Ant capitulates, officials chip away at hukou barriers - Capital Economics
China Economics

Ant capitulates, officials chip away at hukou barriers

China Economics Weekly
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The government is taking some further steps to boost labour market mobility by making it easier for migrants to settle and access healthcare in many of China’s cities. That will ease one constraint on productivity. Meanwhile though, the apparent capitulation of Ant Group – which has reportedly agreed to restructure as a financial holding company, with the much high regulatory burden that entails – is a reminder the raising productivity is not always the leadership’s primary concern.

Ant’s days as a freewheeling tech firm are over

After years of presenting itself as a tech firm and benefitting from limited oversight, fintech giant Ant Group has reportedly agreed to restructure as a financial holding company (FHC). As a result, it will be subject to much stricter regulations, including capital requirements to be set by the banking and insurance regulator (CBIRC). In a further blow to Ant, it now appears that the whole group will become a FHC despite earlier reports suggesting that only parts of the company would be carved out, such as its wealth management and insurance arms.

Given the threat of even more punitive regulatory measures, Ant may have had little choice but to agree to the new arrangement. The fact that the stock price of Alibaba, Ant’s parent company, rose in response to news about the restructuring points to relief in markets that worse outcomes, such as breaking up the company, have been avoided and that Ant’s postponed IPO may still be salvaged.

This is the latest development in a broader crackdown on the tech giants that appears unlikely to end soon. Alibaba’s main competitor, Tencent, will probably receive the FHC treatment at some point too, not least because officials appear keen to push back against the narrative that their crusade against Ant is aimed at punishing its founder Jack Ma for his public criticism of China’s financial regulators. Both firms also face a number of other growing constraints, such as new rules on online lending and sales of deposit products that were introduced last year and the market concentration limits on digital payments published by the PBOC last month.

There are legitimate concerns about financial risks and anti-competitive behaviour that justify greater oversight of the tech giants. But we think a desire to reassert control means that regulators are now swinging too far in the other direction. This threatens to undermine the recent prop to economic growth from rapid productivity gains in the tech sector. (For more on this topic see here and here.)

Policymakers look to boost labour market mobility

On Sunday, the State Council announced new pilot projects intended to make it easier for migrants to acquire urban residency permits (hukous): many cities require migrants to live there for several years before applying. The new rules would allow time spent in one city to be counted when applying for a hukou in another. This is a continuation of long-running efforts to integrate migrants into the cities. In 2015, officials pledged to grant 100m urban hukous by 2020. The share of the urban population with rural hukous has since declined, hitting a 22-year low in 2019. (See Chart 1.)

Chart 1: Migrant* Share of Urban Population (%)

Sources: CEIC, Capital Economics

Progress is also being made in improving welfare portability, which is equally important to labour market mobility – surveys suggest that most migrants don’t want to switch to an urban hukou, mostly out of a desire to preserve their rural land rights. Officials this week announced improved cross-provincial settlement of medical bills using public insurance.

These efforts should support growth by making it easier for workers to shift toward more productive firms and industries. But the gains will be dampened by a continued reluctance to extend hukou reforms to the largest cities, where labour demand is strongest.

The week ahead

China is winding down for the holiday starting on Lunar New Year’s Eve on Thursday. Before then, the data releases of note are of credit and inflation.

Data Previews

FX Reserves (Jan.) Sun. 7th Feb.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

Foreign Exchange Reserves

$3,217bn

$3,222bn

$3,240bn

No signs of direct FX intervention

The PBOC’s net foreign exchange purchases have been negligible in recent quarters, with changes in the value of its reserves mainly the result of movements in bond prices and exchange rates.

There’s no reason to think that will have changed more recently. Pressure on the renminbi has abated in recent weeks, with the onshore rate now broadly in line with the rate offshore. (See Chart 2.) Our suspicion is that the PBOC had been leaning on state banks to accumulate foreign assets late last year so as to slow the renminbi’s gains. But even that won’t have been necessary in January.

The PBOC doesn’t release details of its portfolio, so estimating valuation effects involves a fair degree of guesswork. For January, we think they will have added $20bn to the headline number.

Chart 2: Difference between Offshore and Onshore RMB (Basis Points, 7d ave)

Source: Refinitiv, Capital Economics

Net New Bank Loans, M2, AFRE (Jan.) 9th – 15th Feb.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

Net New Bank Loans (RMB)

+1,255bn

+3,500bn

+3,550bn

M2 (% y/y)

(+10.1%)

(+10.1%)

(+10.0%)

Aggregate Financing “AFRE” (RMB)

+1,719bn

+4,700bn

+4,600bn

Credit growth continues to slow as policy turns less supportive

After quickening during most of 2020 thanks to policy stimulus, credit growth started to ease in the last two months of the year. We think this marked the turn in the cycle as policymakers refocused on credit risks.

Admittedly, there will have been a huge step up in the net increases of both bank loans and aggregate financing (AFRE), the PBOC’s measure of broad credit. But that’s a seasonal effect, the legacy of loan quotas being refreshed at the turn of the year. Other than in 2020, new credit issuance in January has always been the strongest of the year.

It’s more useful to focus on growth in the outstanding values as a guide to the trend in credit creation. On this basis, we think that both loan and broader credit growth slowed. Admittedly, equity issuance picked up slightly in January (see Chart 3) – while not credit, this is a component of AFRE. But issuance of corporate bonds slowed last month and there was a sharp drop back in government bond issuance as local government quotas weren’t renewed. We have less real-time oversight of shadow credit, but our expectation is that it will have weakened further due to worries over credit risk.

