1. September LPR drops…and drops
Get excited – the central bank (PBoC) released the monthly loan prime rate (LPR) for September on Friday morning.
- Today’s one-year LPR came in at 4.2% – down from 4.25% in August.
Get smart: That doesn’t represent a cut to the PBoC’s policy rate – it reflects the fact that banks are offering marginally lower interest rates to their best customers.
That could be for several reasons:
- The PBoC is still putting heavy pressure on banks to lower funding costs for businesses.
- The PBoC cut banks’ reserve requirements earlier in September – perhaps banks are passing those savings on to customers.
- Loan demand among corporates is still weak thanks to the slowing economy – so banks may have had to reduce rates to get companies to borrow.
The bottom line: A 5-basis-point cut isn’t exactly a game changer. We doubt it will have much of an impact on credit growth.
More importantly: The PBoC did not announce any adjustment to its underlying reference rate.
Sounds wonky – why does that matter? It means China’s central bank remains reluctant to ease monetary policy substantially, despite the easing moves from its developed world counterparts.
Xinhua: China’s one-year loan prime rate continues to fall
Bloomberg: Stimulus-Hooked China Traders Shift Focus to Loan Prime Rate
2.Pros and cons of perpetual bonds
Chinese banks are short on capital. You know that – because you read the Tip Sheet.
Lately, perpetual bondissuance has become one of the more fashionable methods for addressing the problem. The FT has a solid piece outlining their pros and cons.
The pros are mainly for the banks:
- “The security is available to public and private lenders, which makes it a powerful financing tool for small banks which have limited access to external funding.”
Bondholders also get some perks:
- “Perps also come with a feature called central bank bill swap (CBS) that helps improve the instruments’ liquidity.”
- “’CBS is giving perpetual bondholders the highest possible collateral they can get,’ said Zhao Wenzhe, an economist at Credit Suisse.”
But if things go bad, investors carry significant exposure:
- “Perps rank behind most debt securities in the priority for collecting repayment, in the event a bank goes bust.”
- “’Perpetuals could neither offer upside potential like stocks, nor security like bonds,’ said [an] investor.”
Get smart: As always, it’s the smaller banks that pose the most risk here. So far it’s mostly the big boys issuing this paper – but if regulators start to let small, city-level banks rush to issue these instruments, we should all be worried.
3. China aims to become a “strong transportation country”
How would you like to travel?
If “fast” is your answer, then China is the place for you.
According to a new outline released yesterday by the State Council and Central Committee, by 2035China wants a transportation system that allows citizens to:
- Commute within any metropolitan area in under one hour
- Travel within any city cluster in under two hours
- Reach any major city from another in under three hours
That’s not all. The 1-2-3 objective also applies to express delivery.
- By 2035, packages are expected to be delivered anywhere domestically within one day, to neighboring countries within two days, and to all major international cities within 3 days.
To do this, China plans to improve its transportation infrastructure. There will be particular focus on using new technologies, including:
- Information technology
- Artificial intelligence
- Smart manufacturing
- New materials
- New energy
Get smart: The industries that Beijing wants to use to improve transportation are the same ones it is looking to develop through its Made in China 2025 industrial policy.
What to watch: Expect concrete plans, policies, and subsidies to follow in the coming months.
Gov.cn: 中共中央 国务院印发《交通强国建设纲要》
4.Another finance expert heads to the provinces
Earlier this week, local mediareported that “Chongqing government Party group member” Li Bo had been poking around the Chongqing branch of the securities regulator (CSRC) to see how things are going.
What that means: This news indicates that Li Bo is likely to take over as the Chongqing vice mayor in charge of financial affairs.
A little about Bo:
- He’s young. At 47, he is one of the youngest vice-ministerial officials in the country.
- He’s cosmopolitan. He’s got a PhD in Economics from Stanford, a PhD in Law from Harvard, and he worked for international law firm Davis Polk Wardwell in New York and Hong Kong.
- He’s spent most of his career at the central bank (PBoC), including most recently as head of the Monetary Policy Department.
Why his appointment is interesting: By our count, Li is the 13th finance expert to be appointed to a high-ranking provincial government position in under three years.
Why that matters: It’s no coincidence that these appointments coincide with Beijing’s push to de-risk the financial sector and get on top of local government debt. Li’s appointment is further evidence that those policies remain top priorities.
5.Party institutes loyalty tests for journalists
Exam season is gearing up – but not for students.
About 10,000 journalists and editors from state media outlets are about to sita “pilot test” for political loyalty in early October using the Study Xi app.
Some context: The “Study Xi” app (xuexi qiangguo) launched in January and contains speeches, news, movies, and even songs – all picked by the Party center to educate people on the Party line and the wonders of Xi Jinping. Cadres across the country have been required to log a certain numberof hours on the app throughout the year.
Need some study motivation? Only those who pass the test will get their press cards.
That’s according to a late August notice from the Propaganda Department.
The exam has five parts:
- Xi Jinping Thought on Socialism with Chinese characteristics in the New Era (duh)
- General Secretary Xi Jinping’s Important Thoughts on Propaganda and Ideological Work
- Marxist views of journalism
- News ethics, policies, and regulations
- News gathering and editing
Get smart: The information environment has gotten progressively tighter under Xi Jinping – and it looks likely to tighten further.
6.Another Taiwan ally bites the dust
The hits just keep coming for Taiwan.
On Friday, the South Pacific nation of Kiribati announced that it will be cutting diplomatic ties with the island.
Some context: It’s been a rough week for Taiwan. On Monday, the Solomon Islands also voted to dump Taipei in favor of Beijing (see the September 17 Tip Sheet).
Taiwanese Foreign Minister Joseph Wu took to the podium to blast the decision, accusing China of trying to “reduce Taiwan’s international presence” and “destroy Taiwan’s sovereignty” (Reuters).
Wu also claimed that Beijing used some pretty sweet inducements to get Kiribati to change teams:
- “[T]he Chinese government has…promised to provide full funds for the procurement of several airplanes and commercial ferries, thus luring Kiribati into switching diplomatic relations.”
It’s happening: Earlier this week, we wondered aloud if the Solomon Islands switch would persuade other Taiwan allies to follow suit. Suffice it to say, the next domino fell faster than we expected.
Remaining Taiwan ally count:1716 15.
The big question: Seven countries have cut ties with Taiwan since Tsai Ing-wen took over the presidency in 2016. Will this undermine her re-election? Or will the increased pressure from Beijing serve to boost Tsai and the DPP?