DRIVING THE DAY
1.US unveils two cases against Huawei at worst possible time
Weeks of will-they-won’t-they ended yesterday as the US Justice Department unsealed criminal charges against both Huawei and CFO Meng Wanzhou:
- The case against Huawei centers around attempts to steal proprietary phone testing technology from T-Mobile. Prosecutors say Huawei institutionalized corporate theft, rewarding employees for obtaining competitors’ trade secrets.
- The case against Meng alleges that she helped Huawei conceal relationships with certain subsidiaries to covertly conduct business with Iran, in violation of US sanctions.
Huawei denies everything (Caixin):
- “The company denies that it or its subsidiary or affiliate have committed any of the asserted violations of U.S. law.”
As does the Ministry of Foreign Affairs (People.com):
- “We strongly urge the US side to stop its unreasonable suppression of Chinese enterprises, including Huawei.”
The timing is particularly touchy given the trade negotiations this week (FT):
- “The US…[had to] formally notify Canadian officials of their intention to proceed with Ms. Meng’s extradition by the end of the month, which raises the question why either side thought January 30-31 was a good time to schedule this critical round of trade negotiations.”
What to watch: It’s unclear whether the Huawei tensions will underminethe recent niceties on trade. For the Chinese, the Huawei issue is an order of magnitude more important than the trade talks.
Caixin: Huawei Denies All Charges in U.S. Indictments
FT: Huawei charges make prospects of a US-China trade deal a lot worse
2.Sun Guofeng explains CBS
There is still lots of confusion as to the details around the central bank’s (PBoC) new swap facility – the Central Bank Bills Swap (CBS).
(For an into to the CBS see the January 25 Tip Sheet).
That’s partly because the PBoC didn’t fully explain how the mechanism will work. But it’s also because the market is desperate to see this as an easing move.
In stepsSun Guofeng – director of the PBoC’s Monetary Policy Department.
On Monday, Sun looked to clarify a few things about the CBS. When swaps occur:
- Ownership of perpetual bonds will not be transferred to the PBoC
- Credit risk of the perpetual bond will not be transferred to the PBoC
- Banks that enter into these swaps won’t be obtaining base money – so this isn’t quantitative easing
Still, many analysts are arguing that this will expand the PBoC’s balance sheet and is therefore stimulative.
- An appreciable balance sheet expansion would involve MUCH more perpetual bond issuance than is currently on the cards
- Banks will likely borrow via CBS instead of borrowing via other facilities – so most of this balance sheet expansion would have happened anyway.
The bottom line: This ain’t QE, and it ain’t stimulus either.
Wall Street CN: 重磅独家｜央行司长孙国峰释疑：银行不能通过CBS工具出表 该工具与QE完全不同
3.Ramping up write-offs
One big reason that banks are starting to issue perpetual bonds (see previous entry) is increased loan write-offs.
We highlighted this trend a few days ago (see January 25 Tip Sheet).Now local media have some additional color:
- Local branches of the banking regulator (CBIRC) are increasingly requiring local banks to classify any loan that is 90 days overdue as non-performing.
- There haven’t been any official regulations requiring this change;it’s an unofficial policy change that is getting widespread take up.
Some context: Regulators have been requiring stricter loan classificationsat larger banks since last summer. Now they are looking to roll it out to the entire banking system.
This is putting pressure on banks’ capital positions – requiring them to raise new capital through various means, such as issuance of perpetual bonds. And the PBoC is offering liquidity to help the process proceed.
Sure – its’ not the most straightforward way to recapitalize the banks. But it’s better than continuing to sweep the NPL problem under the rug.
One more time: Using the CBS (see previous entry) to partially offset some pain that regulators have themselves induced can hardly be called stimulus.
21st Century Biz: 90天以上逾期计入不良，16家上市银行不良偏离度高于100%，银行业绩要挤水分了？
4.The latest market opening moves
In case you still don’t believe that Chinese regulators are increasingly undertaking genuine market opening moves – we offer the two latest examples.
First up, telecoms (Caixin):
- “China has for the first time granted permission to an international telecom company to provide direct services to business customers in the country.”
- “Britain’s BT Group PLC has has become the first international company to gain nationwide internet service provider licenses from the Ministry of Industry and Information Technology, and a license to provide virtual private network (VPN) services in the country.”
Next up, credit rating (WSJ):
- “The People’s Bank of China said Monday that [SP Global Inc] is permitted to set up a wholly owned subsidiary based in Beijing with a remit to conduct credit-rating services for debt offerings in the nation’s $11 trillion interbank market.”
