's pulled back by inertia every time you really want to make a decision."

Chen Dong said the cost includes land costs, labor costs and financing costs. “Compared to five years ago, the rent for the venue has risen from 8 yuan/square meter to 15 to 16 yuan/square meter; labor costs have more than doubled. If all kinds of insurance are counted, the actual expenditure of the factory In fact, it is around 5500 yuan, but in the past it was 2200 yuan; credit costs is rather stable, has remained high, about 10 percent." Chen Dong told the 21st Century Business Herald reporter.

Even at 10 points, Chen Dong has few opportunities to get loans. "The amount of money that can be borrowed by credit loans is very limited. One or two hundred thousand yuan is of little significance to our company. If we want to increase the loan, we need collateral."

Real estate still plays a role in financing:

Chen Dong told reporters in the 21st Century Business Herald that he was fortunate in Dongguan in the past few years that he had bought two houses in the early years. Now these two houses have played a key role in the loan. "A house is used to live and a house is used for mortgage. In recent years, in order to make a loan, the house has been repeatedly mortgaged many times. In the past when buying a house, the price was only 45,000/m2, and now it has risen to 20,000+. Appreciation has reached more than 3 million, relying on this house, the factory has spent time and time again financing difficulties."

Mortgage is not without risk. Chen Dong nearly lost the house last year. At the end of last year, Chen Dong received a single business of nearly 200,000 U.S. dollars. Because in the furniture industry in Dongguan, regular customers did not have any deposits to place orders. In order to purchase raw materials, Chen Dong mortgaged his house and loaned nearly 2 million yuan. Cash. However, there were unexpected circumstances. When Chen Dong delivered the goods, the customer suddenly declared bankruptcy, and 200,000 U.S. dollars were suddenly turned into nonsense. “At the time of the New Year approaching, the workers in the factory were still waiting to pay wages for the Chinese New Year. The funds on the account were bleak. If the operation was not careful, not only would the factory be closed, but the mortgaged property in the bank would also be subject to change.”

Fortunately, the Dongguan Municipal Government subsidized a 150,000 insured amount of insurance for the local SMEs. In the end, China Credit Guarantee paid Chen Dong 127,000. Together with the funds recovered from the bankruptcy company after liquidation, the single business was basically absent. loss. Chen Dong was also surprised to redeem the mortgage in the bank's real estate.

JRJ: 解决小微企业融资难还需“几家抬”

Guided by a series of policies, traditional financial institutions are increasing their support for small and micro enterprises. At the same time, however, there are still a large number of small and micro enterprises that are difficult to obtain loans, or the actual annual interest rate for obtaining loans is high, and the financing difficulties and financing problems of small and micro enterprises still exist.

The reason for this is that Dong Xilu, a senior researcher at the Chungyang Finance Research Institute of Renmin University of China, believes that it is mainly because some small and micro enterprises have difficulty in providing qualified pledges and collaterals, and they have a low degree of credit and investment risks. At the same time, the ability of small and micro enterprises to resist risks is generally weak, the life cycle is short, and the bad rate is high. According to the data, the average life expectancy of SMEs in China is about 3 years, and about one-third of the normal operations of small and micro enterprises after three years of establishment, and by the end of March 2018, the NPL ratio of small and micro enterprises was 2.75%. The company is 1.7 percentage points higher.

Therefore, financial institutions are more cautious when lending to small and micro enterprises. At present, the proportion of financing for small and micro enterprises in China from the formal financial institutions and private financing is roughly 40% and 60%. Compared with countries and regions where financial markets are more developed, the proportion of formal financial institutions still has much room for improvement. At the same time, private financing costs are also relatively high. Specifically, in recent years, the interest rates for small and micro enterprises in China's financial institutions averaged about 6%, the Internet lending rate was about 13%, Wenzhou's private lending registration rate was more than 15%, and microfinance companies and other financial institutions had interest rates of 15%. 20%.

