DRIVING THE DAY
1. US-China Trade war – edition #499
China is one step closer to a trade war with the US.
That’s the state of play after discussions this weekend between Vice Premier Liu He and the US Secretary of Commerce resulted in a big nothing burger.
China has said it is happy to take measures to reduce the trade deficit, particularly by buying more US energy and agriculture exports.
But China’s purchases are conditional, according to the official statement released after the meeting(Xinhua):
- “All economic and trade outcomes of the talks will not take effect if the US side imposes any trade sanctions including raising tariffs.”
The problem: Last week US President Donald Trump promised to put tariffs on USD 50 billion of Chinese imports.
And Trump looks unlikely to back down, according to an anonymous White House official (WSJ):
- “I don’t see any evidence that the president wants to pull back on that.”
- “The president has been leading the charge on that.”
- “There is what I regard as widespread agreement inside the government on that.”
Get smart: China has been consistent in saying that it will not initiate a trade war, but it will also not back down from a fight.
Get smarter: Trump’s constant bluster has numbed markets into a false sense of security. There is a good chance that things could get really ugly, really fast.
FINANCE and ECONOMICS
2. Central bank updates its collateral policy
The central bank (PBoC) has broadened the types of collateral that it will take for certain kinds of loans.
Specifically, for loans made through the Medium-Term Lending Facility, which is one tool the central bank uses to inject money into the banking system and manage liquidity, the PBoC will now accept the following types of collateral:
- Rural bonds
- Green bonds
- Bonds from small and micro enterprises
- Corporate bonds rated as low as AA
Previously the central bank had only accepted higher-quality bonds from borrowers, such as:
- Central government treasury bonds
- Central bank bills
- Policy bank bonds
- Local government bonds
- AAA-rated corporate bonds
Why the change? Some folks will argue that this is a move to stimulate the economy by boosting liquidity, and thus credit.
Those people are wrong.
It’s an effort to change who gets liquidity. Broadening the collateral base will incentivize banks to buy bonds issued by smaller companies, which should help shift financing toward previously under-funded entities.
It will also support the ability of smaller banks to obtain liquidity directly from the central bank – the smaller banks own more of this lower quality paper.
The rub: It will also mean that the central bank is taking on riskier collateral.
The Paper: 央行扩大“麻辣粉”担保品范围：含AA级信用债、优质小微贷
FINANCE and ECONOMICS
3. Meet the joint credit supervision mechanism
On Friday, the banking and insurance regulator (CBIRC) issued some important new regulations meant to give the regulator a better view into corporate debt.
The notice on creating a “joint credit supervision mechanism” requires that banks create an information sharing platform.
Regulators want any company with three or more creditors, or RMB 5 billion in outstanding credit, to be listed on the platform. This will enable banks and CBRIC officials to have a more complete view of each company’s true debt position.
The idea is to keep companies from leveraging up by continually bringing on new creditors.
The CBIRC’s research found that businesses with RMB 5 billion in credit tend to have 5-10 creditors, while companies with RMB 10 billion tend to have 10-15 creditors.
Get smart: This move is related to the central bank’s collateral adjustment (see previous entry). Regulators want to stop big companies from continually leveraging up, since it diverts credit flows from smaller, often more vibrant, companies.
Get smarter: To date, many of the regulators’ efforts have been to keep an individual bank from getting over-exposed to one company. This move is about reducing the exposure of the banking system overall to each company.
21st Cent Biz: 防范重大风险事件 银保监会遏制多头过度融资
FINANCE and ECONOMICS
4. Local government bond deluge coming
China’s local government bond market is about to heat up.
The 21st Century Business Herald reports that traders expect RMB 3.8 trillion worth of provincial bonds to be issued in the next seven months (see link below).
That’s after just RMB 876 billion were issued in the first five months of this year.
The reasons for the coming local government bond deluge:
- 2015 was the first year that such issuance really kicked off. Now those three-year bonds issued in 2015 are coming due.
