Driving the Day
1.Trade talks make little progress
The latest round of trade talks with the US are finishing up as we go to press.
There hasn’t been much progress (Bloomberg):
- “As of Friday afternoon, there had been no visible progress on efforts to narrow the gap around structural reforms to China’s economy that the U.S. has requested, according to three U.S. and Chinese officials who asked not to be identified because the talks were private.
China did offer to (finally!) produce a list of all government subsidies, as required by the WTO.
But an anonymous American official is unimpressed (FT):
- “China’s system is so opaque that you would have to take their word that the WTO notification is complete.”
There are other US frustrations:
- “US officials are…frustrated that Mr Liu’s team has offered few market access concessions.”
And the Chinese side isn’t exactly happy either:
- “Chinese officials are angry about what they see as US efforts to undermine their state-led economy.”
What to watch: The two sides are aiming to sign an MOU. There is an expectation that the March 1 deadline to finalize a deal will be extended.
The big question: China will buy more American goods, but looks unlikely to give much on the larger structural issues. Will that be enough for Donald Trump?
Bloomberg: U.S., China Set to Finish Trade Talks Mnuchin Calls ‘Productive’
FT: Little Progress in US-China trade talks
Driving the Day
2.Data dump – credit
Credit data for January was released on Friday afternoon.
Total credit growth acceleratedfor the first time in in 18 months.
- Aggregate credit expanded by 10.4% y/y – up from 9.8% growth in December.
- RMB loans grew by 13.6% y/y – up from 13.2% growth in December.
- Short-term banker’s acceptance (BA) helped out, contracting by *just* 8.7% y/y in the month – compared to a 14.3% contraction in December.
Bond issuance was especially active:
- Corporate bonds grew by 10.7% y/y – compared to 9.2% in December.
- Local government special bond issuance grew by 35% y/y – compared to 33% in December.
Get smart: Although we saw the first credit expansion in 18 months, this month’s jump does not look like a fundamental bottoming out in credit growth.
That’s because the uptick was largely thanks to seasonal factors, as lenders pushed financing out the door in January due to an early Chinese New Year holiday.
What to watch: We expect broad credit growth to decelerate again in February, and only start to fundamentally accelerate in Q2. That means we shouldn’t see an improvement in economic growth until late Q3, at the earliest.
3.Guangdong has a labor shortage
China’s southern export powerhouse, Guangdong province, is staring at a labor shortage problem.
Specifically, Guangzhou, Shenzhen, Foshan, Dongguan and other nearby cities in the Pearl River Delta are reportedly experiencing acute “recruitment difficulties.”
- The Dongguan government reports that over 800 companies are currently looking to fill 100,000 vacancies since workers failed to return after the Chinese New Year holiday.
- In Foshan, 78% of migrant workers returned home for the holidays (up from 76% in 2018), and estimates are that only 90% of those workers will return.
- In Guangzhou, recruiters at job fairs are sitting idle, as few applicants show up
Why it matters: China’s export machine still operates largely on the back of migrant labor. The last thing the export industry needs is a labor shortage in the middle of a trade war.
Get smart: Lower supply of labor will push up wages. That’s great for workers, but it will squeeze Chinese exports from the bottom, when they are already set to get squeezed from the top thanks to US tariffs.
21st Century Biz: 珠三角“招工争夺战”升级
4.Pressure mounting on Minsheng
China Minsheng Investment Group’s (CMIG) recently missed a bond payment (see February 12 Tip Sheet).
But that’s just the tip of the iceberg of the group’s problems.
The company is in a severe liquidity crunch and is now shedding assets to pay lenders.
- “CMIG, whose activities include solar power, aviation, real estate and finance, has an estimated 233 billion yuan of total debt and some creditors recently won a court order to freeze some of its assets — stakes in two companies valued at a combined 13.2 billion yuan.”
One of the marquee asset sales includes:
- “its share of two high-quality land parcels in Shanghai known as the Dongjiadu project, believed to be one of its most valuable assets.”
The company made its first public statement in over two weeks on Thursday, in a bid to calm creditors.
