1.CSRClearns from2015 mistakes
The securities regulator (CSRC) is getting increasingly nervous about illegal margin lending.
So, over the past few days, officials have been bringing in brokers for a sit down (Reuters):
- “The CSRC said on Wednesday that its subsidiary in eastern Zhejiang province last week held a meeting with local brokerages, flagging potential risks associated with illegal margin financing and banning them from doing any form of business that could facilitate such a business.”
Officials desperately want to avoid repeating the huge boom-bust cycle of 2015:
- “In [another] recent meeting with brokerages, CSRC officials urged the industry to learn the hard lesson from the 2015 stock market crash, which was preceded by a bubble inflated partly by high levels of leveraged trading.”
Our take: After a roaring start to the year, onshore markets have pulled back over the past few days. But we view this as a breather in the rally – not the end of it.
Get smart: Regulators will do anything they can to make sure this rally is sustainable and not given too much jet fuel from margin trading.
Get smarter: Failure to address margin lending early was a key mistake in 2015. It’s underappreciated how much that year’s financial volatility has shaped the psyche of financial policymakers since.
Reuters: China tightens scrutiny over gray-market margin financing
2.More support for the private sector
The banking regulator (CBIRC) continues its slow-but-steady march to boost lending to the private sector (FT):
- “The China Banking and Insurance Regulatory Commission on Wednesday urged lenders to increase loans to small and microenterprises by 30 per cent by the end of the year from their level at the start of 2019 and to offer such loans at ‘reasonable’ interest rates.”
Some context: These guidelines add further detail to a policy first outlined in late February.
The rub: Banks don’t want to lend to private businesses.
So regulators are trying to change the incentive structure for such loans:
- “The regulator specified that banks are permitted to tolerate a non-performing loan ratio for their portfolio of small-business loans that is three percentage points higher than the maximum rate for their overall loan book.”
The irony: By allowing a higher NPL ratio for privateborrowers, regulators are acknowledging that such loans increase risk.
What to watch: After two years of being told to de-risk their balance sheets, will banks heed these new directives? So far, the answer seems largely to be no.
3.Data dump – Jan-Feb econ data
The stats bureau released January and February economic data on Thursday.
Shocker: Things looked weak in the first two months of the year.
- Industrial production grew by 5.3% y/y – down from 5.7% in December.
- Retail sales grew by 8.2% y/y – the same as December, but down from the 8.3% average in Q4.
- Total fixed asset investment grew at 6.1% y/y – up a bit from the 5.9% in December, but still below the 7.2% average in Q4.
Get smart: The continued slowdown in industrial output and consumer spending were in line with expectations.
And the marginal uptick in investment spending wasn’t all it was cracked up to be:
- Manufacturing investment slowed to 5.9% y/y growth – well down from 9.5% in December.
- Infrastructure spending eased to 4.3% y/y growth – down from 4.7% in December.
- But property investment jumped to 11.6% y/y growth – from 8.2% in December.
Our take: The fact that it took such a big jump in property spending to marginally increase overall investment is a concern. The easing for infrastructure and manufacturing strike us as being on trend, while the bump in property looks like a one-off.
The bottom line: Growth has weakened throughout Q1. That will continue in Q2.
4.LGFVs catch a break
China’s stock exchanges are giving local government investment vehicles (LGFVs) a break.
On Wednesday, the exchanges temporarily relaxed rules that had previously kept LGFVs from new borrowing.
Some context: Local governments use LGFVs to borrow off balance sheet. They have been a key source of revenue over the years.
More context: Over the past year, the central government has tried to harden budget constraints on local governments. A key part of the push has been to restrain LGFV borrowing.
So what’s new?
The exchange will temporarily allow companies that receive 50% or more of their revenue from the government (aka LGFVs) to apply to issue bonds on the exchange – IF those companies have maturing debt in the next six months.
But LGFVs can’t issue bonds just to raise new capital.
