1. PBoC moves to marketize interest rates
Interest rates on bank loans in China are set to be further liberalized thanks to an update to the central bank’s (PBoC) Loan Prime Rate (LPR).
The move was approved by the State Council on Friday, with the PBoC givingfurther details over the weekend.
Some context: For a while now, the PBoC has been drawing up plans to move from its current “dual track” interest rate system, which prices loans off of a benchmark set by regulators to a more marketized system (see July 24 Tip Sheet).
So how does the new LPR system work?
- Once a month, 18 banks will report a prime interest rate to the central bank – i.e. the loan rate that they give their best customers.
- Those rates will be linked to the current one-year rate on the medium-term lending facility (MLF) – i.e. one of the key rates that determine banks’ funding costs.
- The PBoC will then take a weighted average of those 18 rates and issue the LPR on the 20th of each month.
- New loans will reference the new LPR, instead of the old benchmark ratessetby the PBoC.
- The first LPR will be issued on Tuesday, August 20.
Get smart: Having banks set the LPR should make loans to businessesmore reflective of actual market dynamics.
2.The PBoC’s reasoning on the rates move
Why do interest rates need to be marketized in China, you might ask?
The key reason – as the PBoC laid out in its announcement over the weekend – is that monetary policy adjustments are not currently filtering into the real economy.
- Authorities have increased liquidity over the past 12 months, which has brought down financing rates for banks – but the banks have not been passing those savings on to customers.
By anchoring the LPR against the MLF, the PBoC’s adjustments to policy rates should transmit more smoothly to end-borrowers.
What that means: Whenthe LPR is introduced tomorrow, it shouldbring down borrowing rates for business a touch, pretty much immediately.
But…it’sunlikely to have a big impact on overall loan creation – or the pace of economic growth.
Get smart: The move to the LPR is part of a long-term program to improve policymakers’ interest rate transmission mechanism.
Get smarter: In the short term, it’s another targeted easing move, which will help ease financial conditions at the margin.
Go deeper: The Bloomberg piece below has a great breakdown of the LPR, how it works, and the big changes it represents.
Bloomberg: China Lines Up Lower Borrowing Costs With Revamped Rate System
3. China seeks to justify Xinjiang camps
On Friday, the State Council Information Office released a new white paper on the re-education camps in Xinjiang.
The paper seeks to explain the need for the camps:
- “For some time Xinjiang has been plagued by terrorism and religious extremism, which pose a serious threat to the lives of the people in the region.”
- “Addressing both the symptoms and root causes and integrating preventative measures and a forceful response, Xinjiang has established vocational education and training centers in accordance with the law to prevent the breeding and spread of terrorism and religious extremism.”
Unsurprisingly, the paper puts a positive spin on the camps and says they have been successful:
- “These efforts have eradicated extremist thoughts, delivered widely recognized results, helped to safeguard social stability in the region, and protected the environment for the healthy development of religions.”
Get smart: This white paper won’t convince anybody outside China that the camps are justified.
Get smarter: The Propaganda Department still feels the need to justify the policy to its domestic audience.
What to watch: Despite the paper’s claims, it’s fully possible that the camps will actually breed more extremism in the region.
Xinhua: Full Text: Vocational Education and Training in Xinjiang
4.Shenzhen gets a new status
On Sunday, the Central Committee and State Council jointly released new guidelines to make Shenzhen a “pilot demonstration area of socialism with Chinese characteristics.”
The guidelines are a wide-ranging document touching political, economic, and social issues.
So what does it mean to be demonstration zone for socialism with Chinese characteristics?
Essentially, the city will have more leeway to experiment with policy. Bloomberg recaps some of the more interesting developments on the economic side:
- “Shenzhen will be granted … privileges in yuan internationalization.”
- “China will also promote the connection of the financial markets of Shenzhen, Hong Kong and Macau.”
- “The southern Chinese city was told to work toward giving “citizen treatment” to Hong Kong and Macau residents who work there.”
The city will also have more legislative authority. Some local laws could even contradict national laws, given prior approval.
The bigger picture: The move looks like an important step in giving Shenzhen the leeway to better integrate with Hong Kong as part of the Greater Bay Area (GBA) initiative.
Get smart: It will also give Shenzhen – as opposed to Guangzhou – a leg up in driving GBA policies.
Gov.cn: 中共中央 国务院关于支持深圳建设中国特色社会主义先行示范区的意见
Gov.cn: China to build Shenzhen into socialist demonstration area
Bloomberg: China to Boost Shenzhen’s Role in Greater Bay Area Innovation
5.Hong Kong protesters rein it in
This weekend, Hong Kong’s pro-democracy protest movement took a turn for the mellow as protestors refrained from violent clashes with the police.
Though police refused the protestors permission to march on safety grounds, an estimated 1.7 million people gathered in Victoria Park to press their demands.
For the first time in weeks, no tear gas was fired in Hong Kong.
Quick recap: Last week saw a sharp escalation in protest tactics as demonstrators thronged the Hong Kong airport and clashed with police across the city. Two mainland men were also assaulted prompting outrage from state media and mainland netizens alike.
The Hong Kong government also softened its tone, calling the demonstrations “generally peaceful”.
The central government has so far remained silent on the protestors’ change of tack.
Instead, state media has focused on pro-China counter protests that took place in a number of cities worldwide as well as Hong Kong itself.
Get smart: De-escalation in Hong Kong will make it harder for Beijing to paint the protestors as violent radicals or potential terrorists, decreasing the likelihood of direct intervention.
The big question(s): Will the protests be able to maintain their momentum? If so, will they remain peaceful?
SCMP: Three nights of tear gas-free protests as Hong Kong’s anti-government movement gives peace a chance
Gov.hk: Police’s response to public meeting on Hong Kong Island
China Daily: Half a million people gather to call for ending violence in HK
China Daily: People in London rally against Hong Kong separatists
6.MNCs under pressure to tow Beijing’s line
Beijing is increasingly pressuring foreign companies to take sides against the Hong Kong protestors.
The most prominent example came on Friday (NYT):
- “Rupert Hogg, the chief executive of Hong Kong-based Cathay Pacific Airways, resigned in the face of Chinese pressure after some of the airline’s workers participated in the demonstrations.”
- “Earlier this month, the Chinese authorities forbade Cathay employees who participated in protests from doing any work involving flights to mainland China and demanded to see lists of workers who fly in or over its territory.”
Other firms are also trying to distance themselves from the protests:
- “On Friday, the Big Four global accounting firms — PwC, Deloitte, KPMG and Ernst Young, now known as EY — put out statements distancing themselves from a full-page ad supporting the demonstrations that appeared in Hong Kong’s Apple Daily newspaper.”
- “The ad was signed and paid for by a group of anonymous employees of the firms.”
Get smart: This kind of pressure from Beijing will only continue to intensify as the protests drag on – becoming a real business risk for more and more companies over time.