1. Central bank has new interbank mechanism
China’s central bank (PBoC) has rolled out a new mechanism to keep money flowing in the interbank market (Regulation Asia):
- “China has introduced trading alerts on its interbank trading platform following a recent plunge in some short-term rates.”
- “The trading alerts are intended to prevent money market rates from falling below the rate the PBOC offers on excess cash that banks park with the central bank, currently set at 0.72%.”
How it works:
- “The China Foreign Exchange Trade System National Interbank Funding Center will alert traders if they place orders outside a daily trading band of 70 basis points around the weighted average repo rate.”
Why it happened:
- The PBoC has been dumping liquidity into the market in recent weeks as insurance against the volatility createdby the Baoshang Bank takeover.
- Those efforts ended up having an unintended consequence. In some cases, interbank borrowing rates got so low that banks could make more money by parking money at the PBoC than by lending into the market.
Get smart: That’s the last thing the PBoC wants – so the new alert system is meant to put a floor under rates to keep liquidity circulating.
Regulation Asia: China Introduces Trading Alerts for Interbank Repo Rates
CNBC: China’s PBOC, trading platform signal floor for interbank rates-sources
2.Local government off-balance sheet debt swap
Yesterday, local financial media scooped that several ministries are formulating a plan to resolve local governments’ off-balance sheet debt.
Some context: The scale of the implicit debt is still being determined, but most estimates put it at RMB 30-40 trillion – more than twice that of explicit debt.
Getting control of the problem now is critical: Much local implicit debt will mature within three years.
So…they are going for the quick fix:
- Maturing debt will be allowed to be extended or swapped.
It’s not quite so simple. Only debt thatmeets relatively strict criteria will qualify. The debt must be:
- backed by specific projects with sustainable cashflow
- approved by both the bank and provincial authorities
- issued before the National Financial Work Conference in July 2017
In some provinces, only one-fourth of implicit debt meets that criteria.
Get smart: The implicit debt load is so big that the government needs years to address it all. This moveshelves addressing the “good” debt for later.
Our question: What will they do about soon-maturing bad quality debt?
3.End of the road for Anbang
Anbang insurance is no more…
- “China’s insurance regulator said Thursday that the newly created Dajia Insurance Group will take over several of Anbang Insurance Group Co. Ltd.’s subsidiaries.”
- “The [CBIRC] said in a statement that Dajia will receive Anbang’s stakes in its life insurance, annuity insurance and asset management subsidiaries, and some of the assets of its property and casualty insurance unit.”
Technically, the company will still exist in a vestigial form:
- “Anbang will be barred from getting into new insurance…though it will still be in charge of its existing insurance contracts.”
Dajia still has a lot of work to do:
- “The government team that took over Anbang will push Dajia to get involved in Anbang’s restructuring and solicit qualified strategic investors for the company, the regulator’s statement said.”
- “So far, Anbang has disposed of, or is in the process of disposing of, more than 1 trillion yuan of assets.”
Get smart: The past few months have seen the orderly and methodical unwinding of a troubled company. What’s more, it was done by the book. The Anbang episode bodes well for the future financial discipline of China’s economy.
Caixin Global:Watchdog Hands Anbang Units to New Insurance Firm
4.SP becomes first foreign agency to issue rating in China
On Thursday, SP Global’s Beijing unit issued a AAA credit rating to ICBC Financial Leasing Co.
Why that’s news: It’s the first rating of a domestic issuer by an international agency.
Some context: In January, SP became the first foreign company to receive a license to rate domestic bonds (see January 29 Tip Sheet).
The move is a long-awaited development:
- “Chinese bond investors hope that ratings by international agencies will help to shake up domestic counterparts which assign relatively safe AA ratings to the vast majority of issuers, and have come under regulatory fire for operational violations.”
Other foreign agencies want a piece of China’s USD 13 trillion bond market:
- “Fitch, which has established a domestic entity, and Moody’s have also applied for licenses.”
Get smart: This is yet another small-but-steady move toward more concrete financial opening and integration with the global financial system.
Reuters:SP Global rates China domestic issuer in first by foreign agency
5.Top climate change group meets
On Thursday, Li Keqiang chaired a meeting of the National Leading Small Working Group for Climate Change, Energy Conservation, and Emissions Reduction.
(You can just call it the NLSWGfCCECER for short.)
Some context: The group was established in 2007. It last met in 2015.
Li reiterated previous commitments:
- “China…will continue to meet its promise to the international community that its CO2 emission volume will peak around 2030 and see a sharp decline in emissions per unit of GDP.”
- “China is willing to join global efforts to safeguard the United Nations Framework Convention on Climate Change and the Paris Agreement.”
The government will continue to promote renewable energies:
- “Hydropower, wind power, solar power, and other forms of clean energy should be promoted, he said.”
But it’s also about making traditional energy and industry less polluting:
- “The Premier also called for work to realize low emissions in thermal power plants and steel production and improvements in waste-treatment infrastructure.”
Get smart: We’ve seen a step change in environmental protection efforts under Xi Jinping. But these efforts have often been disruptive for businesses and local economies. The government is still seeking to find the right balance.
6.Buying votes is best way to win village elections
In China, rural residents can elect village chiefs directly.
But according to Party journal China Comment, these elections are, shall we say…flawed.
- In one village, a large bottle of cooking oil is the going rate for securing a single vote.
And not all votes are equal.
- Candidates may spend thousands of yuan on the swing votes of influential local leaders.
All this political horse trading can really add up. According to one candidate:
- He spent RMB 50,000 buying votes in the first-round election.
- Before the second-round election, another candidate bought him out for more than RMB 50,000.
- The election cost the winner hundreds of thousands of yuan in total.
The calculus: The winner recoups their costs by wetting their beak when they take office.
Get smart: One of the Party’s solutions is to have candidates vetted by county authorities. Residents will be restricted to electing a village chief from a sanctioned pool of candidates.
Get smarter: China’s leadership has long been suspicious of direct elections. Episodes like these only serve to confirm their doubts.