- “[CMIG president Lü Benxian] attributed the company’s problems to overly rapid expansion, during which the company’s assets surged to more than 300 billion yuan from 30 billion yuan in less than five years.”
Somehow we doubt that makes anybody feel better…
Get smart: This is a spectacular blow up for CMIG. But the company does not appear to be considered systemically important by regulators. If it was they would be taking a much more hands on approach – à la HNA.
Go deeper:Click on the excellent piece below.
Caixin: In-Depth: Investment Group CMIG Starts Asset Sales Amid Liquidity Crunch
5.Data dump – inflation
Monthly price numbers for January dropped Friday morning.
- Consumer prices grew by 1.7% y/y – down from 1.9% in December.
- Producer prices grew by just 0.1% y/y – down from 0.9% in December.
Both prints were generally in line with expectations.
Quick take 1: Consumer inflation continues to be a non-issue. That’s one less headache for the central bank. But it doesn’t mean the bank can loosen policy significantly – it is bound by other constraints (debt, anyone?).
Quick take 2: Policymakers will not be happy that upstream prices are flirting with deflation. The ongoing weakness in PPI primarily reflects how weak the industrial economy is. But there is also a negative base effect pushing down y/y price growth – and the recent slump in oil prices won’t have helped either.
The good news: The base effect should fade away in the coming months – so we are unlikely to devolve into a deep deflationary cycle, like what China saw from 2012 to 2016.
China’s inflation slows in January
6.New measures to boost private sector financing
On Thursday, the general offices of the Central Committee and State Council released new guidelines to improve financing for private companies.
Some context: Supporting the private sector has become a top priority in recent months, as policymakers seek to shore up the economy.
Reuters runs down some of the measures in the guidelines:
- “Efforts will be made to improve monetary policy transmission mechanisms to make banks more willing to lend to private firms.”
- “The government will also encourage financial institutions to boost investment in debt issued by private firms and improve the effectiveness of the central bank’s targeted reserve requirement ratio (RRR) cuts for banks to help private companies.”
- “Regulators will speed up approvals for private firms’ initial public offerings and refinancing activities, and allow such firms to issue convertible bonds.”
But don’t get too excited. The new measures do not have any concrete targets or timelines.
Get smart: The government really does want to help private firms. But they are going about it all wrong. Instead of trying to force funding to them by administrative measures, they should put their energies into creating a more market-oriented financial system.
Gov.cn: 中共中央办公厅 国务院办公厅印发《关于加强金融服务民营企业的若干意见》
Reuters: China to cut private firms’ financing costs, improve access to funds – Xinhua
7.Government guarantee companies in vogue
On Thursday, the State Council General Office also released a document to promote “government-managed, financing guarantee institutions.”
Some context: The government is way into loan guarantees. In August, the government set up an RMB 66 billion fund to provide guarantees for loans given by local financial institutions to small businesses (see August 7 Tip Sheet).
The goal (Gov.cn):
- “Channeling more financial resources to small and micro companies, as well as rural households and new agricultural operators”
How it will work:
- “Companies and entities applying for guarantees of no more than 5 million yuan will be prioritized.”
- “Government-managed guarantee and re-guarantee institutions will be run at lower profit margins to help reduce financing costs for their clients.”
- “Guarantee amounts allocated to them should account for over 80 percent of the whole guarantee business, and guarantee projects of no more than 5 million yuan should account for over half.”
Get smart: This will help to get a few more loans to small businesses. But it’s hardly a game changer.
Gov.cn: Govt to support small, micro companies financially
8.Government invites outsiders to review policies
The State Administration for Market Regulation (SAMR) has taken another step forward in its push for fair competition (see January 29 Tip Sheet).
On Wednesday, it issued a guideline on how third parties can take part in the fair competition review process.
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.
The government particularly wants third-party reviews for new regulations that:
- apply to exceptional rules
- deal with issues of public concern
- impact substantially the public interest
- are controversial
Third parties should be independent from the government – such as universities, research institutes, consultancies, and law firms.
But this could be an issue: The government gets to choose which third party agency will assess them.
Get smart: It’s encouraging that the government is opening the door tooutside scrutiny. But given how much control the government has over the assessment process, there are A LOT of reasons to be skeptical.