DRIVING THE DAY
1. SOE banks see a solid first half
China’s big SOE banks had a solid start to the year. They’ve issued their semi-annual reports for the first half of 2017, and things look pretty good (Caixin):
- “In concert with the government’s call to leverage bank loans to expand the real economy, these megabanks have been lending more to the corporate sector, which boosted their respective net interest incomes.”
- “And as China’s economic growth has picked up for a few quarters, credit quality has also improved and net interest margins, a key profitability metric, continued to expand.”
- “Higher interbank interest rates in fact helped big banks’ earnings as they could charge more while lending to smaller banks.”
Some context: No one thinks China’s banking system is truly healthy. But strong industrial profits in H1 meant that companies could service their loans better – that helps the banks.
What to watch: At some point, economic momentum is going to turn down again. That’s when we’ll know if the banks truly improved their balance sheets during the good times – we are doubtful they did.
- Caixin: China’s Leading Banks Looking Up
FINANCE & ECONOMICS
2. Smaller banks slash asset growth
China’s overall bank assets are growing at the slowest pace in over a decade. Let that sink in.
The data for July has been released and it shows total banking assets grew by 11.3% y/y for the month, down a touch from the previous low of 11.4% seen in June.
Some context: that pace of asset growth compares to an average of 15.6% over the past five years and 18.1% over the past decade.
As opposed to the solid performance of the SOE banks we mentioned above, it’s the smaller joint-stock banks (JSBs) that are driving the asset slowdown. The JSBs saw assets expand by only 7.5% in July – and it is hurting their profits.
Get smart: The SOE banks may make politically motivated loans – but they aren’t as involved in the really speculative stuff. Slower asset growth at the JSBs reflects regulators’ initial success is taming some of the wildest banking practices.
- CBRC: 2017年总资产、总负债(月度)
POLITICS & POLICY
3. The EV push gets pushed back
Automakers in China are rejoicing – temporarily.
Implementation of a government plan that requires a ramp up of electric vehicle (EV) production has been delayed (Caixin):
- “The plan was originally set to take effect next year. It involves a system that awards points to companies based on the percentage of their vehicles that meet certain emission standards. But now the rollout of the plan will be pushed back by a year to take effect in 2019.”
The quotas in the plan are intense:
- “The plan, which was announced in 2016, sets quotas of 8%, 10% and 12%, respectively, for all carmakers in the three years starting from 2018.”
- “Those numbers . . . roughly correspond to the percentage of a company’s cars sales that must be electric or hybrid, a group generally referred to as new energy.”
Why it matters: This is industrial policy gone awry. None of the automakers are prepared for that scale of EV production, so they’ve been pushing back against the rules.
What to watch: Industry folks are worried the policy will over-capacitize EV production.
POLITICS & POLICY
4. Premier Li pushes for innovation
Get excited – the State Council met yesterday.
Ok, don’t get excited. The official readout (link below) is a real snoozefest – as per usual.
But we still think it’s important to keep tabs on what the government is up to.
Yesterday’s meeting discussed two topics:
- Promoting innovation and entrepreneurship
- Improving the healthcare services industry
Premier Li Keqiang continues to say the right things:
- “We need to create a fair and unprejudiced environment for market competition”
- “Cutting red tape, streamlining government functions and enhancing compliance oversight over the years have paid off. We need to keep pushing it forward.”
The bigger picture: Li has been pushing a liberalizing agenda since he got into office. But implementation has been uneven – largely because Li’s authority has been undercut by Xi Jinping’s domination of policymaking.
- Gov.cn: 李克强主持召开国务院常务会议 决定推广一批具备复制条件的支持创新改革举措等
- Gov.cn: 今天的国务院常务会定了这2件大事
- Gov.cn: China to further reform to drive innovation
POLITICS & POLICY
5. Cai Qi channels Xi
Beijing Party Secretary Cai Qi convened a meeting of top city officials yesterday. The group discussed what they could do to ensure that the 19th Party Congress is a success.
Two pieces of advice stood out to us:
- “Politics is forever of primary importance”
- “It is absolutely not permissible to engage in improper discussion of [the policies] of the [Party] Center”
Cai might have been the one speaking, but those words were straight from Xi Jinping. They summarize perfectly two prominent trends in Xi’s first five years as General Secretary:
- He has reasserted the importance of politics and ideology.
- He has demanded obeisance to a recentralized Party apparatus.
Get smart: Cai is one of Xi’s closest allies – the pair worked together in Fujian and Zhejiang. His rise has been meteoric since Xi took power in 2012, and he is almost certain to obtain a seat on the Politburo. As far as we can tell, that will make him the first person in the post-Mao era to do so without having first served as a Central Committee member or alternate.
POLITICS & POLICY
6. China’s chief justice calls for better IPR courts
China’s chief justice, Zhou Qiang, wants the courts to improve on at least one score.
That’s according to his report to the legislature, which graded the specialized courts responsible for enforcing intellectual property rights (IPR).
To be fair, the new courts are having an impact even though they are only three years old. For example, the Beijing IPR court nullified 2,166 out of 11,046 incorrect patent and trademark decisions made by the government.
But there is a bandwidth issue to start. Right now, there are only three IPR courts – in Beijing, Shanghai and Guangzhou. So Zhou suggested that more should be set up across the country.
Some context: The government wants better IPR protection. They know it’s key to spurring innovation. These specialized courts will help.
But there’s one important reality: The move will do little to alleviate the biggest IP issue facing foreign businesses in China – technology transfer. The government will continue to demand that in exchange for market access.
POLITICS & POLICY
7. Is SASAC China’s biggest investment bank?
Thanks to a flurry of recent mergers, the number of central SOEs has shrunk from 117 to 98 in the past five years.
That number will shrink further. The SOE regulator (SASAC) is promoting three methods for further consolidation:
- Consolidate what should be shared infrastructure, such as the network infrastructure of China’s three telecommunications giants.
- Transfer non-core assets to other companies – i.e. Poly Group’s transfer of its coal assets.
- Consolidate along the value chain – i.e. the recent merger of China’s biggest coal producer and power generator.
The logic: Reduce redundant investments and improve efficiencies.
Get smart: The real goal is about enhancing state control over the economy. SASAC used to promise more opening to private companies, but now they brag that the state controls more than 80% of several sectors, including electricity, oil, and transport among others.
- Shanghai Securities: 国资委：央企重组将继续深化供给侧改革
- 21st Cent Biz: 国资委： 下一阶段央企重组不设时间表和数量目标
- The Paper: 铁塔模式、资产转让、业务协同：央企重组整合探索出三种模式