Li Keqiang Calls for Tax Cuts 3 Times in 2 Weeks

Maybe year 5 will produce results?

iFeng: 李克强半月三次谈减轻企业税负 这次透露了根本原因

"Why do we need to intensify efforts to small and micro enterprises tax cuts? Why should continue to promote the commercial system reform? These are to encourage entrepreneurship!" In the January 18 State Council executive meeting, Li Keqiang answered why he has been Concerned about tax cuts.

...January 13, Li Keqiang chaired a forum to listen to experts and scholars and business people on the "Government Work Report (Draft)" comments and suggestions. Li Keqiang said that this year to adhere to the government tighten the day to continue to compress general expenses for corporate tax cuts to make room for less this year to reduce fees and other non-tax burden on the market to have personal experience, the State Council to develop check.

Li Supports Housing Market

Global Times: Housing demand to rise further, Premier Li says

China's housing demand will continue to rise and the country still needs a long time to carry out its urbanization plan, Chinese Premier Li Keqiang said on Tuesday during the opening ceremony of a conference held in Macao, according to domestic media reports.

The risks associated with China's housing market should be viewed from an "objective" and "comprehensive" perspective, Li told the conference, the Xinhua News Agency reported.

He also stressed that the domestic real estate market has shown some tendency toward differentiation, and local governments will be asked to shoulder more responsibility in directing the housing market to develop in a sound manner with effective measures, in order to satisfy basic housing demand.

Good luck to the planners.

Tight Credit Conditions for Small Business

SCMP: Access to finance for China’s smaller enterprises continues to deteriorate

“Credit conditions for SMEs turned less favourable in August as financing costs continued to rise and bank loans became more difficult to obtain,” said a research note from Standard Chartered economists, led by Lan Shen.
“Medium-sized companies enjoy better credit conditions than smaller ones,” Lan added.

...Because of the difficulty of raising capital from banks, SMEs have tended to look towards the unofficial banking sector – or shadow banks – for their funding needs. In many cases, this resulted in higher borrowing costs.

In addition, this year, policymakers have launched a number of crackdowns on the shadow banking sector, with the aim of reducing the risk in the system following the collapse of peer-to-peer (P2P) lender Ezubao.

Efforts to increase credit access and lower costs have failed, and the latest stimulus efforts have focused on funneling cash into large SOEs for land buys which can then finance local government infrastructure spending.

2014: Li Keqiang Blasts the Banks for Not Lending to Small Business
2015: Li Keqiang Losing War on Financing Costs; 70% of SMEs Have Seen Financing Costs Rise in 2015
2016: Rumor: Li Sidelined, Xi Takes Over Economic Policy

Anti-Corruption Campaign Didn't Work

The Economist: Xi’s day at the beach

Mr Xi has also been engaged in a fierce campaign against corruption, which has spread fear throughout the bureaucracy; his rivals have been among its most prominent victims (the most recent, Ling Jihua, who once served as Mr Hu’s aide, was sentenced to life imprisonment in July). In all, 177 people with deputy-ministerial rank or above have been investigated as part of the crackdown since Mr Xi took over in 2012. He has had over 50 generals arrested for graft and promoted his own men in their place, says Cheng Li of the Brookings Institution, a think-tank in Washington, DC.

Even so, Mr Xi’s authority remains hemmed in. True, his position at the highest level looks secure. But among the next layer of the elite, he has surprisingly few backers. Victor Shih of the University of California, San Diego, has tracked the various job-related and personal connections between the 205 full members of the party’s Central Committee, which embodies the broader elite. The body rubber-stamps Mr Xi’s decisions (there have been no recent rumours of open dissent within it). But the president needs enthusiastic support, as well as just a show of hands, to get his policies—such as badly needed economic reforms—implemented. According to Mr Shih, the president’s faction accounts for just 6% of the group. That does not help.

