DRIVING THE DAY
1. Trump’s about-face on ZTE
This one is a stunner.
On Sunday, US President Donald Trump suddenly weighed in (via Twitter, of course) on the ongoing dispute between Chinese telecoms giant ZTE and the US Commerce Department.
Trump’s astounding comment (WaPo):
- “President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast,” Trump tweeted.
- “Too many jobs in China lost. Commerce Department has been instructed to get it done!”
Wow.
Some context: Regular readers will know that the US Commerce Department effectively gave ZTE a corporate death blow for cheating US sanctions against Iran and North Korea (see April 17 Tip Sheet).
More context: Under the penalty, US chipmakers were no longer allowed to sell their products to ZTE, which had effectively shut down in recent days.
Now, all that looks set to change.
Our take: Frankly, it’s hard to know what to make of this one. It’s a total 180 on China policy from the US.
What we know:
- China has asked the US to ease up on ZTE.
- China is also a key player in the Korean penisula saga.
- Donald Trump is keen to have good relations with Xi Jinping.
Our hunch: Those last two points likely have something to do with Trump’s about face.
One outcome: It was just announced that Vice Premier Liu He is headed to Washington for more talks (Xinhua).
Stay tuned!
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WaPo: Trump pledges to help Chinese phonemaker ZTE ‘get back into business’
Xinhua: 习近平主席特使、中共中央政治局委员、国务院副总理、中美全面经济对话中方牵头人刘鹤将应邀赴美磋商
FINANCE and ECONOMICS
2. Q1 monetary policy report says look for more of the same
China’s central bank issued its Q1 monetary policy report over the weekend.
The key message: Monetary policy is set to remain “prudent and neutral” – basically the same stance that we’ve seen over the past year-and-a-half.
An increasing number of analysts think a more stimulative policy is on the horizon. But we’re not buying it.
Our thinking: The PBoC is very happy with the current policy mix, which has yielded decent growth and taken steps toward deleveraging (Xinhua):
- “The PBOC said in [the] report that the country’s overall leverage rose to 250.3 percent last year, up by only 2.7 percentage points from a year ago. ‘The growth rate dropped substantially,’ it said.”
That is indeed a substantial reduction in the pace of credit growth. Now comes the hard part – keeping the pace of leverage growth that low.
Get smart: “Reducing financial risks” is one of Xi Jinping’s “Three Tough Battles” for 2018. The PBoC is not going to start back-tracking on its hard-won gains now.
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Xinhua: China’s macro leverage to see slower growth: PBOC report
PBoC: 2018年第一季度中国货币政策执行报告
FINANCE and ECONOMICS
3. Household debt in focus
One more nugget from the PBoC report: Households drove leverage growth last year.
According to official stats (Xinhua):
- “In 2017, corporate leverage went down to 159 percent from 159.7 percent a year ago, marking the first drop since 2011 and reversing an annual increase of 8.3 percentage points during the 2012-2016 period.”
- “Meanwhile, government leverage fell 0.5 percentage points to 36.2 percent.”
- “Household leverage climbed by 4 percentage points to 55.1 percent, slower than a year ago.”
Get smart: That adjustment in corporate leverage is HUGE. As the largest single part of China’s debt load, it’s the area that has been the most worrisome. Right now, policymakers have stemmed the bleeding. The question is whether they can truly cauterize the corporate debt wound going forward.
But, but, but – as encouraging as the change in corporate debt is, the continued growth of household debt is equally concerning.
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Xinhua: China’s macro leverage to see slower growth: PBOC report
PBoC: 2018年第一季度中国货币政策执行报告
FINANCE and ECONOMICS
4. Data dump – April credit
The PBoC had a busy weekend.
Late on Friday, the central bank also released credit data for April.
- Aggregate financing to the real economy grew 10.5% y/y – down a smidgeon from the 10.52% seen in March.
