DRIVING THE DAY
1. CDRs get the green light
Get ready for Chinese Depositary Receipts (CDRs) – they are coming fast.
That’s the message the securities regulator (CSRC) sent on Wednesday when it issued nine separate documents outlining the rules for the issuance and trading of such securities (see links below).
What are CDRs you ask? Basically, they are shares of foreign-listed companies that will trade on Chinese stock exchanges. Custodial banks will buy the shares on the foreign stock market, and then “resell” them in Shanghai.
According to the new regulations, qualified innovation firms can submit applications for CDR approval to the CSRC starting today.
The regulator says it will strictly control both the number of enterprises and the volume of issuance at first.
But we know that Alibaba has already shown interest, as have Tencent and JD.com.
Reports further indicate that Xiaomi is planning to issue USD 3 billion worth of CDRs as part of its expected USD 10 billion IPO (Reuters).
And domestic investors are getting ready. Six large Chinese money managers are rushing to set up equity funds to raise as much as 300 billion yuan to invest in CDRs (see Caixin links below).
Our take: China’s technology homecoming has officially kicked off.
China Securities Journal: 证监会一日齐发九份文件 创新企业IPO或CDR试点呼之欲出
Shanghai Securities Journal: 半夜重磅消息！CDR申报通道正式打开，扫盲+专业，此文全覆盖！
Reuters: China’s Xiaomi plans $3 billion CDRs in blockbuster July IPO: sources
Caixin Global: Money Managers Flex Muscles for Unicorn Funds Targeting CDRs
FINANCE and ECONOMICS
2. PBoC pumps liquidity
The PBoC injected a sizable RMB 463 billion into the banking system on Thursday.
The injection was made via the medium-term lending facility, using 1-year contracts.
What that means: An injection of 1-year money is a fairly long-term injection for the central bank.
This sends five broad messages according to Caixin. The PBoC wants to:
- Stabilize liquidity in H2
- Affirm the status of the MLF as a key instrument for injecting base currency
- Signal a lower probability of RRR cuts over the summer
- Indicate that the widening of MLF collateral does not equate to quantitative easing
- Support small and micro-enterprises through the expanded MLF collateral mechanism
Get smart: As we wrote when the PBoC announced the change to MLF collateral rules, these moves by the central bank do not signal easing (See June 4 Tip Sheet).
Get smarter: The PBoC is trying to change how it provides liquidity so that funds flow to smaller banks, which lend to smaller business.
It’s all about helping the little guy – although we aren’t certain it will work.
Caijing: 央行端出首碗“麻辣粉”：释放5个信号 降准或延迟
FINANCE and ECONOMICS
3. China buys its way into the semiconductor game
China just got one step closer to technological independence.
They did it the old-fashioned way: straight-up buying the technology.
Chinese investors bought a major global semiconductor supplier from a Japanese firm (WSJ):
- “SoftBank Group [sold] a majority stake in the Chinese operations of its U.K. subsidiary Arm Holdings, which designs the chips that power almost all of the world’s smartphones.”
- “At $775 million, it looks like a steal for the buyers — a Chinese-led consortium that includes state-backed Hopu Investment Management. China last year accounted for one-fifth of revenue at Arm, which SoftBank paid $32 billion for in 2016.”
The rationale behind the deal is nakedly obvious for both sides:
- “It’s likely the Chinese investors are paying so little because a large chunk of the China unit’s revenue will still flow back to Arm—and hence to SoftBank—through licensing fees and royalties on its semiconductor products.“
So while Chinese firms will still need to pay licensing fees, at least they will have more control of the chip production itself. In other words – no more ZTE dilemmas.
Our take: It’s not exactly a genuine move toward becoming a technology superpower, but it’s a pretty good stop-gap measure.
WSJ: China Inc. Arms Up in Tech With Latest SoftBank Deal
POLITICS and POLICY
4. China upgrades relations with Kyrgyzstan
He’s back! Xi Dada met with President of Kyrgyzstan Sooronbay Jeenbekov yesterday.
It was Xi’s first public appearance since Thursday.