...Next year the party will appoint a new Central Committee at its regular five-yearly congress, which will probably take place in October. This time not only will Mr Xi be in charge of the process, he will also have more places than usual to fill. Normally 40-60 full members retire every five years when they reach the committee’s retirement age of 65 (the age for the Politburo is 68). Assuming the retirement ages do not change, 85 committee members will leave in 2017. Seven more have been purged for corruption, bringing to 92 the total number of places Mr Xi will have available to fill. At Beidaihe this summer, the elite is thought to have had its first look at the new line-up.

The reform effort stalled because Xi and Li weren't authoritarian enough. From 2014:

According to mainland media reports, Li chaired at least two cabinet meetings over the past two weeks to focus on ways to streamline and delegate government regulatory powers.

At one meeting, on May 30, Li reportedly pounded the table as he blasted local officials for inertia in carrying out central government directives.

He accused departments of micromanaging the economy and wasting time and resources examining and approving projects and deals that were entirely commercial matters unrelated to national security or strategic industries.

Li vowed to do whatever it took to keep his promise to remove and delegate more than 200 administrative approval procedures by year's end.

......The ambitious reform drive, trumpeted by President Xi Jinping and Premier Li, is now entering a stalemate even before the real battle against vested interests and state-sector monopolies has barely begun.

Maybe things will change in the next couple of years, with many retirements at the provincial level as well.

Li Keqiang Says Big Tax Cuts Coming

CNBC: Chinese Premier Li Keqiang tells WEF digital is key to China's industrial revolution

Addressing the World Economic Forum (WEF) in Tianjin, also known as the "Summer Davos," Li focused the bulk of his speech on promoting entrepreneurship and highlighting policies catering to the sharing economy.
"We are embracing a new round of industrial revolution," he said. "We need to implement innovation-driven development."

The measures Li touted included pushing ahead with the Internet Plus initiative, a Chinese program aimed at boosting its mobile internet, e-commerce and cloud computing sectors in the international market. China would also ensure that the Internet of Things (ioT), cloud computing and other information technologies were applied to everyday life, Li said.

Chinese media focused on his tax comments.

iFeng: 李克强2016夏季达沃斯演讲全文

At the same time, we will further advance the massive tax cuts for enterprises, promote financial reform, to support the real economy; promote the reform of state-owned enterprises to fitness and health; relax market access for private enterprises, and further development of private enterprises to eliminate all the species barrier.

Li Keqiang Warns of Butterfly Effect

iFeng: 李克强：地区不稳定“蝴蝶效应”冲击金融市场稳定

Li pointed out that in today's highly interdependent world economy, no country can manage alone. A country, a region of unstable and uncertain factors increased, may have a "butterfly effect" on the world economic recovery and financial market stability or impact shock, which requires parties to strengthen coordination and work together to deal with the difficult challenges and maintain peace stability and promoting reform and innovation, insist on open and inclusive, better realization of the world economy is strong, sustainable and balanced growth.

Yuan devaluation? Brexit? EU dissolution? UK breakup? The butterflies are hatching.

Li Keqiang Visits PBoC, Calls for Better Communication on RMB

WSJ: Stimulating: Chinese Premier’s Bank Visit Stirs Talk of Easing

Is China on the verge of a new round of monetary easing? To some, a recent visit by Chinese Premier Li Keqiang to the country’s central bank and a big state-lender seemed to signal so.

Speculation that the central bank will reduce a required reserve level for banks amped up after Mr. Li turned up at the People’s Bank of China and China Construction Bank Corp. on Monday and called for for state financial institutions to support the real economy. He also told central bank officials to “keep reasonable liquidity” in the market and “to create a good financial environment” for economic growth.

U.S. jobless claims are putting the Fed back under pressure: US weekly jobless claims total 259,000 vs 270,000 estimate

Chinese coverage of Li's visit at iFeng: 李克强：央行应改善沟通 对汇率改革表示满意. Regarding the yuan:

"Practice in the past year, the RMB exchange rate reform has proved that our reform in terms of the purpose and results, is the renminbi exchange rate at a reasonable and balanced level basically stable, rather than letting the yuan devalue and boosting exports. More importantly, the reform of the renminbi exchange rate changes rules should be more transparent, which can better communicate with the market."

