driving the day
1. Lawmakers call for health system revamp
This morning, the National Health Commission (NHC) released the latest COVID-19 numbers.
More good news (NHC): On May 27, there were only two confirmed COVID-19 cases, imported from abroad into Shanghai and Fujian.
- That’sfour consecutive days of zero domestically-transmitted cases.
- Only three domestically-transmitted cases have been found in the past week.
On May 27, China also reported 23 new domestic asymptomatic cases, down from 28 the previous day, marking the fourth straight day of decline.
What has increased:
- The number of health-related proposals submitted at this year’s Two Sessions.
According to Xinhua, the National People’s Congress received a total of 506 proposed bills and approximately 9,000 other proposals from delegates during this year’s annual session, which ended today.
- A quarter of proposals are about improving public health management and crisis response.
Get smart: There’s nothing like a global pandemic – and a botched initial response – for prompting action on public health.
Get smarter: The 2002-03 SARS epidemic promoted a similar response. But the changes instituted in the wake of SARS were not sufficient to head off COVID-19.
2. Companies struggling to get back to normal
China’s business resumption is plateauing.
Here are our estimates as of May 28:
- The Trivium National Business Activity Index indicates that China’s economy is operating at 87.4% of typical output, no change from May 27.
- The Trivium National Large Enterprise Activity Index indicates that China’s large enterprises are operating at 87.8% of typical output, up marginally from 87.7% on May 27.
- The Trivium National SME Activity Index indicates that China’s small businesses are operating at 87.2% of typical output, up marginally from 87.1% on May 27.
This ain’t good:
- Large enterprises have been stuck in the 80%-90% range since March 24.
Get smart: A V-shaped recovery is out of the question.
Get smarter: China’s economy will not fully recover until the rest of the world returns to something approaching normal.
Getting China back to work
3. Group deposits were funwhile theylasted
Recently, China’s banks haveembraced a new innovation: group deposits.
Some background: In 2019, China’s banks started giving savers higher interest rates if they signed up to make fixed-term deposits as a group.
It appears that regulators are now taking an interest.
Caixin reports that:
- “Some local regulators…have started asking banks to submit data and information about…[these] products.”
- “The investigations are mostly being carried out…in the southeast.”
Some context: The central bank sets a ceiling on bank deposit rates, making it difficult for banks to compete for customers.
However, for large deposits, interest rate restrictions get relaxed. Hence, group depositing.
- “Bank of Shanghai has a three-year five-person savings plan that comes with a 4.125% interest rate if each individual deposits RMB 50,000… that compares with a rate of 3.68% if a customer puts the same amount into an individual three-year savings account.”
Get smart: China’s banks are under pressure to lend more to help deal with the pandemic. To do that, they need deposits.
4. Bank “perp” issuance surging
Perpetual bonds are becoming the go-to tool for banks needing to raise capital.
So far in2020, Chinese banks have raised RMB 274 billion by issuing 10 perpetual bonds.
- That’s up from RMB 40 billion during the same period last year.
Why perpetual bonds?
- Perpetual bonds (perps) don’t ever mature – the issuer pays interest on them forever, much likea dividend on equity.
- Regulators therefore allow perpetual bonds to count toward banks’ Tier-1capital.
These instruments were once exclusive to large banks. Not any more:
- This year, the banking regulator allowed 10 commercial banks to issue perps.
- On Wednesday, Alibaba-backed online bank MYbank became the first approved private lender (Caixin).
Get smart: The magic of perpetual bonds is that the central bank can swap them into central bank bills, meaning jittery investors can exchange them for the safest debt available.
Get smarter: Banks are going to need to raise a lot of capital this year to deal with the pandemic. Expect financial regulators to come up with more tricks to ensure this.
China Securities Journal:
5. The missing adjective is back
Right before we went to print, China’s legislature approved the Premier’s Government Work Report (GWR).
The final version of the GWR contained 89 revisions to the version delivered by the premier on Friday.
An important addition to the Taiwan section of the report was made(China Youth Daily):
- “Adhere to the one-China principle and promote the peaceful development of cross-strait relations on the basis of the ‘1992 Consensus’”
Some context: The omission of the word “peaceful” in the earlier version of the GWR caused quite a stir, and prompted speculation that a major policy change was in the works (see May 26 Tip Sheet).
Get smart: Beijing’s being very explicit that there has been no change in policy.
The bigger picture: Cross-strait relations are still in a parlous state, and don’t look set to improve any time soon.
China Youth Daily:
6. NPC sets stage for Hong Kong natsec law
The National People’s Congress (NPC) approved a resolution on establishing a national security mechanism in Hong Kong today.
What that means: The NPC Standing Committee will now get to work drafting a national security law for the city.
- The new law will give the mainland security services the authority to operate in the city and punish acts that “threaten national security.”
Lawmakers have been touting the move (Xinhua 1):
- “Bai Chunli, president of the Chinese Academy of Sciences, said the legislative move is completely reasonable and legitimate.”
- “’It will certainly win the support of all Chinese people,’ Bai said.”
The law has drawn backlash from US Secretary of State Mike Pompeo (US DoS):
- “I certified to Congress today [May 27] that Hong Kong does not continue to warrant treatment under United States laws in the same manner as U.S. laws were applied to Hong Kong before July 1997.”
What that means: The US President can impose sanctions on Hong Kong.
Chinese officials say they don’t care (SCMP):
- “’These threats [by the US] are what we expected… We have prepared for the worst case scenario,’ said Ruan Zongze, [executive vice president] at China Institute of International Studies, a think tank under China’s foreign ministry.”
Get smart: There are a lot of unknowns here.
- We don’t know what will be in the national security law.
- We don’t know when the law will be passed.
- We don’t know how the law will be enforced.
- We don’t know what sanctions – if any – the US will impose.
Bottom line: Given all the unknowns, it’s too early to tell the practical implications for doing business in Hong Kong.
PRC National People’s Congress Proposal on Hong Kong National Security Legislation
Chinese lawmakers deliberate draft decision on Hong Kong national security legislation
China prepared for international backlash over Hong Kong national security law
National security legislation not to bring any changes to fundamentals of HK’s financial system: monetary authority head
7.Tensions with India heating up
China’s longstanding border disputes with India are escalating.
Some context: Earlier this month, minor altercations between Chinese and Indian troops were reported near the Line of Actual Control, the de facto border between the two countries.
Now, things are heating up in the contested Ladakh region (The Guardian):
- “Thousands of Chinese People’s Liberation Army (PLA) troops are reported to have moved into sensitive areas…setting up tents and stationing vehicles and heavy machinery in what India considers to be its territory.”
- “In response, the Indian army has moved several battalions from an infantry division…to ‘operational alert areas’ along the border, and reinforcement troops have been brought in.”
More context: This is the second major flare up at the border in less than three years (see August 4, 2017 Tip Sheet).
Get smart: Over the past two years, Xi Jinping and Indian Prime Minister Narendra Modi have worked to build a personal rapport – but that hasn’t stopped relations from souring.
Get smarter: The relationship between the world’s two most populous countries is chronically under-discussed, but hugely important.
China and India move troops as border tensions escalate