- “SP becomes the first of the big global rating agencies to win approval for a wholly owned business in China, a move Beijing had pledged to make in discussions with the Trump administration in May 2017.”
Yes – progress is still slower than most foreign companies and governments would like.
And no – China is not opening for opening’s sake.
It’s just that the increased global pressure is starting to work – and regulators are responding pragmatically.
5.Xi praises gradual, testing approach
In an annual tradition, on Monday Xi Jinping met with and extended Spring Festival greetings to leaders from non-Communist parties, the All-China Federation of Industry and Commerce, and personages without party affiliation.
Xi reiterated that the country is facing a difficult situation (Gov.cn):
- “At present the domestic and external environments are in the midst of profound and complex changes.”
- “New circumstances and new problems are popping up everywhere.”
But for once, he didn’t sound like he had all the answers:
- “Our country’s 40 years of Reform and Opening have been comprehensive and step-by-step.”
- “[We have] crossed the river by feeling for the stones, and persisted in first implementing pilots, then, once we have gained experience, pushing forward.”
- “This is precisely the historical experience of making progress amidst stability.”
Why that matters: Xi has often said that the country has entered “deep water,” implying that the process of experimental reforms embodied in crossing the river by feeling the stones is no longer relevant.
Get smart: We have seen many signs over the past six months that, in some areas, Xi’s top-down approach is becoming more flexible.
6.Xi cozies up to North Korea
Chinese media reported on Monday that Xi Jinping met with senior North Korean diplomat Ri Su Yong on Sunday.
The two also attended a concert by a North Korean performers visiting Beijing.
Some context (NK News):
- “The visit is the most high-profile by a troupe of North Korean musicians to China in just over three years, following an abortive tour by Pyongyang’s Moranbong Band in December 2015.”
- “It comes on the invitation of the International Liaison Department of the Central Committee of the Communist Party of China.”
The meeting, and the performance were a clear sign of warming ties:
- “[Xi] told Ri that the concerts in Beijing this week would serve as a ‘great success to cement friendship between the two peoples.’”
Get smart: Both China and the DPRK are keen to show the Americans that they have strong relations.
NK News: Ri Su Yong, Xi Jinping commit to strengthening Sino-DPRK ties in Beijing meeting
7.SAMR slaps down local governments
The State Administration for Market Regulation (SAMR) is trying to ensure fair market competition.
Some context: All government agencies have been required to review existing policies and amend or cancel those that favor particular companies. All new policies must also go through an explicit anti-competition review before being published.
Here’s how the initiative went in 2018 (SAMR):
- Of 310,00 new documents passed in 2018, over 1,700 were amended after going through the anti-competition review.
- Of 820,000documents already on the books, over 20,000 were amended after the review.
Here are some of the anti-competitive behaviors they have addressed:
- Mandating specific service or goods providers
- Granting preferential policies to specific companies
- Setting discriminatory market entry and exit barriers
- Setting discriminatory prices on goods coming from different provinces
- Meddling with market prices
- Restricting businesses from other provinces from bidding for public projects
Next step: SAMR will formulate rules to hold officials accountable for disregarding the anti-competitive reviews.
But this is worrying: SAMR will also soon formulate special rules for “exceptional” situations. If the exceptions are vague or broad-based, it could seriously undermine the (praiseworthy) fair competition initiative.
8.CPPCC talks IPR
The head of China’s political advisory body (CPPCC), Wang Yang, chaired a biweekly policy symposium for political advisors on Monday.
The topic was IPR protection (Xinhua):
- “A total of 18 political advisors and experts, including Zhou Qunfei, founder of touchscreen maker Lens Technology and Pony Ma, founder and CEO of Tencent, raised suggestions on IPR protection, legal guarantees and corporate responsibilities while another 180 left suggestions on a mobile application platform.”
- “The political advisors spoke of the need to strengthen IPR protection as a discipline in the university, set up a talent pool and build a professional and international IPR protection team.”
- “They also proposed to put more efforts in the publicity and education work of IPR protection and improve people’s IPR protection awareness.”
Get smart: The CPPCC’s topics for discussion are not chosen at random. It’s clear that the country is trying to strengthen its IPR regime.
Get smarter: For foreign countries and governments, it’s too little too late. There is little that Chinese authorities can do combat the narrative of rampant IPR theft.
People.cn: 全国政协召开双周协商座谈会 围绕“网络环境下的知识产权保护”建言资政 汪洋主持
Xinhua: Political advisors call for enhanced protection of intellectual property rights