Driving the Day
1.The social credit system is coming
The State Council held its weekly executive meeting on Wednesday.
Top of the agenda: Building a social credit system for companies.
Here’s what’s going to happen (Gov.cn):
- “The country will establish, in accordance with the law, authoritative, unified and accessible credit records of all market players based on their unified social credit codes.”
Companies with bad scores will be penalized:
- “A credit ‘blacklist’ system will be further developed.”
- “Strict penalties, including denying market access, will be meted out.”
To make this thing work, government agencies will need to work together:
- “Government departments are required to share the information as permitted by law to break the information monopoly and information storing.”
Our thought:Good luck with that! China’s bureaucracy is heavily siloed and particularly bad at information sharing.
For Premier Li Keqiang, this is part and parcel of his pro-business, small-government agenda:
- “Credit-based regulation is crucial for the sound workings of market institutions.”
Get smart: Most in the West see the social credit system as a march towards Orwellian totalitarianism. But the Chinese government actually sees it as a way to reduce government intervention in markets.
Get smarter: The system is going to have a huge impact on China’s business environment. Every foreign company needs to start understanding it now.
2. Top financial officials focus on de-risking and opening
On Thursday, the annual Lujiazui financial forum kicked off in Shanghai.
Some context: The forum is always interesting for taking the policy temperature, as high-ranking financial officials often attend.
Vice Premier Liu Hekickedthings off witha key-note speech today.
Liu laid out a clear agenda for financial officials:
- Get back to basics – and cut out the recent speculative financial funny business
- Continue to focus on de-risking the financial system
- Improve financial policy coordination
- Improve the financial infrastructure
- Accelerate the opening of the financial sector
What to watch: Liu ended his remarks by saying that specific regulators will be rolling out concrete financial opening measures in the coming days.
Liu’s comments were followed by speeches from other high-level officials:
- CSRC Chairman Yi Huiman – who focused on opening Chinese equity and broader capital markets
- PBoC Governor Yi Gang – who focused primarily on the need to makeShanghai a legitimate international financial sector
- PBoC Vice Governor Pan Gongsheng – who focused on steady, ongoing opening of the capital account
Get smart: Despite the slowing economy and US-China trade tensions – or perhaps even because of them – financial authorities continue to befocused on financial de-risking and openingthe sector.
3. Guo Shuqing explains how to fix the financial sector
In addition to the speeches above, chairman of the banking and insurance regulator, Guo Shuqing, also gave remarks at Lujiazui.
In a broad, frank, and sophisticated speech, Guo laid out eight key requirements to improve China’s financial system:
- Establish a customer-centered philosophy in the financial sector
- Focus on developing more specialized financial institutions – which will help to support SMEs
- Relieve the economy’s over-reliance on bank finance – especially since bank financing is not good at venture capital, which SMEs often need
- Establish and improve corporate “governance structures with Chinese characteristics” – here Guo gave a nod to the recent Baoshang Bank takeover, saying the problem is that “some major shareholders regard financial institutions as ATMs.”
- Severely and promptly punish individuals that violate laws and regulations
- Change the distribution structure of financial assets– the idea is move from bread-and-butter bank deposits to more sophisticated financial products managed by institutional investors
- Resolutely prevent the resurgence of complex financial products – Guo highlighted the success of the recent financial de-risking campaign, emphasizing the need not to backtrack.
- Face up to the problem of real estate financialization in some places
Get smart: Whew – that’s a heckof a list. If authorities can do all that, the financial system would indeed be much improved.
21st Cen Biz:郭树清陆家嘴演讲八大要点：坚决防止结构复杂产品死灰复燃
4. More on the credit data from yesterday
Yesterday, we promised readers a bit more analysis on the credit data released by the central bank late on Thursday.
As we said then, the slight uptick in overall credit growth was largely driven by slightly-less-bad contraction in shadow banking.
- Entrusted loans contracted by 10.4% y/y in May – improved from a 10.9% contraction in April.
- Trust loans contracted by 6.7% y/y in May – improved from a 7.7% contraction in April.
- Bankers’ acceptances contracted by 14% y/y in May – improved from a 15.6% contraction in April.
Get smart: Regulators might be easing up a touch on their shadow banking crackdown, but only just a touch.
As the speeches from key regulators that we highlighted in the previous two entries underscore– regulators are still highly focused on consolidating the gains from the de-risking campaign over the past two years.
Regular readers might be tired of hearing us say that – but it’s amazing how the message does not seem to be getting through to many market watchers.
The bottom line: Credit growth has stabilized, and might improve marginally in the coming months. But at least for now, we are still very far from a 2016-style credit reflation.
5.Hong Kong protesters delay debate on extradition bill
Things got nasty in Hong Kong yesterday:
- “Wednesday’s protest turned violent in the afternoon when riot police fired rubber bullets, tear gas and pepper spray at protesters, who hurled a variety of objects at officers.”
- “As of Thursday morning, 79 people had reportedly been injured during the clashes.”
Some context: Hundreds of thousands of Hongkongers have been protesting against a proposed extradition bill that would allow extradition to the PRC for certain crimes.
The protesters achieved their immediate aim. The city’s legislative council delayed a second reading of the bill.
Surprise, surprise, the protests are not getting much attention in mainland media.
What little Beijing has said thus far has been fairly restrained (China Daily):
- “Spokesman for the Ministry of Foreign Affairs, Geng Shuang, reiterated the central government’s firm support for the SAR government’s proposal to amend the extradition law.”
What happens next? For now, no more protests are planned:
- Protesters said there was no plan for further action, and those in the park started to leave after it was announced the debate had been postponed, although some 300 protesters remained nearby.
Get smart: Protestors see the extradition bill as a clear escalation in the march toward dismantling Hong Kong’s special legal status.
South China Morning Post:Extradition bill debate postponed for second time after Hong Kong protests
6. Tariff deadline “all in Trump’s head”
On Wednesday in the western hemisphere, US President Donald Trump added yet more confusion on the future of the US-China trade war.
Specifically, he told reporters he had no timetable for resuming trade talks or imposing more tariffsexcept for “what’s up here” – motioning to his head.
Get smart: Chinese officials absolutely hate the trademark unpredictability of the Trump administration.
Still, Trump also signaled his personal investment in getting to yes with Chinese negotiators:
- “I would never take something that would be less than what we already had….I think we’ll end up making a deal with China.”
Get Smart: Trump’s words underscore that any resolution to the trade war saga will need to come from the very top. The dealmaker-in-chief is likely to shoot down any proposal that doesn’t give him what he wants.
That’s why from Beijing’s perspective, the ball remains firmly in the US’ court.
What to watch: A lot hinges on a potential Trump-Xi summit at the G20. To us, at this point it still looks like the potential for a presidential sit down is a toss-up, at best .
Bloomberg: Trump Says His China Deadline Is ‘Up Here,’ Pointing to His Head