A week ago: Odds of RRR Cut Decline

Li Keqiang Still Pushing Equity Financing

One bubble later: 李克强：推动股权融资 探索多层次资本市场转板机制

Li came to China Construction Bank to learn more about the bank to support the real economy, the implementation of the camp changed to increase services and public circumstances entrepreneurship and innovation. He said the finance is the lifeblood of the national economy, in the full implementation of the camp changed to increase the pilot process must ensure that the financial sector only reduced without increasing the overall tax burden. Commercial banks should also focus on market demand, and constantly improve the ability to serve the real economy, especially small and micro enterprises and the like.

...Multi-channel financing to promote equity, to explore the establishment of a multi-level capital market transfer mechanism, regional equity market development services to SMEs, and promote the healthy development of the bond market, improve the proportion of direct financing.

Commodities Are Cheap, Might As Will Build 1 Million KM of New Roads

Tencent: 李克强：实施百万公里农村公路建设工程

First, a one million kilometers of rural road construction project, to achieve towns and villages formed hardened road, bus pass, the road dangerous bridge reconstruction, poverty-stricken areas to improve the development of the tourism industry and other traffic conditions. The second is the implementation of highways, railways, airports and other one hundred key channel project, to achieve secondary and higher highway basically covered all the counties, railroads and highways substantially cover the city (prefecture) administrative center. Promoting blank border highway road construction. Increase policy support taxation, land use, construction and maintenance of both a sound investment and management mechanism. "Double Hundred", can effectively stimulate investment and expand employment, poverty alleviation traffic amplification effect for the benefit of hundreds of millions of the masses.

Li Keqiang Speech at Boao Forum

Straits Times: China premier Li Keqiang says govt will cut taxes and red tape, keep yuan stable

Li repeated previous statements that the country hopes to cut taxes by 500 billion yuan (S$105 billion) in 2016 and promote reforms to the value-added-tax (VAT) system.

He also reiterated that China would not devalue the yuan exchange rate to boost exports as it would not help Chinese firms become more competitive, adding that the government would continue to reduce overcapacity in steel, coal and other sectors while helping develop smaller private enterprises.

Full text in Chinese: 李克强博鳌亚洲论坛演讲：中国经济怎么看，怎么干

Some snips:

Second, jointly promote economic growth. Emerging economies and developing countries, 40% of the world's total economic output, the contribution of the past was once two-thirds of economic increment, in response to the 2008 financial crisis played a role in the backbone, but two have greater difficulty some of the country's economic growth fell sharply even negative growth. As Asia's emerging economies, most concentrated areas, the overall maintained a growth momentum. Last year, economic growth in developing countries in Asia, only reached 6.5%, the contribution to world economic growth rate of 44%. Therefore reasonable to boost confidence in Asia, but the need to stimulate vitality, power is formed, which can not only for himself in Asia, but also for the world economic recovery play a greater role. We also hope that the countries in the world to deepen cooperation and solidarity, to strengthen macroeconomic policy coordination, to jointly oppose trade protectionism in all its forms, especially the developed countries should adopt more growth-friendly policies, policy changes in some countries to avoid spillover benefits. China's positive initiatives to build the Asian financial [0.00%] Cooperative Association, is willing to improve cooperation with the parties to the construction of the Asian financial markets, to avoid large-scale joint regional financial turmoil again.

...I think, look at China Economy:

First, look at the whole. China last year although the growth rate slowed down, but on a 10 trillion dollar economy, it can achieve 6.9% growth rate, growth on a high base. And it is in the process of transformation and upgrading implemented. This year, the Chinese economy overall smooth start, but there is some positive changes. We launched a series of steady growth, adjusting structure, promoting reform measures, policy effects are emerging results are constantly accumulate.

