Driving the Day
1.Looking for liquidity
As the mid-year liquidity hump closes in, small banks are looking to get money anywhere they can.
The most recent move is to borrow from the exchange rather than the interbank market (Reuters):
- “Exchange data showed volumes of 14-day repos traded on the Shanghai Stock Exchange leapt to an all-time high of 208.9 billion yuan (£24 billion) on Monday.”
- “Traders said the lower borrowing costs on the exchange and the less stringent requirements for collateral drove smaller players to the exchange.”
Some context: Banks need extra cash to pass mid-year regulatory checks.
Of course, regular Tip Sheet readers know that this isn’t just the usual seasonal cash dash.
Structural issues in the interbank market have been exposed ever since the regulatory takeover of Baoshang Bank in late May (see the past several Tip Sheets):
- “The interbank markets were affected not just by shortages of cash but also concerns over the quality of the pledged collateral.”
- “Borrowers could still pledge their corporate bonds on the exchange for repos but lenders in the interbank markets had turned picky.”
Get smart: The seasonal liquidity pressure won’t help already testy money markets, but if regulators can get through these next ten days, at least the seasonal pressure will subside.
2.US CEOs sit down with Li Keqiang
Ahead of the all-important Xi-Trump meeting next week, a group of US CEOs is set to meet with Premier Li Keqiang in Beijing this week (Bloomberg):
- “At least five CEOs of U.S. firms are attending a meeting in Beijing, people familiar with the matter said.”
- “Those include heads of chemical giant Dow Inc., United Parcel Service Inc., drugmaker Pfizer Inc. and Honeywell International Inc., said the people, asking not to be identified as the meeting isn’t public.”
Our question: What message will the CEOs be looking to send to Chinese officials?
Straight talk: One reason we are where we are in the trade war is that American companies have not been on-message in recent years.
In DC: Companies complain to US officials about unfair Chinese business practices.
But in Beijing: Companies typically tell Chinese officials how happy theyare to be a part of China’s market.
Those mixed messages are one reason the economic status quo between China and the US ultimately became untenable.
Get smart: Most businesses we talk to are hopeful that US pressure will lead to a better operating environment in China. But they don’t like the haphazard way the US president has applied his tariff tactics.
Bloomberg:U.S. CEOs to Meet China Premier This Week as Trade Woes Brew
3.State Council meeting belies worries about growth…
Top leaders are looking increasingly worried about the deteriorating economic picture.
Check out the readout from Wednesday’s State Council executive meeting:
- “According to the Central Economic Work Conference and the Government Work Report it is important to do a good job on the ‘Six Stabilities’ and to stabilize investment.”
Some context: The six stabilities have framed economic governance since late July 2018. They target employment, finance, foreign trade, foreign investment, domestic investment, and expectations.
The readout was at pains to point out that this does not mean local governments now have carte blanche:
- “We must… expand effective investment and strive to achieve steady growth, structural adjustment, and benefits to people’s livelihood in one move.”
Some context: Last week, the NDRC relaxed rules that previously prohibited local governments from borrowing to fund the entirety of an infrastructure project. Ever since, lots of folks have been expecting a ramp up in local government spending. But leaders don’t yet look ready to unleash that beast.
Get smart: The State Council is obviously worried about initiating another round of inefficient investment, a la 2009-2010 (or even 2015-2016). But they also know they need to do something to support growth.
Get smarter: Indecision doesn’t make for good policy, which is why we expect growth to continue slowing for a few more months, at least.
4.…and talked about upgrading infrastructure
Wednesday’s State Council meeting also focused on central officials’ favorite subject – infrastructure.
Specifically, the meeting discussed:
- Improving old residential areas in cities
- Upgrading rural electric grids
- Expanding access to safe drinking water in rural areas
- “[Urban renewal] projects, which are expected to cover an estimated 100 million urban residents, will focus [on] improving facilities for water, electricity, gas and optical fiber cable in old residential areas.”
- “In terms of rural electric grid upgrades, each provincial-level area should ensure that tasks designated in the 13th Five-Year Plan should be completed a year in advance.”
With regards to rural drinking water, the goal is:
- “To fully resolve issues such as inadequate water supply and excessive fluorine for 60 million rural residents next year.”
Get smart: None of this is particularly sexy. But incremental improvements in infrastructure and living conditions facilitate development over time.
5.China reforms education to focus less on exams
On Wednesday, the General Office of the State Council released new guidelines to reform the secondary education system.
Get this: They are going to get rid of tests!
Well, not completely, but the guidelines are aimed at “put[ting] an end to exam-oriented education.”
Instead of great test-takers, China’s authorities want to create more well-rounded students (Xinhua):
- “Reform goals by 2022 include the establishment of improved systems for nurturing students with an all-round moral, intellectual, physical and aesthetical grounding in addition to hard-working spirit.”
Don’t get too excited. These reforms aren’t necessarily going to create a bunch of creative free thinkers. A major component of the reforms is to improve “moral education.” And that means students need to (Gov.cn):
- “determinedly listen to and follow the Party.”
Get smart: China’s leaders know that the education system’s current focus on rote learning and test-taking is not conducive to fostering the creative thinking necessary for innovation.
The big question: Can the Party encourage creative thinking without undermining its own public support?
What to watch: Will parents welcome these changes? As education moves away from a focus on tests, many will question the fairness of the system.
Xinhua: China issues guidelines on senior high school education reform
6.China Mobile increases5G investment
On June 6, the Ministry of Industry and Information Technology (MIIT) issued 5G commercial licenses to four state-owned telecommunication companies (see June 4 Tip Sheet).
China Mobile is keen to get rolling with its 5G build out. In the past few days, the company has announced three big procurement deals for 5G equipment.
Guess who’s the biggest winner?
- “Huawei will provide 49 per cent of the MME/SGSN equipment and 54 per cent of the SAE-GW/GGSN equipment – two types of core network equipment needed for the operation of ultra-fast 5G networks – to China Mobile.”
But some foreign players also got some love:
- “Sweden’s Ericsson and Finland’s Nokia bagged 34 per cent and 12 per cent of the MME/SGSN equipment orders, as well as 34 per cent and 9 per cent of the SAE-GW/GGSN orders respectively.“
Get smart: The amount of foreign-procured equipment that Chinese telecoms utilize in their 5G networks is a useful barometer for the country’s appetite for technological integration.
Get smarter: In 2008, senior leaders sped up 3G commercial license issuance in order to spur investment and boost the economy. They are going back to that playbook now with 5G.
SCMP: Huawei wins half of China Mobile’s 5G network contracts while Ericsson picks up a third
Finance Sina: 5G大采购：中国移动连开3笔大单 份额最大者还是华为