DRIVING THE DAY
1. Beach Party
Most of China’s top leaders haven’t made public appearances over the past week. That means one thing: they are gathering for the annual conclave at Beidaihe, a beach resort northeast of Beijing.
One public appearance we have seen was by the Party’s #5, Liu Yunshan, at the beach town on Wednesday, confirming the presence of top leaders. In an annual tradition, Liu spoke with the country’s leading technological experts.
What it means: Darned if we know. What happens in Beidaihe stays in Beidaihe. We don’t know who exactly is there, what they are doing or what they are talking about. It’s a poignant reminder of just how opaque Chinese elite politics continues to be.
We can’t tell you what’s happening at the secretive Beidaihe meetings, but we can tell you what to watch for at the 19th Party Congress.
If you haven’t already, check out our free preview: Trivium’s Guide to The 19th Party Congress
- Xinhua: 刘云山看望慰问北戴河暑期休假专家
FINANCE & ECONOMICS
2. About those off-balance-sheet assets…
Thanks to all the Tip Sheet readers who heeded our call to help figure out China’s bank assets.
We have received some great insights on the potential meaning behind the PBoC’s statement that banks’ off-balance-sheet assets are equal to 109% of on-balance-sheet assets (see Tuesday’s Tip Sheet).
We’ve collated them here:
- The numbers include assets held in custody – i.e. third parties’ assets that banks help manage
- There is a lot of double counting, so this doesn’t alter other monetary and credit data – i.e. Total Social Financing didn’t just double, nor did debt-to-GDP
- Some transactional business is included, like bond underwriting – it’s unlikely that the banks would be on the hook for such assets
- But there is some exposure – banks often have at least a partial ownership stake in the non-bank entities that do hold these assets
- Actual off-balance-sheet assets are likely around 35-40% of on-balance-sheetassets
The key idea seems to be that the PBoC is trying to get a grip on banks’ off-balance-sheet exposure writ large. If financial assets across the country start go bad in a hurry, the banks will be negatively affected even if they don’t own the assets.
Want more? Get in touch – we’ll give you the full rundown on what we’ve learned. We do client briefings and weekly notes looking at all of these financial issues.
- PBoC: 中国金融稳定报告 (PDF)
FINANCE & ECONOMICS
3. CBRC preps for a banking crisis
You can file this one in the “boring but important” category, but China’s banking regulator (CBRC) is working on net settlement rules.
What’s that you ask? It’s basically a mechanism for sorting out all the various transactions between entities and coming up with a single figure for how much money is owed between the parties.
Sound complicated? It is. Best practices are governed by a group called the International Swaps and Derivatives Association (ISDA) who puts it this way:
- “A Master Agreement has established international contractual standards governing privately negotiated derivatives transactions that reduce legal uncertainty and allow for reduction of credit risk through netting of contractual obligations.”
That last part is the key, and the CBRC’s new rules are explicitly trying to be ISDA compliant.
What does it all mean? These new rules are explicitly aimed at over-the-counter interbank transactions, so it is an effort to make the process smoother if a financial institution goes through bankruptcy.
That’s right – the authorities are slowly making it easier for Chinese banks to fail.
FINANCE & ECONOMICS
4. Banks prep for a banking crisis
China’s smaller banks are prepping for tough times as well.
City commercial banks are banding together to create “mutual assistance” funds that can be tapped when liquidity gets tight.
These funds are being created in conjunction with provincial authorities, at the behest of the CBRC (link below), and they are starting to proliferate around the country.
The idea is to provide an emergency fund for city commercial banks – and even more so for rural commercial lenders – in times of stress. In trials conducted around the country, these funds have been especially nimble (21st Cent Biz):
- “Compared to the interbank market, the arrival time for the mutual funds is fast, inexpensive, and can greatly ease the liquidity management pressure of rural banks.”
The upshot: These new funds may help to stave off the kind of liquidity crunch that could precipitate an outright banking crisis. The risk, of course, is if multiple small lenders all need to tap the funds at the same time.
POLITICS & POLICY
5. Tianjin’s Party Secretary is sweating
Tianjin party secretary Li Hongzhong should get a seat on the Politburo at the congress this Fall.
BUT. Recent criticisms by the central government have some analysts wondering if Li’s position is more tenuous than previously thought.
Recent inspections found that Tianjin officials have been slack in their implementation of environmental protection measures – one of Xi Jinping’s policy priorities.
That’s not all. Tianjin was recently embarrassed when local media exposed the city as a hotbed for Ponzi schemes – including one where two participants died.
Li’s been in damage control mode since. He:
- sacked two lower level officials responsible for the environment
- launched campaigns to enforce environmental protection
- went after the perpetrators of the pyramid scheme
He’s also been quick to remind everybody of his loyalty to Xi. In a Tuesday People’s Daily op-ed he was effusive:
- “Xi as the core is essential to all historical reforms and changes since the 18th Party Congress.”
- “Xi’s theoretical innovation, pioneering practice and inspiring character is the core of the core.”
- Xinhua: 中央环保督察组向天津反馈督察情况 指出四大问题
- Xinhua: 求职大学生疑入传销溺亡 通过BOSS直聘进“李鬼”公司
- Xinhua: 对环保督察意见整改不力 天津两名副区长被免职
- Tianjin Daily: 李鸿忠深入北辰区暗访抽查中央环保督察反馈意见整改落实情况
- Tianjin Daily: 重典治乱除恶务尽 打赢清除传销的人民战争
- People’s Daily: 坚定不移沿着“三个着力”指引的方向前进
POLITICS & POLICY
6. An outline for SOE debt
Xi Jinping got the diagnosis right at the Financial Work Conference – SOE debt is the key driver of China’s leverage.
Not much has been done to address the issue, but we are seeing baby steps.
The most recent was from the NDRC, who advocates the following this week:
- Prioritize SOEs to lower their leverage ratios
- Outline a mix of measures to both restructure debt (including debt-for-equity swaps, (DES)) and check SOEs’ impulses to take on new debt
- Set up a process to “euthanize zombie companies” – cutting life support while supporting dislocated employees
- Turn DES into a “sharp weapon” – to be used not only for deleveraging but also to reorganize and diversify SOE ownership more broadly
What to watch: The PBOC and SASAC are expected to give more clarity to all of the above elements throughout H2. They are the entities that would actually be in charge of implementation.