one big thing
1. H2 set tosee small tweaks to fiscal and monetary policies
China’s macro-policymakers are looking to tweak key fiscal and monetary settings in the second half of the year.
How do we know? On Thursday, the Ministry of Finance (MoF) and the central bank (PBoC) both dropped key policy reports.
- MoF released a report looking back at policy in H1 – the ministry’s first-ever public mid-year review.
- The PBoC released its Q2 monetary policy report.
- Both reports outlined the policy outlook for the second half of the year.
The bottom line: Fiscal policy will stay proactive and supportive, while monetary policy will dialed be back a touch.
- That said, both policy settings will increasingly be geared toward addressing medium-term, structural challenges – rather than focusing solely on the immediate need of normalizing economic activity in the wake of the pandemic.
Our take: As we noted after the July Politburo meeting (see July 30 Markets Dispatch), policymakers are quite pleased with the economy’s performance in Q2 – and are increasingly shifting their mindset to the economy’s broader challenges.
In H2 2020, the PBoC’s top goals include:
- Making monetary policy more flexible and precise
- Actively employing re-lending and re-discounting facilities
- Better deploying resources to support structural adjustment of the economy
- Deepening interest rate reform and exchange rate marketization – to more efficiently deploy financial resources
- Further modernizing the financial system – through Financial Supply-Side Structural Reform
- Preventing and resolving financial risks
Get smart: This isn’t a central bank that is primarily focused on short-term fire-fighting (see next entry).
Meanwhile, MoF is set to focus on:
- Doing everything possible to stabilize and expand employment
- Winning the battle against poverty
- Implementing “fine-grained” tax and fee reductions for businesses
- Ensuring food and energy security – by investing in the development of high-quality farmland
- Stabilizing supply chains
Get smarter: MoF’s list is geared more toward short-term challenges, but not exclusively. What’s more, the ministry is set to put real fiscal resources into each of these priorities.
The upshot: Monetary and fiscal policies are starting to diverge somewhat.
- Policymakers need to be careful that they aren’t working at cross purposes.
The bigger picture: This is all part of the ongoing evolution of macro management in China – where fiscal policy is taking on more responsibility for direct economic support, while monetary policy is becoming more targeted, focused, and nimble.
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2. Monetary policy to see marginal tightening in H2
Oh, we ain’t done yet.
The PBoC’s Q2 monetary report (see previous entry) had some additional nuggets of note.
Encouragingly, central bank officials think the economy is almost back to normal and will continue to improve in H2 (PBoC):
- “Economic growth in the second half of the year is expected to return to potential growth levels.”
Get smart:There is no official estimate of what China’s potential growth rate is, but economic officials and policy advisors generally agree it’s within the 5-6% range.
That positive economic outlook is why the PBoC is comfortable stepping back a touch from its economic support policies, and pivoting toward medium-term priorities.
Here’s how we know the PBoC is looking to shift more firmly into a neutral policy stance:
- The Q2 report dropped a key phrase it had been using to characterize recent support measures – no longer pledging to “strengthen[ing] counter-cyclical adjustments” to policy.
- The bank then reiterated the Politburo’s directive to make monetary policy more “precise” (seeJuly 30 China Markets Dispatch) – reflecting less emphasis on accelerating the pace of overall loangrowth.
- Finally, officials recognized that the macro debt ratio had jumped in H1 – and pledged to bring it back to a “reasonable level” in H2.
None of that sounds like a central bank looking flood the zone with new money and credit.
- That said, the PBoC will continue to use targeted policies to channel liquidity to certain sectors, with SMEs still the top priority forsupport.
- The policy tools will include targeted RRR cuts, re-lending, and re-discounting programs.
The bottom line: This isn’t an about-face for the PBoC. It’s a gradual, steady, and marginal pivot toward monetary normalization.
3. Avoiding the export apocalypse
The customs bureau dropped the latest trade data for July on Friday.
The headline: The export numbers were solid. Imports, not so much.
- Exports increased by 7.2% y/y– up from 0.5% growth in June, and the best print since March 2019.