Second, look at the trend. According to statistics, last year more than 1300 cities and towns million new jobs, and income growth exceeded GDP growth this year from January to February employment situation remains stable, 31 major cities around the survey unemployment rate remained at 5.1%, and last year the basic flat. In this process, accelerate the pace of industrial upgrading, services, equipment manufacturing and high-tech industry to maintain rapid growth. Continue to expand domestic demand, consumption is still double-digit growth. Consumption and services have become the main force driving China's economic growth. Meanwhile, the energy intensity and discharge of major pollutants continued to decline, which marks the quality of economic growth is improving.

The third is to look at the long term. Although China has become the world's second largest economy, but the per capita income is still in the world, the gap itself is also potential, especially the West there is a huge space and room for maneuver in China. China is still in the overall advance of industrialization and urbanization process, the domestic space, the development of toughness, there are innovative means. So, the long-term fundamentals are bullish on the Chinese economy has not changed.

...At the same time, we need to promote the financial and monetary system. For example, we are going to fully open the VAT sales tax reform, which is an important measure of structural reforms, this move is not only meant to give corporate tax cuts, preliminary estimates from the country this year to give businesses by 5000 billion yuan of tax, and policy orientation support services, especially in the development of the service industry. For them, the burden will be lighter. At the same time, this reform will also help unify the tax system, so that the financial and tax system more open and transparent, easy to social supervision. SMEs will derive more benefits. In the process, probably because experience problems, there will be some twists and turns, but in general, I am in the government work report has been talked about, all the industry is not only reduced the tax burden increase. While also reducing costs. Government to do so, is Fangshuiyangyu. In the revenue decline, we are still willing to use short-term revenue "minus" in exchange for the sustainable development of the potential of "increasing." This in itself shows that we are determined to create a dynamic invigorating, but also that we have a certain amount of fiscal space.

In the financial sector, we will also promote the full range of regulatory reform, is more conducive to multi-level capital market development, we are still exploring how to use market-based approach to debt, and gradually reduce leverage. Reform is open, we will focus on promoting the outside world, including the expansion of the orderly liberalization of services, finance and other fields, to further fight the Chinese broader, better environment, the best destination for foreign investment. I remember years ago I announced here before, in a timely fashion, "Shanghai-Hong Kong Stock Connect." This year I announced here this year to choose the launch, "Shenzhen-Hong Kong through." All these indicate that China's capital markets are constantly opening up.

RMB will remain at a reasonable and balanced level stable, China is a responsible big country, China's development of the fundamentals have not decided the yuan, there will not be a long-term possibility of devaluation. China will promote self-initiated, gradual and controllable principle of the exchange rate market, but will not use devaluation to stimulate exports, so it is not to stimulate high-quality products, not to infuse courage to competition, the courage vigor creation. We would like to launch the world's escalating, high-end products.

Li Keqiang's Report on Government Work

REPORT ON THE WORK OF THE GOVERNMENT

Delivered at the Fourth Session of the 12th National People's Congress of

the People's Republic of China on March 5, 2016

Li Keqiang

Premier of the State Council
Esteemed Deputies,

On behalf of the State Council, I will now report to you on the work of the government for your deliberation and approval. I invite comments on my report from the members of the National Committee of the Chinese People's Political Consultative Conference (CPPCC).

Let me start with a review of the work we did in 2015.

Li Keqiang on the Govt Rescue of A-Shares and Renminbi

Li Keqiang made comments on the economy on Tuesday.

China Daily: Market-stabilizing policies right call, says Premier Li

Those market-stabilizing measures, consisting with international practice, defused some "bombs" over a period of time and warded off systematic financial risk, said Premier Li at an executive meeting of the State Council, according to Xinhua.

However, authorities in charge should also draw lessons from the experience, address internal management issues and implement initiatives and take both timely and effective approach, added the Premier.

