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MONDAY, AUGUST 17, 2020

China Markets Dispatch

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exec summary

One big thing: PBoC balance sheet data confirms the central bank was not doing QE in July

Macro: US-China phase one trade deal review postponed

Finance: CBIRC’s Guo tell banks to dispose of bad loans quickly

Credit: Only 29 P2P lenders left, down from 5,000

Commodities: CSRC to set up national commodity indexes

Currency: PBoC promotes RMB internationalization

Property: Regulators to further tighten financing for real estate developers

 

one big thing

1. Not QE (redux), confirmed


We’ve been waiting all weekend to tell CMD readers something very exciting – China’s central bank (PBoC) is NOT doing quantitative easing (QE).

  • You may be asking yourself: Didn’t Trivium say that on Friday?
The answer: Yes, we did.
  • But just as we were going to print Friday, the PBoC released its July balance sheet data, confirming our suspicions that the bank didn’t buy special treasury bonds (STBs) last month.
Recall: Last week the market was abuzz with speculation that the PBoC was buying STBs because a certain category of bondholder – which includes the central bank – suddenly jumped by RMB 200 billion, marking the biggest increase on record. For the full rundown, see Friday’s China Markets Dispatch.

On Friday, we argued it was likely that another entity within that specific category was making the purchases.
  • That turns out to have been right.
The devil is in the details (PBoC):
  • The PBoC’s claims on the central government were unchanged from June to July – at RMB 1.525 trillion.
Get smart: As we also said on Friday, even if the PBoC had bought this debt, we wouldn’t classify it as QE.

Get smarter: It’s still not clear who the mystery STB buyer was, but we’ll keep an eye out to see if it comes to light.

What to watch: The “China is doing QE” speculation crops up once a year or so. Don’t buy in to the hype.
 

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macro

2. Phase one trade deal review postponed


Unless you’ve just woken up from a coma, you know that US-China relations are caught in a dangerous tailspin.

As Sino-US ties approach rock bottom, the phase one trade deal has emerged as seemingly the only point of cooperation.

That's why this was worrying:
  • The six-month review of the deal originally scheduled for this past weekend was postponed.
Don’t panic.

According to Reuters, the postponement is happening for all the right reasons:
  • “One source familiar with the talks said the delay was related to a conference of senior Communist Party leaders at the seaside town of Beidaihe.”
  • “The postponement did not reflect any substantive problem with the trade deal, the source said, adding: ‘The new date has not been finalized yet.’”
This may also be Washington’s way of cutting Beijing some slack:
  • “Another source…said that U.S. officials wanted more time to allow China to increase purchases of U.S. goods agreed in the deal, to improve the political optics of the review.”

Get smart: Neither side wants to see the phase one deal fall through.

Get smarter: No meeting is better than a bad meeting in terms of market sentiment.
 

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finance

3. Toxic lesions


In case you missed it: On Sunday, China Banking and Regulatory Commission Chairman Guo Shuqing published an essay in Qiushi, the Party’s top journal. 

Guo revisited his new favorite message: Nonperforming loans (NPLs) are making a comeback.

  • “Toxic assets are lesions that must be removed with determination."
  • "Cover-ups will only delay treatment and ultimately bring serious consequences.”
  • “Banks must dispose of non-performing assets as early as possible.”
He also called for vigilance against shadow banking.
  • That’s not unusual. China’s banking regulators often warn that shadow banking could make a comeback. 
  • But those warnings are typically paired with boasts about how thoroughly shadow banking has been brought to heel, making them feel a little insincere.
Guo struck a decidedly different tone:
  • “Shadow banking has been brought under control to a certain extent, but the conditions under which it can exist have not been eradicated.”
  • “Shadow banking risks can ignite easily…potentially causing a prairie fire that can cause no end of trouble.”
  • “A slight relaxation of supervision could result in a complete reversal, whereby all our past efforts are wasted.”
To avoid that, Guo said financial institutions still need to:
  • Embrace transparency
  • Clearly define the border between public and private offerings
  • Isolate on- and off-balance-sheet risks from each other.
  • Maintain a clear distinction between investment and savings products
Get smart: The pressures of the pandemic have forced the banking regulator to consider relaxing new rules governing NPL recognition, and to delay the implementation of wealth management rules.
 
