DRIVING THE DAY
1. Politburo talks economy
Xi Jinping chaired the Politburo’s quarterly economic review on Monday.
After the obligatory rundown of recent successes, Xi and company laid out priorities for the rest of the year.
There weren’t a lot of surprises.
Topping the agenda: Winning the “three critical battles.” For the uninitiated, those are:
- Defusing financial risks
- Alleviating poverty
- Controlling pollution
Get smart: These items have been top-of-the-agenda for months.
But another key priority stood out (people.com):
- “Strengthening efforts to develop core technologies, and actively supporting the development… of new industries.”
Get used to it: Xi and other top officials see developing next-generation technologies as critical to the country’s future prosperity. You are going to hear this mantra for years.
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People.com: 习近平主持中共中央政治局会议分析研究当前经济形势和经济工作
FINANCE AND ECONOMICS
2. Why markets are reading the Politburo incorrectly
There was another nugget from the Politburo readout that we found particularly interesting (Xinhua):
- “The central government should speed up the release of indicators, policies, standards, statistical system[s], and performance evaluation methods as guidance for local governments and departments to follow in promoting high-quality development.”
Why that matters: The biggest problem in changing the growth model has been a lack of clear metrics for local officials. If the central government can succeed in creating new metrics, it will go a long way towards better implementation of “quality-oriented” economic policy.
But quite a few analysts have missed the point. That’s because they are focused on this phrase from the readout:
- “[We] must…continu[e]…to expand domestic demand.”
That’s the first time a Politburo readout has talked about expanding domestic demand in years.
Why does that matter? Traditionally, the phrase, along with “expand aggregate demand,” has signalled stimulative economic policies. That’s one reason that Chinese stock markets jumped across the board on Tuesday.
But this time is different: The phrase is now all about underscoring the need to insulate the Chinese economy from a potential trade war. It’s not about providing a stimulant, so much as providing preventative medicine.
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Xinhua: China’s high-quality development off to good start: CPC Politburo
FINANCE AND ECONOMICS
3. Banks finally start owning up to their NPLs
Chinese banks don’t normally publicize their bad loans.
But that seems to be changing. Anecdotally, we’ve heard that recognition and disposal of bad assets accelerated in 2017.
It seems the trend will only deepen this year (Caixin):
- “The four national asset management companies (AMCs) will need to speed up their disposal of bad loans and may choose to sell some in bulk, Jinzhuo Asset Management Co. Chairman Liu Lü said at an industry conference on Thursday.”
- “Late last year, regulators tightened rules for AMCs, setting a minimum capital adequacy ratio of 12.5%. This ratio refers to the amount of capital these companies must hold as a percentage of their risk-weighted assets.”
It’s not out of the goodness of their hearts that banks are making this adjustment. It’s all part of the regulatory effort to clean up the financial system:
- “Regulators have been pushing banks to better recognize and speed up the disposal of nonperforming loans (NPLs).”
Get smart: Times are changing. Regulators are finally serious about cleaning up China’s financial markets. Incentivizing banks to openly recognize and dispose of bad assets is a strong indicator of that.
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Caixin: Deluge of Soured-Loan Sales Expected This Year
FINANCE AND ECONOMICS
4. The financial hits just keep on coming
Stop us if you’ve heard this one before: a high-flyer in China’s financial community has been taken in for corruption.
The latest victim is Lai Xiaomin. Until recently, Lai was the head of one of China’s four national asset management companies (a.k.a the “bad banks” that help traditional lenders dispose of their bad loans).
It seems that Lai’s activity wasn’t all on the up-and-up:
- “Emerging details about Lai’s tenure at the company paint a portrait of an ambitious official who leveraged his own personal connections and Huarong’s status as a government-backed financial giant to expand the company’s balance sheet sixfold over the last six years.”
- “The breakneck expansion allowed the company to quadruple its profits, but at the cost of making questionable investments that may have boosted the bad bank’s own bad assets.”
Get smart: This is yet another case of someone getting too big for their britches – thinking they can use the financial system to their own ends with no repercussions. Xi Jinping and his discipline inspectors are changing that game.
But, but, but…This doesn’t change the fact that banks and AMCs like Huarong will be disposing of lots of loans in 2018.
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Caixin: Bad Business at a ‘Bad Bank’
FINANCE AND ECONOMICS
5. The policy rationale behind relaxing deposit rates
China is relaxing deposit rates, as we discussed in the April 16 Tip Sheet.
Why is it happening now? Caixin has details on the reasoning:
- Banks, especially smaller ones, are under lots of pressure to attract deposits.
- More autonomy for banks can foster more competition.
- Pending competition with foreign banks requires such liberalization, as they have stronger deposit-pricing capabilities.
But as we have pointed out before: Rate liberalization will be constrained by guidance from the central bank, which has told banks not to get into a deposit rate price war.
So, when can deposit rates be truly liberalized? Per a city banker:
- Not until bankruptcy procedures are clearer.
Get smart: That’s pretty heavy stuff. While bankruptcy proceedings are making a lot of progress in China, we are still a long way from a clear, straightforward bankruptcy procedure.
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Caixin: 利率并轨攻坚开始
POLITICS AND POLICY
6. China aims to get the data right
It’s hard to manage an economy if you don’t have accurate information about it.
That’s why we’ve seen a concerted effort by central authorities in recent years to improve China’s much-maligned economic statistics.
Those efforts got another boost on Monday (Xinhua):
- “China’s top legislature will conduct a round of inspections on the implementation of the Statistics Law in 13 provincial-level regions.”
Some context: There have been several high-profile instances of provincial governments faking data in recent years.
Get smart: China’s statistics aren’t as bad as everybody thinks, not least because central officials need good stats to do their job. They are still not perfect, but they are getting better.
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Xinhua: Top legislature to inspect on statistics law implementation
POLITICS AND POLICY
7. Dongbei prepares for North Korea opening
Kim Jong-un announced over the weekend that North Korea will halt all nuclear tests.
The reason? He wants to “concentrate all efforts” on building the economy (BBC).
That’s got many in China’s northeast (Dongbei) excited that the DPRK may be about to embark on its own era of “reform and opening.” A boom on the other side of the border would be great for Dongbei’s morbid economy.
The stock market is jazzed: A-shares rallied on Monday, with many Dongbei firms hitting the one-day 10% limit.
But Liang Qidong, vice president of Liaoning Academy of Social Sciences, throws water on the excitement:
- “The thunder roars loudly, but little rain falls.”
That’s not all, according to Liang. He claims that Dongbei won’t really develop until it reforms its inefficient state-owned enterprises.
Get smart: There is no silver bullet for Dongbei’s woes. And Liang is right – even if the DPRK does open up (which is a BIG if), it will not be able to fully resuscitate the Dongbei economy in the absence of more fundamental reforms.
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BBC: North Korea ‘halts missile and nuclear tests’, says Kim Jong-un
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