- The local government bond swap program will end this year, so this is the last chance for local governments to replace existing bank debt with cheaper bond debt.
- The recent crackdown on public-private partnership projects means that local governments need a new funding channel.
Our take: The development of the local government bond market in China is crucial for fiscal reform. Provincial governments need an on-budget mechanism for raising money to improve transparency and keep revenues up.
Get smarter: City-investment bonds are still the key bonds to watch. They are the primary channel for sub-provincial governments to fund investment. Central authorities want to shut down that illegal funding channel but are worried they will tank economic growth if they do so.
21st Cent Biz: 前5月地方政府债券缩量发行 后续发债规模或超3万亿
POLITICS and POLICY
5. Fiscal reform en vogue
China is restructuring its tax collection system. It’s all part of the MASSIVE government re-org announced in March.
Vice Premier Han Zheng gathered tax officials to discuss the matter Friday.
Han’s message (Gov.cn):
- “[We] must follow the principles…of ‘losing weight’ in order to ‘stay fit.’”
In plain English: The government is consolidating tax authorities at the local level.
- “China will reform national and local taxation systems by integrating their offices at and below the provincial level.”
Get smart: The move further centralizes power in Beijing.
Get smarter: This should give Beijing further leverage over local governments as it looks to initiate difficult fiscal reforms.
But…the central government has a difficult needle to thread. They want more control, but they don’t want to cut off local governments at the knees. Hence the push for more local government bond issuance (see entry #4).
Xinhua: Vice premier calls for more efforts on taxation system reform
POLITICS and POLICY
6. New anti-monopoly regulator has its first targets
One important change resulting from the MASSIVE government re-organization announced in March is the merging of China’s three anti-monopoly regulators.
Those duties are now all overseen by the powerful new State Administration of Market Regulation (SAMR).
On Friday, the new agency singled out its first targets – the world’s three largest DRAM producers.
Some context: A DRAM is type of memory chip used in mobile phones (we Googled it).
Who, exactly, is in the crosshairs:
- Korea-based Samsung and SK Hynix
- US-based Micron
Those three companies account for more than 90% of global market share.
On Friday, the SAMR executed dawn raids at the companies’ offices in Beijing, Shanghai, and Shenzhen.
This doesn’t come as a huge surprise. Regulators had previously expressed concerns about high DRAM prices to at least two of the companies in response to complaints from Chinese mobile phone manufacturers.
The worst-case scenario: Maximum fines could be as high as RMB 8 billion, based on the companies’ revenue in China and relevant articles of the Anti-Monopoly Law.
Get smart: As the new sheriff in town, SAMR will want to demonstrate its effectiveness. This one is going to be painful.
POLITICS and POLICY
7. New medical insurance administration launched
We don’t know if we’ve mentioned it, but the government approved a MASSIVE re-org in March.
One outcome is the brand new State Medical Security Administration (SMSA), which, at long last, opened its doors last week.
Some context: The SMSA manages the RMB 1.8 trillion public healthcare insurance fund. That makes it the biggest purchaser of healthcare products and services in the country.
The SMSA’s main goal will be to keep healthcare costs in check. It will have considerable influence over healthcare prices.
The agency should have opened sooner, but the central authorities couldn’t decide who should head it.
The man in charge: Hu Jinlin, former Vice Minister of Finance.
Hu’s appointment was a surprise. He doesn’t have experience in healthcare or with medical insurance.
Get smart: The appointment is telling. It’s a clear sign that the government is viewing healthcare through a fiscal lens.
What it all means: Profit margins in the healthcare industry are in for a squeeze.
What to watch: Will the SMSA be able to put pressure China’s monpolistic – but inefficient – pubic hospitals?
China Daily: New medical security body to boost population’s health
Xinhua: 国家医疗保障局正式挂牌 三种医保统一管带来啥改变
Xinhua: 挤出医疗医药价格水分 国家医保局多场改革重头戏将上演