Chinese reinterpretations
A common Chinese proverb posits that we makes better progress toward our goals if we do not try to advance too quickly (欲速则不达). Perhaps this is how to interpret an “extended” speech by Xi Jinping that was released over the weekend describing ‘Common Prosperity’. A few references in the speech were notably absent in the Xinhua and People’s Daily versions in mid-August. These include (emphasis added):
“Common prosperity is a long-term goal. It cannot be achieved overnight”
“We must mobilize the enthusiasm of entrepreneurs to promote the healthy developments of different types of capital”
“After years of exploration, we have a complete solution to the problem of poverty, but we still need to explore and accumulate experience on how to get rich”
“It is necessary to increase the income from various properties of urban and rural residents, such as housing, rural land, and financial assets” (emphasis added)
“It is necessary to actively and steadily advance legislation and reform of real estate tax, and do a good job of pilot projects. It is necessary to intensify the tax adjustment of the consumption link and study the expansion of the scope of consumption tax collection”
Points 1 to 3 would seem to indicate a moderation in approach to ‘Common Prosperity” whereas points 4 and 5 may suggest that policy may favor financial asset investment over real estate investment. Property is where c. three-quarters of Chinese wealth sits whereas equities are dramatically under-represented in household accounts.
Separately, Sun Guofeng who heads the monetary policy research department at PBOC reiterated at a press conference on Friday that “the supply and demand for liquidity in the banking system will continue to be basically balanced and there will not be any big fluctuations”. This was taken to mean that the odds of a cut to the RRR or significant liquidity injections (via OMO) were low.
The State Council may have other ideas. Yao Jinguan, a government advisor to that body noted:
The RRR can be “lowered by 1 percentage point in the fourth quarter…A 1 percentage point cut would unleash 1 trillion yuan of liquidity”. He further mentioned that liquidity conditions of companies was tighter than others perceived.
“We don’t need to worry about whether releasing more money will push inflation higher because we still have room…Consumer inflation is likely to be 1% for the full year”. This may chime with what PBOC governor Yi Gang said over the weekend that producer prices would begin to decline at the turn of the year.
In conclusion, it is interesting that policy may be shifting: a potential for a moderation in approach to Common Prosperity, a preference for wealth in “financial assets” over real estate, and perhaps greater odds of liquidity injections. If this is the case, Chinese equity markets (and markets linked to China) can do well in the months ahead. Let’s see.