The recent sharp decline in the international equity market has brought new challenges and uncertainties to China's economy, but it is also a test of tenacity, he said. "China's economy has proved stronger and stronger in the time of challenges."

iFeng: 李克强总理讲话释放重磅信号 今天走势才是关键

Li Keqiang Slams Drug Approval Process

Li Keqiang slammed the practice of approving "new drugs," which is simply a way for drug companies to raise prices on the public. In a speech he also said drugs are for the "benefit of the people" before making a comment about the "steady growth" of the industry.

State Council executive meeting focused on the pharmaceutical industry for the current steady growth of the leading role, is the most natural thing. However, a detail worth noting is that the Prime Minister Li Keqiang in his speech, deliberately swapped conventional sort, said development of the pharmaceutical industry is the first "benefit people's livelihood", followed by the "steady growth."

Chinese medicine is the basic needs of the people, it belongs to the basic livelihood of the people. Industry can certainly stimulate economic growth, but it must first and foremost in order to meet the health needs of the people, at the same time, it is related to the psychological needs of the entire community stability. Prime Minister expression, not just a simple tandem problem, but the most direct and simple reflects the emotional foundation and the logical order of governance - the so-called "Road, people-oriented."

...Meeting for approval of the reform of the medical field is also requested. The fundamental purpose of decentralization is for the ordinary people. Prime Minister stressed, do not allow under the name of "approval" a myriad of so-called "new drug": just to raise prices!?

iFeng: 李克强又怒了 严斥某些新药审批：还不是为了涨价?!

Li Keqiang: If We Have to Intervene, We'll Intervene

Reuters: Chinese premier says economy faces great challenges, new uncertainties

China's economy faces great challenges and new uncertainties brought about by the global economic environment and various countries' ailing stock markets, Premier Li Keqiang said on Monday.

As well as maintaining stable levels of employment, China must be highly vigilant and maintain financial market stability, Li said.

iFeng: 李克强：一旦经济滑出合理区间 该出手时会果断出手

"China's economy still has great potential: We have such a high savings rate, so much room for maneuvering, in case the economy really shows reasonable range of signs of slowdown, when its time to act we'll act decisively." Li said firmly. "This year the global economic situation is very complex, so we have to be more active as, 'picked up a golden cudgel' the challenge!"

Li Keqiang Rebukes The Bears

Li Keqiang said that China is still a developing country, the future will continue long primary stage of socialism. To say China caused fluctuations in international markets, has "overvalued" us.

Li Keqiang reason for anger, due to investment Soros in Davos and will be accepted after January 21 interview with Bloomberg News, he said China's economy may face a stiff breeze insurance. Soros said that China's economy may face the risk of a "hard landing" in. It was not his intended result, but by observing the conclusions.

...Li further explained, various economic indicators, "Government Work Report" developed in 2015, almost all completed on schedule, only one exception is the import and export growth. "This one has us on the world trade slump last year, commodity prices fell sharply underestimated the reason. But then, this is precisely the description of the Chinese economy by the global economic downturn."

iFeng: 李克强怒了：“唱空”中国经济 这是哪家的道理？

Listen to Xi, Li and the PBoC

Here's me commenting on leadership comments in May 30, 2014: One More Time: No Stimulus

The Chinese leadership has been extremely consistent in saying there will be no stimulus. I can understand if investors think there will be a stimulus once there are obviously problems in the economy, but the leadership has said it will not repeat 2008.

If there is a crisis in 2014 or 2015, it will be worse than 2008 because by nearly every measure (except the stock market) is at an elevated level: more debt, more real estate supply, higher home prices, greater inventory, etc. If the government is saying it won't repeat 2008, then I take them at their word and assume they will not launch a massive stimulus program to save the economy until it is too late, and even then, they may decide it is too late and decide instead to see a real recession through to the end.

In the People's Daily Overseas Edition, the point about no stimulus was driven home yet again and it specifically addresses the investment banks that are saying China will cut the reserve requirement ratio (RRR) or make other adjustments to aid the economy. Short of banging them on the head with the latest 5-year plan, I'm not sure what else it will take for people to get the message.

