Driving the Day
1. Ramping up testing
This morning, the NHC dropped the latest numbers for domestic COVID-19 cases.
On April 23 (NHC):
- There were 34 asymptomatic cases, one of which was imported.
Confirmed cases have once again dropped to single-digit increases:
- There were six new COVID-19 cases, of which two were imported.
Locally transmitted cases are continuing to pop up in Harbin and Guangzhou.
- Of the locally transmitted cases, three were recorded in Harbin and one was recorded in Guangzhou.
This is big: Yesterday, the NHC announced that active confirmed cases in China dropped below 1,000 for the first time since the outbreak began.
To get back to normal, the central government is now looking to ramp up testing.
Local governments are already all over it:
- Between Tuesday and Thursday, Guangzhou tested 193,000 people;38,000 have already received negative results (21st Century Biz).
- Shanghai municipality and Shanxi province have released lists of clinics that can do testing (The Paper).
And there’s more where that came from:
- Yesterday, the Ministry of Industry and Information Technology said China could produce five million test kits a day.
Get smart: The government is looking to ensure that they can continue to track and control any possible resurgence of the virus. The fate of the economy depends on it.
Driving the Day, Cont’d
2.Xi signals shift in economic policy
Xi finished up his four-day trip to Shaanxi on Thursday.
The grand finale: A sit down with the provincial leadership to discuss their work.
The big message: It’s time to up policy support for the economy.
Xi said he knows that times are tough:
- “The sudden outbreak of the novel coronavirus epidemic has made it challenging to meet previously specified targets.”
But that is no excuse to slack:
- “I hope that all cadres and the masses in Shaanxi will work tirelessly…and contribute to the realization of the two centenary goals.”
Why that’s important:
- The first “centenary goal” is to build a “moderately prosperous society” by 2021.
- By the Party’s own definition, achieving a moderately prosperous society would necessitate economic growth of around 5.5% in 2020.
Get smart: 5.5% growth is impossible. But Xi’s statement is a strong signal that he wants officials to do everything they can to juice the economy.
Get smarter: Xi’s Shaanxi visit has indicated a new approach to economic policy.
- He has focused on large state-owned enterprises instead of small, private businesses (see yesterday’s Tip Sheet).
- He is focusing on more aggressive economic support measures – particularly on boosting investment (see next entry).
CPC People: 习近平：扎实做好“六稳”工作落实“六保”任务 奋力谱写陕西新时代追赶超越新篇章
Driving the Day, Cont’d
3. Xi’s plan to boost growth
On Thursday, Xi urged Shaanxi officials to boost economic growth (see previous entry).
Xi’s plan: Boost investment.
Specifically, Xi is all about “new infrastructure”:
- “[We] must…push forward with investment in 5G, the Internet of Things, artificial intelligence, the industrial internet, and other new-type infrastructure.”
But Xi’s also pretty fond of “old infrastructure”:
- “[We] must…expand the intensity of investment in the areas of transportation, hydropower, and energy.”
- “[We] must…address shortages in rural infrastructure and public services, and strive to solve the problem of unbalanced and inadequate development.”
Get smart: Friday’s Politburo meeting signaled more urgency about the economy (see Monday’s Tip Sheet). It looks like a big part of the policy response will be to up investment in infrastructure – both old and new.
CPC People: 习近平：扎实做好“六稳”工作落实“六保”任务 奋力谱写陕西新时代追赶超越新篇章
4.Echoes of shadow banking
Get this: China’s securities companies are selling bad loans collateralized by stock to asset management companies (AMCs).
Why you ask? Securities companies are trying to insulate themselves against losses that arise from taking possession of the stocks trading below the value of loans they’ve made.
- In theory, securities firms could hold the shares until the price rebounds.
- But until that happens, they’d have to carry the loss.
- Meanwhile, the AMCs – financial institutions chartered to acquire distressed debt – function on a longer time horizon, so they can afford to dispose of the collateral when its value rebounds.
But there’s a catch: AMCs won’t pay full price for loans insufficiently backed by collateral, so this shouldn’t really be a solution to the predicament facing securities firms.
