1. Interbank deleveraging set to kick off again
Hold onto your hats – the banking regulator (CBIRC) is doubling down on its moves to de-risk the interbank market.
Why’s that a big deal? The recent volatility we have seen among China’s small banks was exposedbecause of the de-risking campaign fromthe past two years.
- That’s what Chinese policymakers call “the risks of addressing risks.”
The latest from 21st Cent Biz: Regulators are asking highly leveraged city-commercial banks to start drawing down interbank borrowings. Specifically, regulators are putting banks into different risk categories then requiring that:
- “The ratio of total interbank assets to net tier-one capital should not exceed 300%, 400% and 500% respectively, according to the different ratings.”
- “Correspondingly, the ratio of total interbank liabilities to net tier-one capital should not exceed 200%, 300%, and 400%, respectively.”
It’s no secret who is in the crosshairs:
- “Changsha Bank’s ratio of interbank assets to the net tier-one capitalexceeds 400%; that of Nanjing Bank, Hangzhou Bank, and Guiyang Bank ranged from 300% to 400%.”
Get smart: Regulators are telling banks that they can draw down their lending gradually, but they are clearly re-upping efforts to deleverage the interbank market.
The big question: So far efforts at interbank deleveraging have gone relatively smoothly, but can they continue to?
21st Cent Biz:独家｜城商行同业“去杠杆”：监管发文逐步压降，市场误读“政金债”
2.Addressing inflationary pressure
Rising food prices, especially for pork, are one of the major indicators that China’s laobaixing use to informally assess the economy and its impact on their lives.
That’s why the government is scrambling to deal with the outbreak of African Swine Fever,which has hit China’s pork supply (see July 4 Tip Sheet).
Yesterday, the NDRC revealed it has handed out a total of RMB 2.4 billion in food subsidies to low income individuals since April.
The subsidies can be expected to continue in either of the following two scenarios:
- CPI increases to 3.5% y/y
- The food price index increases by 6% y/y
And the NDRC isn’t alone. MofCom is doing its part, too.
Officials from the ministry said at a Thursday press conference that they are ready to release frozen pork, beef, and lamb from the central reserve if needed – and continue ramping up pork imports, as well.
Get smart: As far as the government is concerned, the availability and affordability offood is one of the key metrics people use when answering the question“are you better off now than you were 70 years ago?”
For that reason, the Party has a very strong incentive to literally bring home the bacon.
3. Shenzhen to accelerate financial opening?
Yesterday, central bank governor Yi Gang met with Shenzhen Party Secretary Wang Weizhong in Shenzhen.
Unsurprisingly, they discussed Shenzhen’s shiny new status! (See August 19 Tip sheet)
They both agreed to implement the new guidelines to make Shenzhen a “pilot demonstration area of socialism with Chinese characteristics.”
And apparently that will have a lot to do with finance. Specifically, Shenzhen will:
- pioneer the internationalization of the RMB
- conduct research into digital currency
- promote the development of green finance
And those priorities are seeing some concrete actions.
The foreign exchange regulator announced yesterday that it will extend a pilot program to allow companiesto exchange foreign currency in their capital account into RMB without prior approval.
- The program was originally contained to certain districts in Shenzhen, but has now been rolled out to the entire city.
- The idea isto help foreign companies expand operations and reinvest on the Chinese mainland more easily.
Get smart: The long game here is to transform Shenzhen into a finance center to rival (and eventually replace) the perennially pesky Hong Kong.
Get smarter: This push didn’t start because of the Hong Kong protests – but they have certainly accelerated the process.
4.Former planner reflects on industrial policies
This week, former NDRC official Xu Lin, penned an article offering suggestions for China’s industrial policy of the future.
Some context: Xu is the former head of the NDRC’s planning department and worked intensively on many of China’s key industrial policies. Now he’s a private investor.
Some of Xu’s suggestions struck us as ironic:
- Reduce both supportive and restrictive policies that discriminate against companies based on ownership
- Cut subsidies for encouraged sectors
- Scale back statefunds tofocus solely on relatively riskier angel investments
But he certainly didn’t call for an end to all industrial support. Xu says China should:
- Have a list ofcore technologies that authorities want to develop, based on input from a wide range of businesses and research institutes.
- Have a public bidding system where companies – including private ones – can compete for government money to support research.
Xu also had a kicker:
- China should require developed countries to lift export bans on high-tech products in exchangefor China giving up import substitution policies.
That one seems like a non-starter for Donald Trump and co. – but we like the gumption.
Bottom-line: Current and former officials are genuinely trying to rethink industrial policy to support a 21st Century economy.
5.Duterte’s unenviable mission
Yesterday, Philippine President Rodrigo Duterte arrived in Beijing for a long-awaited meeting with Xi Jinping.
On the agenda: An awkward conversation about the disputed South China Sea (SCS).
Some context: Since gaining office, Duterte has sought to build closer ties with China.
More context: Duterte’s conciliatory stance is widely unpopular at home due to a series of spats between the two countries in the SCS.
Xi tried to put a positive spin on the situation (Xinhua):
- “As long as the two sides handle the South China Sea issue properly, the atmosphere of bilateral ties will be sound, the foundation of the relationship will be stable.”
But behind closed doors: Xi reportedly refused to budge when Duterte raised the issue, doubling down on China’s claims to the SCS.
But it wasn’t all bad news for Duterte:
- Xi offered to import more agricultural products and to send Chinese technical experts to assist with development initiatives.
- Xi also expressed his hope that the Philippines would help China promote the adoption of the SCS Code of Conduct to help resolve maritime tensions.
Get smart: China’s approach to resolving the SCS issue has been to use economic inducements to divide and conquer its ASEAN opponents. So far, it’s been remarkably successful.
Xinhua:Xi, Duterte meet on pushing forward ties
Rappler:Xi refuses to recognize Hague ruling after Duterte brings it up