DRIVING THE DAY
1. China’s markets are breathing a sigh of relief
Happy Friday — the last day of June!
Folks that have been following the Tip Sheet closely will know that we’ve focused quite a bit on liquidity in the Chinese banking system this month.
It may seem esoteric but this is really important stuff — the interbank market is the lifeblood of the financial system. If it seizes up, we have a financial crisis on our hands, full stop.
Back in May, Chinese money and bond markets got a little tense. Two reasons:
- Increased regulatory scrutiny
- Smaller liquidity provisions by the central bank
Lots of banks were expecting June to be even worse — most of them needed more money throughout this month to pass various regulatory inspections. So investors were nervous that too much regulatory pressure on the banking system might accidentally choke off lending.
That fear wasn’t unfounded — that’s exactly what happened in June 2013 when the PBoC didn’t provide enough cash to the banks.
This time around, the PBoC was generous with the amount of liquidity it provided. But it made banks pay higher interest rates for that money in order to instill at least some discipline.
The plan worked, and we are now safely heading into July. The relief in Chinese markets is palpable (Caixin):
- “With the finishing line of June 30 in sight, traders and institutions are starting to breathe more easily after the PBOC dosed the market with timely dollops of money.”
- “From June 1 to June 19, the central bank pumped around 620 billion yuan ($91.2 billion) into the interbank market.”
- “It was the biggest monthly injection of funds since January.”
Our key takeaway: The financial volatility that has emanated from China over the past two-and-a-half years has generally been catalyzed by regulatory missteps. But the financial regulators are quickly coming up the learning curve and are now much more coordinated. It doesn’t mean they won’t mess up again, but we are encouraged for now.
Caixin: PBOC Heads Off June Jitters in Interbank Market
FINANCE AND ECONOMICS
2. Regulatory storms rain down on insurance companies
Speaking of tighter regulatory scrutiny…
Data now show that revenue and profits at China’s insurance companies plunged in May thanks to a crackdown on certain types of life insurance products.
Anbang took the worst of it (Caixin):
- “The regulatory measures have been hurting Anbang Life Insurance’s business significantly. Its investment insurance income fell from 925 million yuan in January to 356 million yuan in May.”
- “Even income from its conventional insurance products plunged to only 56.52 million yuan in May, from 85.26 billion yuan in January, according to CIRC data.”
- “The regulatory storm shows no sign of dying down.”
Why it matters: People continue to want to read political intrigue into the Anbang story because of its chairman’s political ties. But this is part of the financial clean up plain and simple.
The risk: Some folks are worried that Anbang might be a systemic institution. Regulators are trying to asses bank exposure to the company, but if Anbang starts to default on loans because of weak revenue there could be a ripple effect. Regulators should proceed gingerly.
Caixin: Insurers See Revenue Plunge From High-Yield Investment Products
FINANCE AND ECONOMICS
3. Maybe China’s economy has not peaked for the year
We don’t put a whole lot of stock in China’s Purchasing Managers’ Indices (PMI) these days — especially for manufacturing. The economy is evolving and so these fairly simple sentiment indicators don’t capture as much information as they did five or ten years ago.
But the acceleration in today’s PMI’s still caught our eye.
The official manufacturing PMI for June came in at 51.7 — it was 51.2 in May. That’s a three-month high.
The official non-manufacturing (i.e. services) PMI came in at 54.9 in June — it was 54.5 in May. That is also a three-month high.
The key point: Analysts have been trying to pinpoint the top of China’s economic cycle since April. May came in stronger than expected, and today’s PMIs are a small sign that June may have as well. We put it all down to property being much more resilient than expected.
China Securities: 6月官方制造业PMI51.7 非制造业PMI54.9
CNBC: China manufacturing activity accelerates in June, with official PMI at 51.7, beating expectations
POLITICS AND POLICY
4. To China, one country is more important than two systems
Hong Kong’s government has taken an increasingly hardline approach against pro-democracy and pro-independence groups in recent years.
Xi Jinping likes that.
He praised outgoing chief executive C.Y. Leungand top officials Thursday (SCMP):
- “Under Leung’s leadership in the last five years, you showed a sense of responsibility towards the country, Hong Kong and history in seriously implementing ‘one country, two systems’”.
- “You made achievements…especially on steadily handling a series of important political and legal issues, curbing ‘Hong Kong independence’ effectively, and maintaining social stability.”
Get smart: Hong Kong officials know where their bread is buttered. New chief executive Carrie Lam will continue to toe the Beijing line. That may not be promising for the future of Hong Kong as an independent, global city, but it’s exactly what Xi wants.
POLITICS AND POLICY
5. The Premier charts his own course
Li Keqiang played hooky from Wednesday’s Politburo meeting on enforcing ideological conformity in China’s top universities.
Instead, he visited a private university in Dalian and said that “private education is an important component of our education system.”
The Party and ideology were not mentioned in official coverage of the visit (link below).
Li’s other stops on his recent visit to Liaoning burnished his image as a liberalizing reformer:
- He visited Intel and encouraged more foreign investment
- He made a stop at the Liaoning Free Trade Zone and called for further efforts to reduce investment barriers
- He popped in at the state-owned Bingshan Group, but didn’t mention Party committees; he rather pointedly praised reforms at the company that let employees own shares
Get smart: Li looks increasingly out of step with Xi Jinping’s drive to impose ideological orthodoxy and Party control on all aspects of Chinese society. The big question for the next five years is whether Li acts as a check on Xi’s agenda, or is increasingly marginalized. Stay tuned.
Interested in our 19th Party Congress outlook? Get in touch!
POLITICS AND POLICY
6. Financial sector opening to foreign investors falls short
China is trying to show progress on opening to foreign investors. But there is not much to show.
Regulators have published the 2017 edition of the Foreign Investment Industries Guidance Catalogue (FDI catalogue). It does two important things:
- Adopts a negative list approach beyond the Free Trade Zones (FTZs) to the entire country.
- Removes a further 30 industries from the negative list. (See 2017 FDI catalogue link below).
The reality: This catalogue will still be disappointing to foreign companies and governments. The Chinese government continues to tout Document No. 5 — the State Council’s January notice that FDI rules will be relaxed in services, especially finance — as a game changer.
For now it’s all talk — finance is still restricted in the latest catalogue.
A glimmer of hope: The Shanghai FTZ also announced a preliminary negative list for foreign financial investors. It could be the initial trial area for FDI in finance. Don’t hold your breath, but watch that space.
POLITICS AND POLICY
7. China’s central SOE supervisor is shaking things up
We had the basics in the June 8th Tip Sheet.
Essentially, the regulator is rethinking the way it categorizes state companies. It wants more “capital management” and less company management.
What does that mean?
There are now three new groupings for central SOEs:
- Real economy or industrial companies
- Capital investment companies
- Capital operation companies
The first group is straightforward. The second set will be larger holding companies that generally own several companies in group one. So they can manage capital between the various subsidiaries.
The third set is meant to be a group of de facto fund managers. They will focus on maximizing returns for state capital.
This could be a shakeup: The point of the plan is to insert more operational tiers between SASAC itself and the industrial companies it manages.
Why it matters: The plan should blunt the regulator’s direct interference in company operations. But it certainly won’t help to level the playing field for private or foreign firms.