So securities firms and AMCs are cutting a deal(21st Cent Biz).
- “The securities companies enter into an agreement with the AMCs… to buy back the stock once the risks have cleared.”
Get smart: Securities firms are gussying up their books by using AMCs to move bad loans off balance sheet temporarily.
- This is exactly how China’s banks previously employed the shadow banking system – which led to a huge crackdown.
Get smarter: As pressure mounts on financial institutions thanks to the coronavirus, the incentive to use financial engineering to hide risk will only rise.
21st Century Business Herald: 独家丨券商接洽AMC处置股票质押“不良” 协议转让价格折扣力度加大
5.An unexpected liquidity problem
Bank lending in China is running into an unexpected problem – too much liquidity(21st Century Biz).
- Specifically, liquidity injections and interest rate cuts by the central bank are driving down money market rates much faster than loan rates.
- That’s driving higher quality borrowers to issue bonds rather than taking on new loans.
Normally, that wouldn’t be a problem – in fact financial regulators are wanting to encourage more direct (i.e. bond and equity) financing rather than indirect financing through bank loans.
However, large, “high quality” companies are the ones with the most ready access to the bond market, which raises two immediate issues:
- Low money market rates aren’t doing much to help SMEs, which are the primary targets of policy support.
- The move to bonds might deteriorate banks’ overall loan quality – because they can’t balance risky SME lending with loans to bigger companies with stronger balance sheets.
More generally, this underscores that the transmission mechanisms between money market instruments and loans still aren’t in sync, which was what regulators were trying to achieve with the introduction of the new loan prime rate (LPR).
Get smart: It’s just another illustration of the financial system’s deficiency in financing SMEs.
21st Century Business Herald: 市场利率下行快于LPR 债市分流部分贷款融资需求
6.Zeroing in on dates for the Two Sessions
Bloomberg scoops that Chinese officials are eyeing late May to hold the annual government meetings known asthe Two Sessions.
The details (Bloomberg):
- “The gathering of China’s legislature, the National People’s Congress, usually runs for about two weeks in Beijing.”
- “At least one set of dates being considered is May 23-30.”
- “That would be shorter than normal.”
There seems to be corroboration of the dates in the Hong Kong press:
- “The Chinese People’s Political Consultative Conference, an advisory body whose annual meeting is held in conjunction with the NPC, will gather from May 21 to May 27, two Hong Kong broadcasters reported over the weekend.”
As we’ve pointed out before (see April 20 Tip Sheet), we should know seen enough:
- “The NPC Standing Committee, which is set to meet in Beijing April 26-29, will decide the final date to convene the legislature, [the people] added.”
Get smart: We’ve said it before, but it bears repeating – setting a date for the Two Sessions will be an important marker for China’s return to normalcy.
- It will also be an important signal that senior Chinese officials are confident in theirvirus containment measures.
Bloomberg: China Ponders Late May Date for NPC After Virus Forced Delay
7.NEV subsidies less than meet the eye
The first months of 2020 have been a veritable policy roller coaster for the new electric vehicles (NEV) industry.
- For years, the government had promised toeliminate NEV purchase subsidies by this year.
- Butin March, the State Council said it would extend NEV purchase subsidies to 2022.
Now, the finance ministry has clarified that it will cut production subsidies by 10% this year.
- It also said it would cut subsidies by 20% in 2021 and 30% in 2022.
Sun Guangqi, head of the finance ministry’s department of economic construction explained the rationale (Xinhua).
- “China’s new energy vehicle industry started early, started well and developed rapidly, but there are some practical difficulties at present.”
- “The manufacturing cost of new energy vehicles is still relatively high, it is difficult to compete with traditional fuel vehicles, and [the NEV industry] needs to continue to support, consolidate and expand the hard-won development achievements.”
Get smart: The debate about whether, and how much, to suppor the NEV industry continues to rage. Producers have leveraged the coronavirus to garner more government support. But the overall goal remains to make the industry stand on its own two feet.
Reuters: China to cut new energy vehicle subsidies by 10% this year
Xinhua: 新能源汽车免征车辆 购置税政策延长两年