DRIVING THE DAY
1. National market regulator sacked for vaccine scandal
We told you that heads would roll for the vaccine scandal that has consumed the country for much of the past month (see July 24 Tip Sheet)
On Thursday, heads rolled.
The Politburo Standing Committee (PBSC) announced the firing of four senior officials:
- Bi Jingquan, Party Secretary and Deputy Director of the State Administration of Market Regulation
- Jin Yuhui, Vice Governor of Jilin overseeing food and drug regulation
- Li Jinxiu, Deputy Chairman of the Jilin People’s Political Consultative Conference and former Vice Governor of Jilin overseeing food and drug regulation
- Liu Changlong, Mayor of Changchun
That’s not all (SCMP):
- “Beijing also asked Jiang Zhiying, a top party official from Jilin, and Jiao Hong, director of China’s national drug regulator, to make a “deep self-inspection”, and imposed penalties on 35 other unidentified officials.”
- “Meanwhile, the National Supervisory Commission, the country’s anticorruption super agency, launched an official investigation into Wu Zhen, former deputy director of the China Food and Drug Administration who was also in charge of drug registration and management.”
Get smart: The vaccine scandal has once again exposed systemic corruption and negligence and undermined the public’s faith in government. The ex post measures taken now will do little to remediate that.
FINANCE and ECONOMICS
2. Central bank steps up currency intervention
China’s currency appreciated for the first time in a week on Thursday.
After depreciating by 1.12% over the four previous trading days, the currency got a reprieve for two reasons:
- China announced the resumption of trade talks with the US, giving markets a glimmer of hope that progress might be made (see yesterday’s Tip Sheet).
- But the more important factor was the central bank’s intervention in offshore currency markets.
One element of that intervention was a notification by the PBoC’s Shanghai branch that it will not allow certain outflows through the Shanghai Free Trade Zone (FTZ). Shanghai temporarily suspended something called the three net outflow formulas, which typically give FTZ accounts more leeway in cross-border transactions. The move helped squeeze offshore yuan liquidity.
Get smart: The PBoC has become uncomfortable with the pace and magnitude of depreciation. Expect it to become increasingly more interventionist in the coming months.
Get smarter: Onshore traders expect the currency to stabilize in the fourth quarter, staying below the 7/1USD level. For that to happen, it requires one of two things:
- The PBoC has to become much more aggressive in its intervention.
- The trade war has to ratchet down.
Wall Street China: 央行暴打空头？人民币做空成本创逾两年半最大涨幅
FINANCE and ECONOMICS
3. Data dump – FDI
The Ministry of Commerce announced July FDI data on Thursday.
- Inbound FDI grew by 5.5% y/y in the first seven months of the year – compared to 4.1% in the first six months of the year.
- On a monthly basis, July saw FDI grow by 19.3% y/y – compared to just 5.8% in June.
Why it matters: Chinese regulators continue to be concerned about their ability to attract foreign capital. They need capital inflows in order to offset increasingly large outbound investment and outbound spending on tourism.
Get smart: The combination of pressure from the US and the need to continue attracting FDI has accelerated market openings this year – we expect more concrete opening measures to come in H2.
China.org: FDI into Chinese mainland grows steadily in Jan.-July period
FINANCE and ECONOMICS
4. Rural lenders are struggling
As we pointed out yesterday, non-performing loan (NPL) ratios are rising across the country – thanks in large part to new requirements that banks do a better job of recognizing bad loans.
Specifically, any loan more than 90 days overdue is now required to be listed as an NPL.
As the central bank’s official newspaper pointed out today, that requirement has hit rural commercial lenders the hardest – sending their collective NPL ratio up to 4.29% as of June, from 3.26% in March.
Some context: Rural commercial banks almost exclusively service SMEs and agricultural enterprises. There are 1,114 of them in the country at last count, and together with rural credit cooperatives, they account for 13.3% of total bank assets.