The reason for the relaxation (21st Century Biz):
- “2019 is the peak year for local governments debt on maturity, and the pressure for repayment is enormous.”
Get smart: Everyone is going to read this as backsliding on reining in local government debt. But it’s just regulators simply addressing a temporary liquidity issue.
So don’t get too excited – it’s still not stimulus time.
21st Century Biz: 地方融资平台发债、信贷松绑？ “借新还旧”开口子但严控新增
5.China says competition with EU is healthy
A new position paper by the EU Commission calls China a rival (European Commission):
- “China is…an economic competitor in the pursuit of technological leadership, and a systemic rival promoting alternative models of governance.
Some context: This is just the latest in a number of signs that attitudes toward China are hardening in the EU. The Commission recently tightened oversight of foreign (read: Chinese) investment. And earlier this week, the EU Parliament tabled a resolution on cybersecurity also aimed at China.
The Chinese government is downplaying any tensions.Here’s Ministry of Foreign Affairs spokesperson Lu Kang at a press conference yesterday (MoFA):
- “We stand ready to enhance mutual understanding and practical cooperation with Europe.”
- “As for the issues specified in the ten actions of the report, I want to say that China and the EU maintain constructive dialogues in all these areas.”
Lu was also at pains to say that competition is not necessarily bad:
- “Healthy competition, instead of vicious competition, should be encouraged.”
Our take: We mostly agree with Lu here. Western countries should use the rise of China to reinvigorate their own political, economic, and social systems.
EU Commission: EU-China – A strategic outlook
MoFA: Foreign Ministry Spokesperson Lu Kang’s Regular Press Conference on March 13, 2019
6.CAAC wins people’s hearts with Boeing ban
Five days after the tragic Boeing 737 MAX crash in Ethiopia, the US has finally joined other major countries in grounding the model
That’s not gone unnoticed in China – where the domestic aviation regulator (CAAC) was out front in responding to the incident.
Some folks think Chinese authorities may have been a bit too hasty (WaPo):
- “Experts widely caution that … China’s move to immediately ground its entire fleet while the Ethiopian investigation was barely underway diverged from industry and regulatory norms.”
ButCAAC Deputy Director, Li Jian says China had to step up because the US was behind the curve:
- “They [FAA] have had difficulty making a decision, so we took the lead.”
Get smart: From what we are seeing, the CAAC’s decision was widely welcome among the Chinese public.
Get smarter: CAAC also won points within the governmental system, as it was seen as highlighting a Chinese “institutional advantage” – showcasing that the government has the capacity to be decisive in important cases involving the public interest.
The big picture: The Chinese government will take every chance to challenge US leadership in the global arena – in ways large and small – when the opportunity arises.
WAPO: China’s ban on the Boeing 737 Max inspires others, ramps up pressure on U.S. regulator
21st Century Biz: 民航局副局长李健：737-8飞机问题料难解决
7.‘High-standard’ FTZ targets too high for Hainan?
Local officials are struggling to set up a new Free Trade Zone in Hainan by 2020.
That’s according to the Hainan Vice GovernorMao Chaofeng, who shared his woes in an extensive interview with the SCMP.
Some context: The concept of creating “high standard” FTZs has been a buzzword in recent years, as China renews its push to leverage the zones to make the economy more innovative.
Maohighlighted Hainan’s deficiencies:
- “To be honest, Hainan is still lagging behind in development.”
- “Our GDP, GDP per capita, [and] our hardware, still have some way to go.”
- “Our airport, railway, seaport … these are where we are still seeing shortcomings,”
And to top it all off, there is a lack of talent:
- “Hainan currently lacks the supply of tech personnel, protection of innovation, and policies to support innovation.”
Get smart: Officials are trying to catapult a relatively underdeveloped region into an advanced economy by 2020. It’s ambitious, but it’s a heavy lift.
Get smarter: For foreign companies this may represent an opportunity. Filling the space between China’s ambitions and its capacity is a market opportunity.