Driving the Day
1. PBoC ups liquidity, everyone freaks out
Get ready – the central bank (PBoC) is finally stepping in to boost growth in China’s economy.
Okay – not really. But that’s what financial headlines will say in the coming weeks.
Why you ask?
Because the PBoC is very likely to up liquidity provisions from now until the late January Chinese New Year (CNY).
- The bank already reduced interest rates on 14-day reverse repo operations on Wednesday – cutting rates from 2.7% to 2.65%.
- What’s more, there are increasing expectations among domestic market participants that a cut to banks’ reserve requirements will be forthcoming before the end of the year.
Get smart: The adjustment to 14-day reverse repos is simply meant to bring the rates on these instruments in line with other short-term lending facilities that have seen similar adjustments in recent weeks (see November 18 Tip Sheet).
Get smarter: When CNY occurs early in the year – in late January instead of early-to-mid-February – the annual liquidity crunch for banks and companies between year-end and the CNY holiday is exacerbated.
The bottom line: The PBoC is looking to head off a cash crunch – not rampup monetary support for the economy.
Reuters:China central bank adds more liquidity, cuts 14-day reverse repo rate
2.Bank bailouts march on
The bailouts for China’s troubled small banks roll on.
The latest development concerns Hengfeng Bank – which has seen its share of challenges in recent months (see August 9 Tip Sheet).
What’s happening? Surprise! Rather than leaving things to the market, the state is stepping in to bail the lender out (Caixin):
- “China’s Hengfeng Bank will raise 100 billion yuan ($14.21 billion) through a private placement to a group of state and foreign investors.”
- “The troubled Shandong-based lender will issue 100 billion shares, Hengfeng said Wednesday in a statement.”
It’s not just the central government – a consortium of central, local, and foreign investors are set to get involved:
- “Central Huijin Investment Ltd., an investment arm of China’s sovereign fund, China Investment Corp. (CIC), will subscribe for 60 billion shares in the sale.”
- “An asset management firm controlled by the Shandong provincial government, [will subscribe] for 36 billion shares.”
- “And Singapore’s United Overseas Bank and other investors, [will subscribe] for the remaining 4 billion shares.”
Get smart: In case you missed it, China’s sneaky system-wide bank bailout is well underway.
What to watch: Tight financial conditions will unearth more troubles at China’s small banks throughout 2020.
Caixin:China’s Hengfeng Bank Gets $14.21 Billion Bailout
3. Xi bets on Macau
Xi Jinping was in Macau on Wednesday to celebrate the 20th anniversary of the territory’s return to China after being administered byPortugal for over 400 years.
The festive occasion was made even more jolly by Xi’s praise of Macau’s accomplishments since its return to the fold (SCMP).
- “The achievement[s] and progress that Macau has made after returning to the motherland [have]made people feel proud.”
Xi also gave Macau kudos for having (China Daily):
- “Fully and accurately implemented the ‘one country, two systems’ policy and acted strictly in accordance with the Constitution and the Basic Law.”
Translation: Thanks for not being Hong Kong.
Some context: As Hong Kong has descended into months of violent anti-government protests, Beijing sees Macau as a vindication of the “one Country, two systems model.”
What to watch: Xi is expected to announce a number of “gifts” for Macau in form of favorable new financial policies (see the December 13 Tip Sheet).
Get smart: The new policies are about both rewarding Macau and diversifying away from Hong Kong.
4. State Council promises more transparent government
On Wednesday, the State Council held its weekly executive meeting.
Top of the agenda: Making government more transparent.
In particular, top officials are seeking to increase transparency at lower levels of administration, where public interaction with government is most common. This includes governments at the county, district, township, and community levels.
The details (Gov.cn):
- “Primary-level governments should formulate, by the end of 2020, a catalog of government affairs to be made public.”
- “Governments at the primary level shall release their service items, as well as guidelines and processes for accessing these services, both online and offline.”
- “To make it easier for businesses and people to access government services, county-level governments shall open unified online portals for accessing government services.”
The government also wants to make it easier for citizens to get involved in government decision making:
- Wider public involvement in the administrative decision-making process will be encouraged.
- Primary-level governments shall clearly define the scope and format for public involvement in administrative decision-making, and disclose this information to the public.
- They must promptly respond to any public concern about policy implementation and project development.
Get smart: In Xi Jinping’s China, politics is becoming more opaque. But government is becoming more transparent.
5.Local governments attempt to get a handle on debt
In 2019, local governments have spent a lot of time quietly dealing with their off-balance sheet debt (see December 6 Tip Sheet for the latest).
The Paper did a year-end review of the process, summarizing local governments’ various strategies.
There are several models:
- Zhenjiang model – Swap LGFVs’ debt with low-rate loans from China Development Bank.
- Shanxi model – Set up a company to take over highway assets and debts. The company then goes through debt restructuring.
- Haikou model – Government pays down existing debts with some good ol’ fashioned fiscal discipline.
- The mixed model – Combine elements of the three models above.
Get smart: Local governments have until around 2028 to resolve existing off-balance sheet debt.
Get smarter:Many local governments are set to see cash flow problems in the next three years.
The bottom line: For local governments, there is no easy way out of debt woes.