1.More trouble at small banks
This is a shocker: another small bank in China is getting a bailout.
The Shangdong provincial government is reportedly working to find a group of strategic investors to infuse capital into Henfeng bank to(21st Cent Biz):
- “enhance the capital adequacy ratio of the bank”
- “enhance its strength and operational capacity”
Some context: This is the second time a government has introduced strategic investors into a local bank in the past few weeks – with Bank of Jinzhou being the first to fall.
More context: Both of the moves have come in the wake of the Baoshang Bank takeover, which rattled the sector and dried up liquidity for smaller banks (see July 4 Tip Sheet).
The Hengfeng bailout has been a long time coming:
- In 2017, the chairman and Party secretary of the bank were investigated for corruption.
- Since then, the bank has failed to issue annual reports for two consecutive years.
That latter development has become a surefire way to tell that a Chinese bank is in trouble.
Get smart: Baoshang was the start of a trend for China’s small banks – not a one-off.
What to watch: Expect more bailouts, takeovers, and consolidation to come.
2. Data dump – inflation
The stats bureau released monthly inflation data for July on Friday.
- Consumer prices grew by 2.8% y/y – up asmidge from 2.7% in June.
- Producer prices fell by 0.3%y/y – after being perfectly flat in June.
Quick take: Upward pressure on CPI is still benign – authorities don’t need to worry about it.
But on the PPI side: This was the first contraction since 2016.
Some context: From 2012 to 2015 China was deep in a deflationary spiral – a period that culminated with major economic and financial volatility.
More context: The next year – 2016 – authorities began implementing Supply Side Structural Reform (SSSR) to boost upstream prices, curtail corporate debt, and reduceproperty inventories.
The SSSR program worked splendidly – and helped boost growth until mid-2018, when the economy started decelerating again.
Get smart: The combination of deflation, weak growth,and financial volatility from 2015 is still fresh in policymakers’ minds.
They won’t be keen to see another bout of sustained price contraction.
Our question: Will this be enough to convince policymakers to finally ramp up stimulus? Or will they look to restrict commoditysupplies to get prices up – a la 2016?
Our bet is on the latter approach – watch for production restrictions on key commodities soon.
Bloomberg:China Factory Prices Drop as Consumer Gains Hand PBOC Headache
3.China looks for boost from platform economy
On Thursday, the General Office of the State Council released a Guiding Opinion meant to stimulate the platform economy.
Some context: The platform economy refers to fast-growing business activities based on internet platforms.
The new doc asks relevant agencies to come up with legislation and regulations aimed at:
- Improving conditions for market access
- Reducing compliance costs for enterprises
- Employing innovative supervisory approaches
- Deploying tolerant and cautious supervision
- Ensuring fair competition and regulation
- Encouraging the internet industry to cooperate with the service, manufacturing, and other innovative sectors
To ensure “healthy development” of the platform economy, the regs also stress the need to:
- Strengthen data sharing between government agencies and internet platforms
- Regulate the sector with an improved and optimized social credit system (SCS)
Foreign businesses take note: Data sharing and the SCS will be increasingly staple features of China’s business environment.
Get smart: In the face the domestic economic slowdown and the external trade pressures, policymakers are desperately looking for new drivers ofgrowth.
Get smarter: They have become increasingly aware of the power of the internet.
Our take: It might not work – but it’s better than pulling the investment lever for the umpteenth time.
4.US consular official meets with Joshua Wong, ignites firestorm
Chinese propaganda organs are kicking into high gear over the Hong Kong protests – and putting the US in the crosshairs.
The latest: On Tuesday, US consular official Julie Eadeh met with Hong Kong democracy activist, Joshua Wong.
Some context: Wong was one of the leaders of the 2014 Umbrella Movement and was recently released from prison.
What happened next?
- The Ministry of Foreign Affairs lodged a formal complaint with the US Consulate General – urging US diplomatic personnel not to engage with “anti-China forces.”
- Pro-Beijing Hong Kong newspaper Ta Kung Pao published an article revealing some of Eadeh’s personal details, including the names of her children.
- Yesterday, State Department officials accused the Chinese government of leaking Eadeh’s personal information, calling it the behavior of a “thuggish regime.”
- Today, the Ministry of Foreign Affairs hit back with a scathing statement denying the charges and condemning US foreign policy conduct.
Get smart: State media has consistently deployed the claim that foreign agents provocateurs are behind the Hong Kong protests – in order to galvanize national sentiment in the mainland.
Get smarter: Whether or not Beijing genuinely believes the US is working to fan the flames of insurrection in Hong Kong, Eadeh’s meeting with Wong is certainly giving the propagandists plenty to work with.
The Commissioner’s Office Lodged Stern Representations with US Consulate General on its Officer Meeting “Hong Kong Independence” Activists (2019/08/08)
US calls Beijing a ‘thuggish regime’ for ‘harassing’ American diplomat over Hong Kong meeting with Joshua Wong
5.Rare earth producers ready to “weaponize” their supply
On Wednesday, China’s rare earth producers announced that they are ready to do their part in the trade war effort.
The details: The Association of China Rare Earth Industry released a statement declaring its support for Chinese countermeasures against the US – and saidproducers will pass the cost of any tariffs onto their American customers.
Some context: The Association represents some 300 firms involved in the rare earth production process.
More context: China produces roughly 80% of the world’s rare earth minerals, and the US is still heavily dependent on Chinese suppliers.
Even more context: President Xi paid a visit to a rare earth facility back in May during his Jiangxi tour, in a move that was widely interpreted as a warning to the US (see the May 21 Tip Sheet).
Get smart: Now that negotiations seem to be breaking down (again), China has circled back to the rare earth option in hopes of creating more leverage.
Get smarter: Any disruption to rare earth supplies would put a temporary squeeze on American businesses – but US producers have reportedly been looking to ramp up their own output, just in case.
So the move might ultimately backfire on Chinese producers.
The bottom line: Everyone loses in a trade war.