I went on:

They go on to say that the slowdown is structural, not cyclical. In other words, the slowdown is a result of the rebalancing. China's leaders clearly do not want to screw up their reform efforts by hitting reset and reinflating up the sectors that need to shrink relative to the overall economy. They would like to avoid a full blown recession in which these sectors decline rapidly, but if their goal is ultimately reform, I don't expect they will do much of any rescue effort directed at sectors such as steel, cement or real estate, if any type of rescue at all even arrives in time. Most likely, the economy will tip into a major slowdown, with a full blown recession still a possibility.

The only thing to change in there is that the reforms didn't really take hold. We're at the start of 2016 and only now is the real effort to rebalance about to begin because now there is no way out. Now the market is going to force a major adjustment if the government doesn't.

Here's a post on Li Keqiang from September 2015: NNo Large Scale Stimulus or Money Printing? No Need To Rush Into Housing
One week ago, I did a longer post touching on the topic: Li Keqiang: No Stimulus Coming.

A Chinese blogger explains the PBoC's message (iFeng): 别等降准了！央行说得很清楚了 (Do not wait for RRR cut! The PBoC has spoken clearly!)

First, the exchange rate issue. Some time ago yuan swings, and a certain degree of devaluation, under the central bank to turn the tide began to gradually stabilize. If you choose this time to cut interest rates or RRR, the exchange rate will depreciate again. The central bank wants to give everyone a forecast, in the near term no devaluation, it wants stablility.

Second, structural adjustment problems. Although economic growth is falling, but that does not need to take the old road of stimulus. Proposed supply-side structural reforms will be implemented, of course, also need stimulation. Late last year, some analysts said, this year's protagonist is not monetary but fiscal [government policy], the central bank will slow down the pace of interest rate and RRR cuts, to slowly adjust.

No more kicking of the can. We'll know very soon if the reforms begin in earnest or not, if actions match the talk, but the message from the leadership couldn't be clearer.

Li Keqiang: No Stimulus Coming

iFeng: 李克强：不会再通过“强刺激”的投资来扩大内需

We will not pass "strong stimulus", "flood irrigation" investment to expand domestic demand

One of the big themes I covered here in recent years was the leadership transition (lots of links at bottom of that post) and the economic thinking of the new regime, mainly Li. I summed up a lot of this in an article here: China's New Age Of Reform. From the summary points:

Rhetoric has been followed up with action, with major reforms in the SOE and financial sector underway.

Monetary stimulus is off the table unless the economy slows substantially or the reform camp suffers a political setback.

It turns out reforms are moving much slower than expected, but monetary stimulus continues to be doled out in doses only large enough to prevent a crisis.

The leadership has been saying no stimulus for several years. It is a message I covered repeatedly on this blog because foreign media kept repeating the "China stimulus" theme in past years. Li Keqiang in particular has consistently voiced opposition to such a stimulus and it continues to this day in the midst of a serious slowdown. He is not wrong on the economics. Making the hard choices is what good leaders do. Stimulus and currency devaluation are the policies of weak leaders and almost never resolve the underlying problems. As in 2008. The biggest difference between 2016 and 2008 is amount of debt. What was a big problem has grown into an incomprehensible crisis.

Li may also be right on the politics of deflation. The leadership has been jailing corrupt politicians at a healthy clip and removing their political opposition. There are still many party insiders who oppose the economic reforms because it will take money and economic power away from party officials up and down the line, as well as introduce market forces and foreign influence into the economy. Local governments have refused, at almost every turn, to implement the leadership's policies on reforming local economies. The best way to push reforms then, may be to break their enemies with deflation.

China is already on the path to reform. The leadership is moving slowly because they don't want a disorderly transition. They want the growth from new markets to offset the slowdown in old markets, but if there is a crisis of any size, it will accelerate reform, not derail it— assuming the leadership has consolidated power and squelched opposition.