- Imports fellby 1.4% y/y– downfrom 2.7% growth in June.
Get smart: We’ll keep this one short. China has largely dodged the export apocalypse that many analysts expected the pandemic would bring.
- That’s partly thanks to an increase in exports of medical equipment.
- But it’s also because the pandemic has been most detrimental to SMEs throughout the world–particularly local bars, restaurants, and other service companies.
- These businesses don’t do much purchasing from China, leaving exporters less vulnerable than conventional wisdom would expect.
- Meanwhile iphone and other online merchandise sales are booming.
Putting it all together: China’s economy is on better footing than any other major country.
4. Baoshang goes bust
Nope…we’re still not done.
- There was one more semi-bombshell in the Q2 monetary report (seeentries #1 and #2).
which was taken over by the central bank and banking regulator last year
will file for bankruptcy and liquidate its remaining assets, according to the report.
Wow! That seems like a big deal.
After all, no Chinese bank has gone bankrupt in 20 years.
Buuuut there’s less here than meets the eye.
Earlier this year, the PBoC transferred the bulk of Baoshang’s business into Mengshang Bank, a new bank created just for that purpose.
Mengshang’s equity is owned by the PBoC, a couple of commercial banks, and an assortment of state firms.
which controlled 89% of Baoshang through subsidiaries
is not on Mengshang’s shareholder roster.
Separately, Baoshang’s four branches outside of Inner Mongolia
where the bank is based
went to Huishang Bank.
What was left on Baoshang’s books were those debts incurred by creditors who were not protected by deposit insurance.
What remains of Baoshang is a shell, filled with assets no one wants and liabilities that won’t be repaid.
While the bankruptcy is little more than a technical final step, Baoshang’s restructuring will serve as the PBoC’s model for dealing with distressed banks for years to come.
5. Loosening up on bad loans
In the face of a pandemic you can only push reform so far.
On Thursday, Caixin cited sources saying that draft regulations requiring banks to more stringently recognize non-performing loans (NPLs) may be watered down.
The draft, circulated last year by the China Banking and Insurance Regulatory Commission (CBIRC), would require banks to:
Recognize shadow banking assets classifiedas receivables as NPLs.
Recognize all financial assets overdue by more than 90 days as NPLs.
Adhere to more strictly defined rules governing the circumstances under which loans migrate from the normal to the non-performing category.
According to Caixin, the CBIRC estimates that the new rules would cause NPLs to increase 60%, with small and mid-sized banks experiencing a greater increase.
Those estimates were made prior to the pandemic and would likely be far higher under current conditions.
With small banks already under pressure to raise fresh capital, loosening the rules will give them some breathing room.
The CBIRC has spent the last few years forcing banks to incrementally recognize more NPLs. The overall direction of that trend is not about to change.
6. China’s big banks look to slash budgets
China’s banks are in cost cutting mode
– and they are having to get creative.
On Thursday, domestic financial mediareported that CITIC Group
had called for a reductionin administrative expenses of at least 10%(excluding labor costs, depreciation, and amortization).
Analysts have warned of zero or negative growth in the Chinese banking sector for months now. Cutting down on unnecessary administrative costs, such as business travel, is low-hanging fruit to offset sluggish profits.
But that’s not all:
There have also been “hidden” salary cuts as year-end bonuses and benefits have been canceled.
Likewise, some banks have increased the proportion of performance-linked pay at a time when performance across the sector is negative.
Regular wages are under fire, too:
The total wages paid out by state-owned banks, such as those under CITIC Group’s umbrella, are calculated according to a formula set by the Ministry of Finance, which is tied to the previous year’s performance.
According to the formula, if financial SOEs fail to maintain or increase the value of state-owned assets, total wages will drop or remain the same as the previous year.
This is only the beginning. Since it’s difficult for many state-owned banks to reduce headcount, employees can expect to see a decrease in total wages next year as well
as this year’s poor performance will hitthe 2021 budget.
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The information contained in this newsletter does not constitute investment advice.