Chart 3: Direct Financing (outstanding, % y/y)

Sources: CEIC, WIND, Capital Economics

CPI, PPI (Jan.) Wed. 10th Feb.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

CPI (% y/y)

09.30

(+0.2%)

(-0.1%)

(0.0%)

PPI (% y/y)

09.30

(-0.4%)

(+0.3%)

(+0.3%)

Seasonal effects weigh on consumer price inflation

After briefly turning negative, consumer price inflation returned to positive territory in December (see Chart 4) as the drag from falling pork prices eased.

Food prices rose last month, as they always do in the run-up to Lunar New Year. But the holiday falls later this year than last, and the result is that food inflation probably fell.

This should pull the headline rate down. One source of uncertainty is that the CPI basket weights will be overhauled for this release. We expect the weight of food to be reduced but can’t be certain by how much. However, with core inflation likely to have been stable, the headline rate should still have fallen.

In contrast, factory gate inflation is likely to have returned to positive territory for the first time since January 2020. Commodity prices, which correlate well with producer prices, rose last month. Weekly producer price data also suggest that the PPI picked up thanks to the ongoing improvement in economic activity.

Chart 4: Consumer Prices (%y/y)

Sources: CEIC, Capital Economics

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (China)

Previous*

Median*

CE Forecasts*

February

Sun 7th

Chn

Foreign Exchange Reserves (Jan., USD)

+3217bn

+3222bn

+3240bn

Wed 10th

Chn

Consumer Prices (Jan.)

(09.30)

(+0.2%)

(-0.1%)

(0.0%)

Chn

Producer Prices (Jan.)

(09.30)

(-0.4%)

(+0.3%)

(+0.3%)

11th – 17th

Chn

Lunar New Year (National Holiday)

12th – 15th

HK

Lunar New Year (National Holiday)

Also expected during this period:

8th – 18th

Chn

Foreign Direct Investment (Jan.)

9th – 15th

Chn

Aggregate Financing “AFRE” (Jan.)

+1,720bn

+4,700bn

+4,600bn

9th – 15th

Chn

Net New Lending (Jan.)

+1,255bn

+3,500bn

+3,550bn

9th – 15th

Chn

M2 Money Supply (Jan.)

(+10.1%)

(+10.1%)

(+10.0%)

TBC

Chn

Financial Inst. Assets, Earnings, NPLs (Q4, CBRC Data)

TBC

Chn

Job Openings to Job Seekers Ratio (Q4)

TBC

Chn

Vehicle Sales (Jan.)

Selected future data releases and events:

February

Fri 19th

Chn

Current Account Balance (Preliminary Q4)

Also expected during this period:

TBC

Chn

Government Revenue and Expenditure (Jan.)

TBC

Chn

PBOC Balance Sheet data (Jan.)

Main Economic & Market Forecasts

%q/q annualised (%y/y), unless stated

Latest

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

2020e

2021f

2022f

Official GDP

(+6.5)*

(+21.0)

(+9.0)

(+7.0)

(+5.5)

(+5.0)

(+2.3)

(+10.0)

(+4.5)

GDP (CE CAP-derived estimates)

(+7.6)*

(+31.0)

(+10.0)

(+5.0)

(+2.5)

(+3.0)

(+1.0)

(+10.0)

(+3.5)

Consumer Prices

(+0.2)**

(+0.9)

(+1.8)

(+1.5)

(+1.4)

(+1.4)

(+2.5)

(+1.5)

(+1.5)

Producer Prices

(-0.4)**

(+1.0)

(+2.5)

(+2.0)

(+1.5)

(+1.3)

(-1.8)

(+2.0)

(+0.5)

Broad Credit (AFRE)

(+13.1)**

(+12.0)

(+11.0)

(+10.0)

(+9.0)

(+8.0)

(+13.3)

(+9.0)

(+7.5)

Exports (US$)

(+18.1)**

(+27.0)

(+14.0)

(+2.0)

(+3.0)

(-2.0)

(+3.6)

(+10.0)

(+1.5)

Imports (US$)

(+6.5)**

(+17.5)

(+22.5)

(+12.5)

(+8.0)

(+7.0)

(-1.1)

(+15.0)

(+6.0)

RMB/$

6.45

6.40

6.30

6.20

6.20

6.20

6.54

6.20

6.20

7-day PBOC reverse repo %

2.20

2.30

2.40

2.50

2.50

2.50

2.20

2.50

2.50

1-year Loan Prime Rate (LPR) %

3.85

3.95

4.05

4.15

4.15

4.15

3.85

4.15

4.15

1-year MLF Rate %

2.95

3.05

3.15

3.25

3.25

3.25

2.95

3.25

3.25

10-year Government Bond Yield %

3.24

3.20

3.10

3.00

2.80

2.70

3.20

2.80

2.60

RRR (major banks) %

12.5

12.5

12.5

12.5

12.5

12.5

12.5

12.5

12.0

CSI 300 Index

5,474

5,550

5,600

5,650

5,700

5,825

5,211

5,700

6,200

Hong Kong GDP

(-3.0)*

(+3.0)

(+5.5)

(+4.5)

(+6.5)

(+7.5)

(-6.1)

(+5.0)

(+5.5)

Hang Seng Index

29,114

29,450

30,125

30,800

31,250

31,200

27,231

31,250

35,360

Sources: Bloomberg, CEIC, Capital Economics *Q4; **Dec.; End of period


Julian Evans-Pritchard, Senior China Economist, julian.evans-pritchard@capitaleconomics.com
Sheana Yue, Assistant Economist, sheana.yue@capitaleconomics.com