1. The problem with the LPR
China’s central bank (PBoC) is looking to improve the transmission of monetary policy in the long run, while lowering the cost of capital for businesses in the short run.
That’s why officials introduced the new methodology for the lending prime rate (LPR) over the past few days (see yesterday’s Tip Sheet).
But on the ground, banks aren’t rushing to make fundamental changes to lending practices (21st Cent Biz).
- First, because of the lag between loan agreement and actual loan issuance, LPR-linked loans won’t start to go out until September, at the earliest.
- Second, banks are already pushing more fixed-rate loans, rather than floating rate loans.
- Third, lots of borrowers were already seeing interest rates well above those of the benchmark rate – and that won’t change.
That last point means that SMEs – which are supposed to be the government’s primary target for cheaper credit – are unlikely to see interest rates budge even ifthe PBoC cuts its reference rate.
One banker even said outright that he didn’t expect the bulk of new RMB loans to be priced against the LPR until the beginning of 2020.
Get smart: The PBoC’s new tool will take time to become operational in reality. That meansif the bank cuts rates, we’re unlikely to see much impact until next year.
21st Century Biz: 新LPR机制下银行定价调研 初期鼓励签固定利率合同，房贷利率难撼
2.More problems with the LPR
We hate to pile on here, but another glaring challenge for the LPR mechanism will be implementing it for mortgage loans.
Some context: The central bank (PBoC) explicitly excluded mortgage loans from the LPR system for now.
But on Tuesday, PBoCVice Governor Liu Guoqiang indicated that rules for mortgage loans should be handed down in the coming days.
- He stressed that the PBoC wants to enact this system in a way that doesn’t lower mortgage rates – in order to keep a tight rein on the property market.
- That’s going to be a challenge – given that a key short-term objective is to lower rates on most other loans.
Another big issueis the length of mortgage loans – many of which extend to 30 years.
- For now, the PBoC is requiring all new loans (besides mortgages) be indexed to the LPR – and plans to apply the system to currently outstanding loans over time.
- But given the long-term nature of mortgages that will be trickier, as the turnover in the stock of loans is lower.
- Some banks are even worried about the legality of breaking mortgage terms in order to move to the LPR system.
Get smart: There are clearly still lots of kinks to work out in the LPR mechanism.
Caixin: 央行：改革后房贷利率不能下降 相关细则近期出台
3. China decries Twitter and Facebook “censorship”
In today’s installment of news from bizarro world: On Tuesday, the Chinese government asserted the right of its people to express themselves on Facebook and Twitter.
Ummm, what’s that now?
Some context: On Monday, Twitter and Facebook took action against what was believed to be a Chinese state-sponsored effort to undermine the Hong Kong protests. Twitter removed 936 accounts that it said were linked to the Chinese government, while Facebook shut down five accounts, three groups, and seven pages.
In response, Foreign Ministry spokesman Geng Shuang noted that (Reuters):
- “[Overseas Chinese and exchange students] of course have the right to express their point of view.”
- “Why is it that China’s official media’s presentation is surely negative or wrong?”
Irony alert: China operates one of the largest and most advanced internet censorship regimes in the world.
Get smart: In a week where a Chinese tech champion listed Taiwan as a country, and the government came out in favor of online freedom of expression, we’re increasingly sure that we’ve fallen into an alternate dimension.
Get smarter: Social media is becoming a battleground in the war to control narratives and shape public opinion.
4.Huawei foundersays it’s do or die time
Yesterday, Huawei founder Ren Zhengfei put the company on a war footing in the face of mounting US pressure.
Some context: On Monday, the US gave Huawei a 90-day reprieve to continue to do business with US clients, but also put 46 of the company’s affiliates on the Entity List (see yesterday’s Tip Sheet)
In an internal memo, Ren warned that the company was at a critical “live or die moment” and told underused employees to make themselves useful.
Specifically, he urged employees to form “commando squads” to explore new projects or to look for jobs that need doing internally. Ren warned that those who did neither would face the consequences (Caixin):
- “If they fail to find a role, their salaries will be cut every three months.”
This isn’t the only way in which Huawei has gone into survival mode:
- “The company switched to 24-hour days, working as many as 10,000 developers across three shifts to eliminate the need for American software and circuitry.”
Get smart: 2019 has been a gut punch for Huawei. Ren is right that it’s do or die time – the question is which will happen.
Caixin: Huawei Founder Sees ‘Live or Die Moment’ in U.S. Pressure
5.Li focuses on the economy in Heilongjiang
Li Keqiang was in Heilongjiang on Monday and Tuesday.
Li’s trip focused on checking the pulse of the economy:
- “He checked a paddy field in Mudanjiang and asked about the price of rice, income of farmers and labor costs.”
- “Premier Li visited a food market in Harbin city and asked about the prices and sales of pork, vegetables, eggs, soy products and fruits.”
- “Premier Li inspected the new economic industrial park in Harbin and learned about the makers’ mass entrepreneurship and innovation achievements.”
At the Harbin food market, Li implied that inflation could be a worry:
- “The Premier said multiple measures should be taken to ensure market supply, price stability, and food quality and safety, because the rise in food prices will have a great impact on people, especially low-income families.”
Get smart: Budding concerns about inflation are just one more reason why large-scale monetary stimulus just isn’t on the cards.
Gov.cn: Premier stresses stable economy and people’s livelihood
6.Xi visits martyrs’ cemetery
On Tuesday, while touring Gansu, Xi Jinping paid a visit to the martyrs’ cemetery of the West Route Army of Chinese Workers’ and Peasants’ Red Army in Zhangye.
Some context: The West Route Army suffered huge losses in 1936 during the Long March.
While there, Xi laid a wreath at the monument commemorating the martyrs.
Our take: Xi almost always visits revolutionary monuments when he goes on inspection tours. It’s his reminder to the Party – and the people – of the Party’s historic role in “liberating” China.
Tuesday’s visit was also a reminder of the “Long March spirit,” something Xi has recently been touting to prepare the country forprotracted economic competition with the United States.