- Traditional RMB bank loans grew by 12.7% y/y – down a slightly larger smidgeon from 12.8% in March.
Get smart: Credit growth is continuing to gradually decelerate, in line with the broader de-risking campaign. But it’s hard to see it going substantially lower from here. High single-digit growth is the cutoff point.
Other developments of note:
- Entrusted loans contracted outright on a monthly basis – for the fourth consecutive month.
- Trust loans contracted outright on a monthly basis for the second consecutive month.
- Corporate bond issuance held up well for the second consecutive month thanks to relatively low yields – in other words its cheap for companies to issue bonds right now. So that’s what they are doing.
Some context: At the beginning of the year, the chairman of the banking and insurance regulator, Guo Shuqing, stated that trust loans and entrusted loans are in the regulatory crosshairs this year. Lo-and-behold, they are contracting.
Get smart: Listen to the regulators! They are telegraphing their moves and following through.
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Reuters: China April new loans rise but shadow lending shrinks
PBoC: 2018年4月金融统计数据报告
POLITICS and POLICY
5. CCCDR does work
China’s most important policymaking body – the Central Committee for Comprehensively Deepening Reform (CCCDR) – met Friday.
As always, it was a productive meeting. They approved 10 documents. The most interesting:
- A five-year plan for implementing reforms proposed at the 19thParty Congress
- Guiding opinions on controlling debt at SOEs (see Entry #7)
- Guiding opinions on Party-state restructuring at the local level (see Entry #6)
- A plan for creating a central pension fund for workers
Get smart: If you’re interested in where policy is headed, pay attention. What the CCCDR approves today, becomes official policy tomorrow.
Check this: Premier Li Keqiang was not at the meeting, despite the fact that he is a deputy head of the CCCDR. It’s further proof that Li is increasingly marginal to key decisions.
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CPC: 习近平主持召开中央全面深化改革委员会第二次会议
POLITICS and POLICY
6. Local governments to get a longer leash?
The readout from the CCCDR meeting spends a lot of time on Party-state restructuring at the local level.
Local authorities could have more ability to run their own affairs (Xinhua):
- “Institutions at the provincial or lower levels will be granted greater autonomy.”
- “Local authorities will be allowed to set up institutions and design functions based on their own conditions.”
But there will be limits:
- “Institutional reform must be implemented precisely in an all-round manner to uphold the authority of the Central Committee and its centralized and unified leadership.”
- “Party and government institutions will be subject to strict quota management, with the authorized sizes of institutions serving as a rigid constraint.”
Some context: Center-local dynamics are THE issue in China’s political economy. Local experimentation has propelled China’s 40-year economic boom. But errant local officials are also the primary driver behind some of the country’s biggest ills, such as environmental pollution and ballooning debt.
Get smart: Xi wants local officials to toe the Party line. But he also wants them to proactively experiment and innovate, so long as it’s within certain boundaries. It’s a delicate balance, and a tough line for local officials to walk.
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Xinhua: Xi stresses coordinated efforts in central, local institutional reform
POLITICS and POLICY
7. SOE debt in focus
SOEs are firmly in the crosshairs of China’s regulators.
As discussed above, Friday’s CCCDR meeting passed a document to take action against SOE debt.
Specifically, the meeting promised to:
- “Establish… a mechanism for constraining the… debt of state-owned enterprises.”
The goal:
- “[To] bring the asset-to-liabilities ratio of heavily indebted state-owned enterprises back to an appropriate level as quickly as possible.”
That’s not all. The meeting also passed new measures for managing top officials at central SOEs.
The goal:
- “To build… a troop of upright, honorable, and honest leaders of central enterprises.”
What it all means: SOEs, and particularly central SOEs are going to be under the gun to reduce their debt burdens.
What to watch: Spin-offs, bankruptcies, and debt-for-equity swaps all look set to multiply.
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CPC: 习近平主持召开中央全面深化改革委员会第二次会议