Driving the Day
1. Xi and Trump agree to meet in Japan
24 hours after Xi Jinping announced his first trip to North Korea (see yesterday’s Tip Sheet), US President Donald Trump rushed to get on the phone with him.
Xi and Trump spoke on Tuesday evening, Beijing time. According to Xinhua, the call came at Trump’s request.
Trump comes off a bit pleading in the Xinhua readout:
- “I look forward to…meeting with President Xi again [at the G20].”
- “[America] hopes that both sides’ negotiating teams can initiate communication, and find a way to resolve our current differences as soon as possible.”
Xi said he would deign to meet with Trump:
- “I am willing to hold a meeting [at the G20]…and exchange views on fundamental issues concerning the development of China-U.S. relations.”
Xi also had a pointed request:
- “China hopes the U.S. side can treat Chinese firms in a fair manner.”
Get smart: The Chinese readout is keen to make Xi appear in control of the relationship with Trump. In reality, he’s not.
Get smarter: Markets loved the call. But we are still far from a deal.
Get even smarter: Even if a preliminary deal is reached on trade at G20, the broader strategic competition between the two countries has just started.
2.Liquidity problems keep bubbling
The hits just keep on coming on the liquidity front.
On Tuesday, officials from the central bank (PBoC) and securities regulator (CSRC) held yet another meeting to try and improve interbank liquidity (see yesterday’s Tip Sheet).
This time, regulators implored large banks to channel funding to large securities brokers – so that they could in turn continue offering funding to smaller non-bank financial institutions (NBFIs).
Caixin has the details:
- “For the Tuesday conference, the PBOC and CSRC summoned six big state-owned banks and some leading brokerage managers to discuss ways to address liquidity risks facing the non-banking financial sector.”
- “Regulators urged the six banks to step up financing support to the top brokerages through interbank lending and pledged repos.”
- “The big banks and brokerages were also encouraged to act as counterparties in the interbank market.”
That may seem like a convoluted way for authorities to get liquidity where it needs to go. But it’s out of necessity.
- The PBoC doesn’t want to lend directly to securities firms because overall liquidity is ample.
- Smaller NBFIs don’t have direct access to the PBoC anyway, so this chain lending is required to some extent.
Get smart: Authorities will need to remain vigilant to keep isolated liquidity issues from becoming systemic.
Caixin Global: China Asks Big State-Owned Banks to Back Top Brokerages
Caixin Finance: 央行证监会出台大行支持非银方案 头部券商成流动性供给桥梁
3. Why counter-party risk is rising
An excellent piece by the 21st Century Business Herald lays out some of the key drivers behind the current liquidity challenges.
The Baoshang Bank takeover was the proximate cause, of course.
But there were more fundamental issues lurking in the interbank market.
Proving the law of unintended consequences, those issues are largely a by-product of the financial de-risking campaign carried out over the past two years.
Here’s what happened:
- Since 2018, many SMEshave had to raise capital through structured bond issuance because of the tighter financing environment.
- A portion of the structured bond issuance ended up pledged as collateral in the interbank market through NBFI intermediaries.
The result: SME corporate credit risk now permeates the interbank bond market.
All was fine, until the Baoshang move spooked lenders and cause a few defaults.
Now, interbank lenders no longer trust certain interbank borrowers.
Get smart: The interbank market has long been ground zero for financial speculation. But authorities thought they had tamed the beast through the de-risking campaign.
Get smarter: If they don’t untangle this mess quick, the interbank market could have real problems.
21st Cen Biz:同业“食物链”末端的债券结构化发行冤不冤？监管要求质押式回购避免出现违约
4.Xi tells air force to stay loyal
On Tuesday morning, Xi donned his military garb and headed over to the Jingxi Hotel to meet with delegates to the People’s Liberation Army (PLA) Air Force Party Congress.
Some context: The PLA is the Party’s army – not the government’s. Like other Party institutions, it holds a Party congressevery five years.
What delegates discussed (Xinhua):
- “Delegates discussed how to thoroughly implement Xi’s thinking on strengthening the military and the military strategy for the new era.”
- “They reviewed the work related to the Party building and military building of the Air Force over the past five years, and drafted major plans for the next five years.”
Get smart: Xi has thoroughly restructured the military. That was in part to create a better fighting force. But it was also to create a force more loyal to Xi.
The bigger picture: Military reforms initiated by Xi seek to improve the ability of China’s various armed forces – like the air force – to carry out joint operations. Most PLA analysts think they still have quite a ways to go.
Xinhua: Xi meets with PLA Air Force Party Congress delegates
5.China extends its reach into Central Asia
On Monday, we highlighted that Chinese leaders are worried about what could happen in Afghanistan as America disengages from the region.
According to the Wall Street Journal, China has been taking steps to stabilize the region:
- “Seeking to buttress cross-border security and protect its regional economic investments, China in early 2017 committed $85 million to set up an Afghan-led army brigade in northeastern Badakhshan province, according to a June 2017 Pentagon report to Congress.”
- “In neighboring Tajikistan, China in 2015 or 2016 signed secret agreements with authorities that gave Beijing rights to refurbish or build up to 30 to 40 guard posts on the Tajik side of the country’s border with Afghanistan, a Tajik official said last year.”
In Tajikistan, China is basically running the border:
- “Under the accords, Chinese border guards have replaced their Tajik counterparts along large swathes of the territory along the Tajikistan-Afghanistan border, where Beijing deems the Tajiks incapable of stopping militants potentially infiltrating Tajik territory, the official said.”
- “’There are parts of the country where the Chinese have taken over border control completely,’ the official said.”
Our question: Will China’s growing presence in Central Asia be welcome? Or create a backlash?