Get smarter: Guo has spent the last three years cleaning up the financial system so that it’s safer, more stable, and more sustainable. He’s not about to see his good work undone.
 

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credit

4. The end of P2P


There was another interesting tidbit from China Banking and Insurance Regulatory Commission (CBIRC) Chairman Guo Shuqing’s Qiushi essay (see previous entry).

He gave an update on what remains of the P2P online lending industry.

  • At the end of June, there were only 29 P2P lending platforms left in China, down from 5,000 at their peak.
  • The scale of lending and the number of people participating in such platforms has declined for 24 consecutive months.
Guo also talked about P2P in an interview he gave on Friday to China Central Television.
 
Guo said that failed online lending platforms had left RMB 800 billion in unpaid debts in their wake (Bloomberg).
  • The CBIRC in cooperation with the police will try to recoup the money, Guo said.

Some context: For a time, the regulators got out of the way and gave online lenders the freedom to innovate. The hope was that these financial start-ups would help provide a way to get much needed credit to small firms.
 
Get smart: Those days are now well and truly over. The crackdown on online lenders reinforces China's bank-centric credit system.
 

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commodities

5. CSRC to set up national commodity indexes


On August 14, Caixin reported that the China Securities Regulatory Commission (CSRC) plans to set up a series of national commodity futures indexes.

Some context: Four futures exchanges currently offer commodities futures products, but there are no national commodities futures indexes.

The motivation is two-fold (Caixin):

  • Meeting the hedging needs of futures traders
  • Providing early macroeconomic warning signs
What we know so far: All we know is that the new commodity futures index company will be set up in Xiongan New Area.
  • Information remains scarce as the CSRC has yet to make an official announcement.

Get smart: The CSRC has been pushing for the development of futures for the past year or so to provide better hedging tools for investors.

Get smarter: The CSRC also hopes that national commodity indexes will help to create better price benchmarks for commodities.
 

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currency

6. PBoC promotes RMB internationalization


On Friday, the central bank (PBoC) published its annual report on internationalization of the RMB.

Things are moving in the right direction:

  • In 2019, cross-border payments denominated in RMB amounted to RMB 19.67 trillion, up 24.1% y/y, setting a new record high.
The state broadcaster took the opportunity to tout the growth of yuan-denominated transactions (CCTV):
  • “The renminbi is serving as the new ‘safe haven’. It shows global markets are placing confidence in China’s economy and the renminbi.”
Buuuut the RMB is hardly a reserve currency compared to the US dollar (PBoC):
  • “According to data from the IMF, RMB reserves [held by members of the IMF] reached USD 217.67 billion, accounting for 1.95% of the total foreign exchange reserves of designated currencies as of Q4 2019.”
That's a fraction of the USD reserve share:
  • USD accounted for 60.90% of total foreign exchange reserves.
To further internationalize the RMB, the PBoC pledged to:
  • Relax restrictions on cross-border trades in RMB
  • Facilitate foreign investment in domestic stocks and bonds
  • Increase the convertibility of the RMB
In other words, nothing new from last year’s report.

Get smart: Fears of a financial war with the US are giving renewed impetus to the RMB internationalization push.

Go deeper: Check out the 141-page report (link below). 
 

read more

property

7. Regulators mull further tightening of property financing


Over the weekend, 21st Century Biz scooped that financial regulators are mulling new measures to further tighten real estate financing.

Potential new measures include:

  • Three new “red lines” for developers’ interest-bearing debts, covering the debt ratio after excluding advance receipts, the net debt-to-equity ratio, and the ratio of cash to short-term debt
  • Not allowing new bond issuance to cover more than 70-90% of maturing debt

Some context: In July 2019, regulators effectively banned real estate developers from issuing domestic bonds – except to cover soon-to-mature bonds.

Get smart: The measures are in response to growth in bond issuance by developers since July – and in anticipation of a surge in maturing bonds in H2.

Get smarter: Regulators are keen to keep the real estate market under tight control and refrain from using it to boost short-term economic growth. 

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The information contained in this newsletter does not constitute investment advice.

 

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