Not surprisingly, official readouts have painted the meeting as an orgy of good feeling:
- “China and Kyrgyzstan on Wednesday agreed to establish a comprehensive strategic partnership.”
Xi says that’s a big deal:
- “It is another landmark event in the history of bilateral ties.”
More concretely, the two sides agreed to cooperate in the following areas:
- Fiber-optic communication lines
Get smart: Help in those areas goes one way – from China to Kyrgyzstan.
Get smarter: Chinese involvement in Kyrgyzstan is already a huge political issue there. Several prominent Kyrgyz politicians have been accused of taking bribes from Chinese companies (Eurasianet).
The bigger picture: The improper actions of Chinese companies abroad are increasingly having negative effects on China’s image. The most prominent case is the way that ZTE has complicated relations with the US. But there are many other examples.
CPC People: 习近平同吉尔吉斯斯坦总统热恩别科夫会谈
Xinhua: China, Kyrgyzstan agree to establish comprehensive strategic partnership
Eurasianet: Kyrgyzstan: Jeenbekov goes to Beijing with China the talk of Bishkek
POLITICS and POLICY
5. Social credit system in focus
Wednesday’s State Council meeting focused on improving China’s social credit system.
Some context, from the excellent Rogier Creemers (New America):
- “The Social Credit System (SCS) is an ecosystem of initiatives at the central and local level, operated by state and private actors, that largely share a fundamental logic. That logic is simple: to incentivize individuals and businesses to improve their behavior by creating consequences for their behavior.”
Premier Li Keqiang stressed that it is all about creating a better business environment (Gov.cn):
- “The priority now is to improve our business environment with stronger measures against cheating in the marketplace, such as counterfeiting, and infringements of intellectual property rights.”
Some next steps:
- “A blacklist mechanism will be introduced.”
- “Law violations including infringement, counterfeiting and cheating in the marketplace and fraudulent advertising will be resolutely tackled and made public.”
Get smart: China’s social credit system is a work in progress, and will not be fully operational for some time.
Get smarter: The SCS has the potential to provide all sorts of conveniences to people’s lives. But it also creates the potential for full-on digital totalitarianism.
New America: China’s ‘Social Credit System’ Isn’t What It Sometimes Seems—So Far
Gov.cn: China speeds up efforts to build social credit system
POLITICS and POLICY
6. Audit offices play key role in government debt control
We’re guessing that not many readers are familiar with the National Audit Office (NAO), the government’s auditor.
Well, we think you should get to know it. That’s because it will play a critical role in imposing fiscal constraints on government.
Some context: Xi upgraded the audit system by creating a new Party Central Audit Committee as part of the MASSIVE Party-State reorganization. (See the May 24 Tip Sheet)
Yesterday, the NAO tasked its local branches with measuring the size and structure of local governments’ off-balance sheet debt.
They were also told to:
- Expose local government’s illegal borrowing since the July 2017 National Financial Work Conference
- Analyze the risk arising from the debts of each locality
Get smart: The central government is serious about getting a handle on the local government debt problem. They are being increasingly targeted in their approach.
The big picture: The NAO’s mandate is much broader than dealing with debt. They will increasingly measure the implementation of all sorts of policies.
POLITICS and POLICY
7. The soar industry pushes back
Ever wonder how industry players shape policy in China?
There’s an interesting – and surprisingly public – instance playing out at the moment.
The heads of 11 big Chinese solar companies sent a letter to Xinhua protesting against the government’s recent decision to withdraw subsidies (see the June 5 Tip Sheet).
Why complain to Xinhua?
- Because Xinhua provides intelligence directly to top leaders.
The industry’s arguments:
- There was no opportunity to comment on the policy before it was released. That’s illegal.
- The new policy runs counter to policies released last year. The flip-flop undermines the government’s credibility.
- It’s unfair to spring a policy like this with no warning. Companies should at least be given a grace period to adjust.
- If the government continues the subsidies, China will be a global leader in just a few more years, so don’t destroy the progress we’ve already made.
Get smart: Subsidies are like a drug, and the solar industry is addicted.
Get smarter: The industry does have a point. Abrupt shifts like this are disruptive. We bet officials are taking note.