1. Wobbles for China’s small banks continue
Financial officials are still dealing with the fallout from the Baoshang Bank takeover (see May 30 Tip Sheet).
Worries are growing that other small banks are in trouble (which they are).
That’s why authorities have been trying to calm nerves.
On Sunday, the banking regulator published a QA, saying:
- The Baoshang takeover is being done by the book.
- Hengfeng Bank, which has also been rumored to be in trouble, is being sorted by Shandong authorities.
- Small banks are having no problem getting liquidity – any suggestion that they are is a just a nasty rumor.
Also, on Monday, local press reported that the Financial Stability and Development Committee met “recently” to discuss small bank funding issues – and decided everything was fine.
Then, the central bank (PBoC) issued a Credit Risk Mitigation Warrant (CRMW) for the first time ever – to help the Bank of Jinzhou raise liquidity.
Some context: CRMWs are the Chinese version of Credit Default Swaps – or insurance against a loan default.
Get smart: It’s not good news if a bank needs that kind of insurance in order to borrow.
Get smarter: Authorities are trying to project confidence and calm, but interbank lenders don’t believe that all is well.
2.Yi Gang’s weekend press blitz
We’ve got things covered!
Thatwas central bank governor Yi Gang’s message this weekend, as he made his own effort to instill market confidence in the government’s handling of the economy and financial system.
In an exclusive with Bloomberg, Yi reiterated that the central bank has plenty of tools to wield, should the trade conflict with the US worsen:
- “We have plenty of room in interest rates,…[and] in required reserve ratio[s].”
- “Also for the fiscal, monetary policy toolkit, I think the room for adjustment is tremendous.”
Get smart: Yi’s message was widely interpreted as hinting at further monetary easing. We disagree. The chances of more monetary support are certainly increasing – but we aren’t there yet.
Yi also said that recent weakness in the CNY is only temporary – and potentially good:
- “A little bit of flexibility of renminbi is good for the Chinese economy…because it provides an automatic stabilizer.”
Get smart: That last statement was widely interpreted to mean that the PBoC could let this “temporary” deprecation go further – not defending the currency at 7/USD. We agree.
The bottom line: Authorities are bracing to deal with more economic weakness, even as they try to project strength.
Bloomberg: China Has Lots of Policy Room If Trade War Worsens, PBOC Chief Says
3. Data dump – trade
The customs bureau released monthly trade stats for May on Monday morning.
- Exports grew by 1.1% y/y – up from a 2.7% contraction in April, and well above expectations of a 3.8% decline (following the latest US-China tariff escalation).
- Imports contracted by 8.5% y/y – down from 4% growth in April.
Quick take 1: The May export data doesn’t really reflect the effects of the latest US tariff hikes.
- The 25% US tariff on USD 200 billion worth of Chinese goods was announced on May 10, but it only applied to goods leaving China on or after that date.
- So the first tariff-ed goodsdidn’t arrive in the US for another couple of weeks.
- That means the effectsdidn’t kick in until very late in the month.
Quick take 2: The decline in imports points to still sluggish domestic demand.
- That’s not a good sign.
- And if the domestic economy keeps deteriorating as the trade war escalates, authorities may have no choice but to up their stimulus game.
- But they will hold on as long as they can – big stimulus is still the last thing Beijing wants to do.
4. Rules on local government borrowingrelaxed
As you may have heard – China’s economy is slowing.
That’s why, on Monday, the General Officesof the State Council and Party Central Committee published new rules on local government bonds.
What the rules do: They will allow governments to fund certain infrastructure projects entirely withborrowed money.
Some context: Previously, local governments couldn’tborrowall of theneeded funds for infrastructureprojects– at least some amounthad to come directly from government coffers.
Get smart: The governmentstill isn’tenacting “flood-like” stimulus – instead it’s a steady drip of supportive measures.
Get smarter: That being said, this move undermines recentefforts to rein in local government debt.
Gov.cn: 中共中央办公厅 国务院办公厅印发《关于做好地方政府专项债券发行及项目配套融资工作的通知》
Gov.cn: China steps up local govt bond issuance to support key areas, major projects
Reuters: China to boost funding support for projects as economy slows
5.Hong Kong goes to the barricades
On Sunday, hundreds of thousands of Hongkongers took to the streets to register their displeasure with the Hong Kong government.
The reason: A proposedbill that would allow for the extradition of Hong Kong defendants to mainland China to face trial.
The bill’s supporters pointout that:
- Extradition requests would still need to be approved by Hong Kong courts
- “Political offenses” would not be eligible for extradition
But the protestersweren’t having it.
Most Hongkongers have little to no confidence in China’s legal system, andthere is a fear that the bill will undermine Hong Kong’s independent judiciary.
Hong Kong Chief Executive Carrie Lam is unmoved. She has reiterated her support for the bill.
Surprise, surprise: The Chinese government, via the Ministry of Foreign Affairs, backed Lam and blamed the unrest on “foreign interference.”
Get Smart: The bill is all but certain to pass.
Get Smarter: Despite the massive outcry, the protesters have little influence. While Hong Kong was once “the gateway to China,” that title has since been claimed by…well…China.
6.Huawei’s homegrown OS
Given its recent problems with the US government, you may have heard that Huawei has been developing a proprietary OS.
What you might not have heard is that this project has been under development since 2012.
The SCMP has some great reporting on how this unfolded:
- “Seven years ago, in a villa facing a lake in Shenzhen, a small group of top Huawei Technologies executives headed by founder Ren Zhengfei held a closed-door meeting that lasted for several days.”
- “Their mission was to brainstorm ideas on how Huawei should respond to the rising success of Google’s Android smartphone operating system.”
- “The group agreed that Huawei should build a proprietary OS as a potential alternative to Android.”
Following the meeting, Huawei set up a secret task force:
- “A specialist OS team…was established and began to work on an OS under conditions of tight secrecy.”
- “A specialised zone was created inside Huawei to house the OS team, with guards on the door.”
Get smart: Huawei’s recent American blacklisting has clearly displayed thecompany’s vulnerability independingon US hardware and software.
Get smarter: Huawei may have been first, but now every Chinese company ofany size is looking for ways to reduce reliance on American technology. The great tech decoupling is already underway.