Driving the Day
1. The next phase for financial de-risking
On Monday, the central bank (PBoC) releasedits annual Financial Stability Report for 2019.
This year’s report detailed the history and future prospects of the financial de-risking campaign – saying that the current phaseis scheduled to conclude in 2020.
The early years of the campaign saw some success. In 2018:
- The macro leverage ratio fell from 250.9% to 249.4%.
- The number of peer-to-peer lending facilities was slashed from 5,000 to 1,490.
- 173 cryptocurrency platforms were shut down.
Next year, regulators plan to:
- Maintain prudent monetary policy
- Improve the transmission mechanism for monetary policy
- Resolve risks associated with shadow banking
- Handle high-risk financial institutions, especially SMEs
- Prevent liquidity risks emanating from cross-border capital flows
- Widen financial sector opening
Get smart: This all means more of the same in 2020 – i.e. tight financial conditions, weak credit growth, and a struggling economy.
What to watch: Regulators will have to roll out a plan for 2021 and beyond soon.
By the by: There was LOTS more details in the report – we’ll break everything down for paying clients in the coming days.
2.Local government bonds are flopping
The FT is out will a solid piece about why local government investment spending is still in the doldrums.
The gist is that a key funding channel isn’t working properly:
- “Beijing ordered a big increase in the issuance of so-called special-purpose bonds in late 2018, touting them as a way to fund specific projects including irrigation, transport and toll roads.”
- “But a particularly flexible slice of these bonds that can be paid off using projects’ revenues has flowed largely into real estate projects.”
One issue is that local governments have few profitable projects to finance:
- “One official…in Shanxi province…said because so few projects actually generated any income, many local governments instead plan to pay off the bonds with tax revenues.”
Another problem: – city bond quotas aren’t large enough to move the needle, anyway:
- “In September, Beijing assigned quotas for next year’s SPBs, three months ahead of schedule.”
- “Local officials say these quotas still are not enough.”
- “The LGFV official from Shanxi noted midsized cities’ SPB allocations could be as little as Rmb10bn.”
- “That’s like a drop in the bucket given that total fixed-asset investment could easily exceed Rmb100bn in a city.”
The bottom line: Central government efforts to support the economy simply aren’t working.
3. PBoC sets its sights on fintech and crypto
The 2019 China Financial Stability Report (see entry #1) also had a heavy focus on internet finance.
The report explains three ways in which fintech is disrupting macro policies:
- Fintech innovation complicates the transmission of monetary policy, especially for financial products with maturity mismatches.
- Peer-to-peer lending platforms channel funding to restricted and outdated industries.
- Fintech companies that can clear payments, collect social credit information, and process transactions undermine rules governingmarket entry and exit.
The central bank (PBoC) didn’t mention Alibaba or Tencent by name, but warned that:
- Some internet giants have become de facto financial holding groups, without subjecting themselves to financial regulations, by setting up subsidiaries or investing in financial enterprises.
The PBoC also thinks that the internet giants are too big to properly tackle, so regulators are picking on smaller guys:
- On Sunday, the nation’s Leading Group for the Special Campaign against Internet Financial Risks confirmed that a major, nationwide crackdown on cryptocurrencies and illicit blockchain activity is now underway.
Get smart: Regulators see fintech and internet finance as both an opportunity to improve the financial system and a major threat to stability – they are trying to thread the needle by supporting innovation while strengthening regulatory procedures.
4.Hebei steel producers push back
Winter is tough for industrial producers around Beijing – because that’s when the government ramps up efforts to curtail air pollution (See October 18 Tip sheet).
This year, though, Hebei’s steel industry is fighting back.
- Hebei produced one quarter of China’s steel in 2018.
- That’s one-eighth of global production – cause China produces half of the world’s steel (yay, math!).
So what’s the latest? Earlier this month, the Hebei Metallurgical Industry Association submitted a letter to the provincial branch of the industry regulator (MIIT) detailing the disruption that environmental protection measures have caused for the industry.
The main complaints:
- Some operations are still shut down through unlawful means.
- Environmental standards have been raised too fast – and too drastically.
- Too many inspections are conducted by too many different departments – with different inspectors requiring conflicting remedies.
- Companies have to trial environmental solutions at their own expense – with little guidance from regulators.
Get smart: Beijing views its recent environmental shock and awe tactics as a success in quickly curbing pollution.
What to watch: The outcome of this back-and-forth could have a significant impact on industrial growth over the next four to five months.
5.Sino-Japanese ties on the mend
State Councilor and Minister of Foreign Affairs Wang Yi was in Tokyo, Japan, on Monday.
The reason: To attend the first meeting of the China-Japan high-level dialogue on people-to-people and cultural exchanges.
Why that matters: The new dialogue is evidence of the thawing relations between the rival Asian powers.
Xi Jinping and Japanese Prime Minister Abe both sent congratulatory letters to the dialogue, confirming its importance.
Abe also took the time to meet with Wang, where he said (Japan Times):
- “We’d like to work together to make for a meaningful visit fitting of a new era in Japan-China relations.”
Some context: Xi is scheduled to make his first state visit to Japan in the spring.
But bilateral relations are far from copacetic, as evidenced by comments by Xi on Friday to attendees of the Bloomberg New Economy Forum (Bloomberg):
- “As for the biased view of Japanese people toward China, yes, China needs to do some things but more importantly the responsibility is on the Japanese side.”
- “It needs to do more things to undo the prejudiced and biased views against China.”
Get smart: Xi and Abe are both proud, conservative nationalists. That limits the extent to which Sino-Japanese relations can improve while they are in power.
Japan Times: As Xi visit nears, Abe urges China to maintain free and open Hong Kong
Bloomberg:Japan Needs to Do More to Fix China’s Image Problem, Xi Says
6.Don’t call it a secret lair
On Tuesday, Reuters published an excellent pieceon how Beijing is attempting to manage the situation in Hong Kong.
The scoop: Despite Beijing’s oft-repeated claims that the protests should be handled locally, central authorities have been closely monitoring (and managing) the situation from a semi-secret compound known as Bauhinia Villa in Shenzhen, just across the border from Hong Kong.
Why that’s interesting: Officially, Beijing communicates with Hong Kong through the Liaison Office of the Central People’s Government in Hong Kong.
- This means Bauhinia Villa forms a sort of unofficial parallel command structure.
That may be because Beijing is unhappy with how Liaison Office Director Wang Zhimin has handled the situation in Hong Kong.
- Word on the street is that Beijing is already headhunting for Wang’s replacement.
According to an unnamed Chinese official, Wang and his colleagues have been living in a bubble:
- “The Liaison Office has been mingling with the rich people and mainland elites in the city and isolated itself from the people.”
Get smart: Months of protests combined with a decisive electoral drubbing have shown that Beijing’s Hong Kong policy has been an utter disaster.
Get smarter: The window of opportunity for Beijing to get constructive buy-in from ordinary Hongkongers is long past.