If there's no credit, then it's game over for every over indebted local government and state-owned enterprise.

Li has been saying the exact same thing on economic policy going back at least to 2010. Many reforms such as property taxes were part of a push to build a Chinese middle class. The political leadership that designed the 2008 stimulus has seen its power diminished, with the PBoC becoming more powerful than the Ministry of Finance. For those who lean towards the political intrigue, a brutal deflation would wipe out many political enemies because the companies and governments under their control will go bust.

Going back to the economic policy. More than a year ago here: Kuroda Says Dump Yen, Yuan to Fall

China cannot simultaneously cut interest rates and expect the yuan to appreciate because hot money will flow out of the country. Short of igniting an economic boom, a yuan rally isn't going to happen. Since the leadership does not want an investment led boom, which is the only way the current economy would be able to deploy massive capital inflows/credit growth, the hot money will leave if rates continue to slide. The other option is to let the tight credit conditions deflation do its work. The painless short-term solutions are gone. Long-term, reforms will lift the economic growth rate, but short-term there are no painless or costless options.

The point I've been trying to drill home on the blog is that China faces no pain free choices. It cannot control the laws of economics, but it can control where the fallout lands. Yet until recently, the "mainstream" opinion on China was still that their reserves and the ability to do stimulus would allow them to avoid any real pain.

Now the mainstream is finally coming around to the idea that China has to pay the bill for its 2008 stimulus binge.

The Australian: China’s tough reform choices as ‘era of easy growth over’

Some economists don’t rule out an abrupt drop in growth, a hard landing that would see bad debts soar, consumer confidence tank, the Chinese yuan plunge, unemployment spiral and growth crater.

More likely is that Beijing will continue to prop up growth, steering more capital to money-losing companies, unneeded infrastructure and debt servicing, depriving the economy of productive investment and leading to the sort of protracted malaise seen in Japan in recent decades. But China is less prosperous than Japan.

...“They don’t want to take the pain,” said Alicia Garcia Herrero, economist with investment bank Natixis. “But the longer they wait, the more difficult it becomes.”

I suggest that this type of statement should be accompanied by the question, "Who doesn't want to take the pain?"

Conclusion

This moment was unavoidable. Xi and Li have been on the right path with economic policy and based on the consistent public statements by Li, they haven't deviated from their agenda. (The stock market bubble is a glaring exception.) That reforms haven't been implemented and overcapacity is still a major issue could reflect a lack of commitment by the leadership, but I don't believe this to be the case. In addition to consistent public comments on policy, there are reports of Li's "table pounding" moments in closed door meetings with local officials in past years. More likely is there is still hefty political opposition. High-ranking officials with personal interest in preserving the status quo to those at the bottom in local government form a powerful bureaucratic opposition. Add in legitimate fear of a major economic crisis among the leadership, plus a belief or desire that reform be achieved with as little pain as possible, and it's clear why Xi and Li may not have pushed reforms hard enough to overcome opposition. It is a natural tendency to avoid painful decisions, especially when one still hopes there might be a better outcome. Plus, if you act early and trigger a smaller crisis, you are blamed for the crisis, not the avoidance of a depression. Even in a non-democracy like China, the political pressure pushes one to wait until the crisis is full blown. We should know by March, after Spring Festival, if the leadership will finally start managing the crisis rather than reacting to it.

Although devaluation is a bad policy as a solution, I have forecast yuan devaluation for several years not because I viewed it as inevitable based on the growth in debt, the trend in the U.S. dollar and economic history. At some point, the imbalances will end. Liabilities and assets must balance. With potentially trillions of dollars in bad debt, either the debt collapses and asset prices follow, or the currency collapses to "save" the debt and nominal asset prices. If China did implement another 2008-stimulus, it is currency devaluation by another name. In keeping with the reform ideas of Li and the PBoC, it is much preferable to have the international currency market force the yuan lower, then to resort to a stimulus that will end up having the same currency effect, but in the process, set reforms back a decade.