Each individual lender is tiny – accounting for just a fraction of 1% of system assets on average – that the banking regulator does not consider them to pose a systemic challenge to the banking system.
Get smart: Because of their customer profile, these small banks have poor asset quality – by definition. They have also been hit hard by the financial de-risking campaign, and despite the effort to clean up their balance sheets, many of them will go bust.
Financial News: 切实打赢防控重大风险这场硬仗2018年全国保险监管工作会议在京召开
FINANCE and ECONOMICS
5. Regulators turn to AMCs to clean up the P2P mess
Regulators have been struggling to clean up the mess in the peer-to-peer lending market (see August 10 Tip Sheet).
So to turn things around, the banking watchdog has turned to an unlikely source – asset management companies.
Reuters has the details:
- “In a regulatory meeting with senior executives of the four asset management companies (AMCs) on Wednesday, the China Banking and Insurance Regulator (CBIRC) asked the AMCs to protect social stability by proactively taking part in resolving the P2P issue.”
- “The four AMCs…were created by the government more than a decade ago to deal with massive bad loans in the banking system.”
It’s not clear just what the CBIRC is asking the AMCs to do. But it’s likely that they will purchase many of the P2P loans in bulk and try to recover payments as best as possible – that is exactly what these entities were set up to do.
Get smart: The ongoing challenges in the P2P lending market show that regulators remain behind the curve when it comes to supervising financial innovation. It’s not clear to us that bringing in the AMCs will be a silver bullet.
Reuters: China calls on bad debt managers to resolve P2P lending risks – sources
POLITICS and POLICY
6. State Council encourages private investment
Thursday’s State Council meeting focused on boosting private investment.
Here’s how they plan to do it:
- “Conditions hampering private investment entering fields such as healthcare and caring for the elderly will be reduced or lifted.”
- “The government will make targeted efforts to remove hidden obstacles in land use, funding support and personnel training.”
- “Tax and fee cutting measures for private businesses will be further implemented, while value-added tax reform will be deepened.”
- “A risk compensation mechanism for lending to private businesses will be established to make financing more accessible and affordable for private businesses.”
Get smart: The private sector accounts for the majority of employment in China. Government leaders know that – that’s one big reason why they will increasingly focus on private investment as the economy slows.
Get smarter: The State Council has already been pursuing each of these measures for a year now. So far, private companies are unimpressed.
Gov.cn: China promises new measures to boost private investment for steady growth
POLITICS and POLICY
7. A Taiwanese bakery gets caught in the middle
In recent months, international airlines, hotel chains, and other companies have come under pressure from the Chinese government to label Taiwan as part of China (see January 12 Tip sheet).
Now Taiwanese bakery chain 85C – which has a large presence on the Mainland – is getting the same treatment.
Here’s what happened (SCMP):
- “One of its US outlets presented a gift to Taiwan’s president, Tsai Ing-wen, during her stopover in Los Angeles on Sunday.”
That upset some Mainland customers:
- “Mainland internet users demanded boycotts of the beloved Taiwanese chain.”
But this was the kicker:
- “On Thursday morning, searches…for 85C on multiple [food] delivery platforms in China did not turn up any results.”
What’s a bakery to do in such circumstances? 85C’s solution was to announce that it supports the One China Policy.
Taiwan’s government had some harsh words for the Mainland:
- “Taiwan Presidential Office Spokesman, Alex Huang, said on August 15 that any imposition of ideology on international business is a manifestation of a non-civilized society.”
Get smart: No business wants to have to take a stand on the Taiwan issue. But if forced to choose, most companies – even Taiwanese companies – are going to appease the PRC, rather than risk being shut out of the huge Mainland market.
SCMP: Bakery chain 85C share price falls in China as backlash grows over gift for Taiwanese president
SCMP: Taiwan furious after 85C Bakery Cafe bows to mainland backlash over gift bag for Taiwanese president
Taiwan News: 85C Bakery Café kowtows to Chinese bullying, reaffirms 1992 consensus, after Tsai signs pillow