This ain't good - China Tip Sheet March 2, 2020 - Trivium China - Policy insights driving brilliant China strategies

Driving the Day

1. Hubei economy devasted by virus

In China, new cases of coronavirus continue to drop (Reuters):

“Hubei had 196 new confirmed cases on Sunday, the National Health Commission said on Monday, sharply down from 570 cases a day earlier and the lowest since Jan. 24.”
“Overall, mainland China had 202 new confirmed cases, the lowest since Jan. 22.”

But the economic situation in Hubei looks grim.

According to a recent survey of 573 firms in the province (The Paper):

97.2% of firms have partially or completely stopped operations.

Some firms look destined to close down.

57.6% of firms say that they cannot survive a three-month shutdown without resuming operations.
A further 30.9% say that they would not be able to sustain a six-month closure.

And even if they do get back to work, companies are not optimistic about the future.

53.2% of firms are pessimistic about their firm’s outlook post-crisis.

Get smart: For now, officials in Hubei have been singularly focused on containing the virus. But increasingly they will be asked to address the economic fallout from the outbreak.

Get smarter: Resuscitating the Hubei economy will not be easy.

Finance Economics

2.Data – PMIs drop through the floor

Gulp. This ain’t good.

China reported purchasing managers’ indices (PMIs) for February over the weekend (CNBC):

“China’s official [manufacturing] PMI fell to a record low of 35.7 in February from 50.0 inJanuary…well below the 50-point mark that separates monthly growth from contraction.”

Some context: We’ve all been waiting to see what effect COVID-19 would have on the economy – and the extent to which authorities would allow the weakness to show up in official data.

This pretty much answers the question: Things are historically bad, and the authorities don’t seem to be shying away from that fact.

Going under the hood, the numbers get worse:

“A sub-index of manufacturing production nosedived to 27.8 in February from January’s 51.3 while a reading of new orders plunged to 29.3, down from 51.4.”

And it’s not just manufacturing:

“China’s services sector activity also posted the deepest contraction on record, with official non-manufacturing PMI dropping to 29.6, from 54.1 in January.”
“Transportation, tourism, catering and entertainment sectors have been hard hit during the coronavirus outbreak.”

Get smart: It’s been clear from the beginning that the virus would whack China’s economy in Q1. The big question is, after this extreme contraction,how quickly can the economyget up and running?

Finance Economics

3. I see those NPLs a-risin’

Financial regulators continue to offer targeted support to the country’s struggling SMEs.

The latest: Over the weekend, the banking regulator (CBIRC) told banks to give SMEs additional room on loan repayments (Bloomberg):

“Qualified small- and medium-sized businesses nationwide with principal or interest due between Jan. 25 and June 30 can apply to delay repaying their debt, the China Banking and Insurance Regulatory [Commission] said in a joint statement with the central bank on Sunday.“

To keep the banks from taking the brunt of the blow, though, the CBIRC also gave them some leeway – saying these loans don’t have to be classified as non-performing until later in the year:

“Regulators told lenders not to downgrade loans with missed payments or report borrowers’ delinquencies to the country’s centralized credit-scoring system before the end of June, according to the statement.”

Get smart: Officials are employing the banking system to cushion growth – but in a very different way than in the past.

Get smarter: Instead of pumping out loans, banks are being asked to provide forbearance to corporate borrowers.

The upshot: This new strategy will impair bank asset quality but shouldn’t have a significant negative impact on the country’s overall debt load. It’s the least bad option.

Politics Policy

4.Regulators ease corporate bond issuance rules

Yesterday, regulators announced that it will now be easier for companies to issue bonds.

Some context: China’s new Securities Law took effect yesterday. One of the law’s key revisions involves switching from an approval system to a registration system for securities issuance, including the issuance of corporate bonds.

More context: China’s corporate bond market was worth close to RMB 10 trillion in 2019.

Here’s how it works (Reuters):

“Companies seeking public sales of corporate bonds only need to send applications to the China Securities Regulatory Commission (CSRC) to register.”
“The exchanges will vet the corporate bond sales electronically to ensure they meet the rules.”
“Enterprise bonds, issued mainly by state-owned companies and government-backed entities, no longer need the approval of local governments and need only register with the NDRC.”

Get smart: In reality, the change doesn’t mean the approval system has been scrapped, just that the process has been simplified. The revision shortens the approval process by more than two weeks and lowers the requirements for corporates to issue bonds.

Get smarter: Despite having been in the works long before the COVID-19 outbreak, the rollout of the new rules will provide a timely and desperately needed boost for ailing corporates.

Politics Policy

5.Xi calls Latin American leaders

On Saturday, Xi Jinping called Chilean President Sebastián Piñera and Cuban President Miguel Díaz-Canel.

Judging from the Foreign Ministry’s summary of the calls, Xi took the opportunity to deliver verbatim the same lengthy monologue detailing China’s coronavirus containment efforts to both leaders (MoFA).

“To limit the further spread of the virus, the Chinese side has acted in an open, transparent and responsible manner in sharing timely information with WHO and the global community, actively responding to various concerns, and seeking cooperation with the rest of the world.”
“Xi pointed out that the Chinese nation, who had seen many trials and tribulations, has never been crushed. The outbreak’s impact on the Chinese economy will be short-lived.”

Kay.

In response to Xi’s soliloquy, Piñera and Díaz-Canel made supportive noises and expressed full confidence in Xi’s virus control efforts.

Get smart: This is another stop on Xi’s global reassurance tour designed to convince other world leaders that things will be back to normal soon.

Our question: Why these two countries in particular?

This ain’t good — China Tip Sheet March 2, 2020

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