one big thing
1. PBoC envisions newbenchmark interest rate
On Monday, the People’s Bank of China (PBoC) published an importantwhite paper in which it outlined plans to develop a new benchmark interest rate for pricing financial products.
For this purpose, the bank is looking to promoteinterest rates on repurchaseagreements (repos) between depository institutions that are collateralized by bonds.
Some context: Interest rates on these products areotherwise known as DRs.
What’s the PBoC’s rationale here? (21st Cent Biz):
- “The white paper believes…China’s currency, bond,and derivatives markets have developed benchmark interest rates that are…recognized by the market.”
- “But apart from the loan prime rate (LPR)…the other benchmark interest rates are mainly just indicators that reflect supply and demand, with limited use in pricing financial products.”
That’s what the PBoC wants to change.
Specifically, the bank wants to encourage the use of DRs in pricing:
- Floating-rate bonds
- Interest rate swaps
- Negotiable certificates of depositand other interbank activities
It also would like to see international organizations use it to price yuan-denominated financial transactions and products (more on this below).
According to the white paper, DRs have become the most important indicators for observing interbank lending dynamics (see next entry), which makes these rates particularly good candidates to help price broader financial products.
Get smart: This move is part of the central bank’s multi-year campaign to build up a roster of market-based interest rates – to better price risk and to enable the PBoC’s ongoing shift toward a fully priced-based monetary policy.
But this isn’t just about domestic policy.
The bigger picture: The white paper starts by explaining that the previous global benchmark for financial products– the London Interbank Offered Rate (LIBOR)– has been severely weakened as a reference rate since the 2008 Global Financial Crisis.
- Without getting into the details of the LIBOR’s demise, the paper points out that by the end of 2021 its phase-out will be largely complete.
- This has prompted a wave of benchmark interest rate reform in a number of major countries.
Get smarter:The PBoC needs a well functioning interest rate curve to improve domestic monetary transmission, but the urgency has been increased with the weakening of the global LIBOR benchmark, which Chinese banks use to price international transactions.
Our take: The PBoC knows it is behind its global peers on establishing an operational interest rate regime, and the white paper says as much. But central bank officials clearly see now as an opportunity– to get their own house in order, and to potentially offer a Chinese benchmark rate to underpin global RMB transactions.
2. Money’s too tight to mention
On Monday, Zheng Kuifang, an official from China Construction Bank’s financial markets department, published a notablecolumn in the 21st Century Business Herald– which appears to reflect broader thinking throughout the banking sector.
Zheng’s message:Loose monetary conditions are well and truly over– but monetary officials need to be careful not to overdo it.
- The overnight rate on repurchase agreements (repos) between depository institutions rose 96 basis points from their lowest point in April to August.
- Over the same period, the seven-day repo rose 72 basis points.
A quick aside: The rates Zheng is referring to happen to be those DRs that the central bank (PBoC) is looking to further promote as a financial benchmark (see previous entry).
According to Zheng:
- “The overnight and seven-day pledged repo rates are now higher than where they were in February, prior to the pandemic.”
Zheng says the rates are being driven higher for two reasons:
- Since May, the central bank has tightened up on liquidity through its conservative use of the medium-term lending facility (MLF).
- Over the same period, banks have reduced their outstanding volume of structured deposits in response to a regulatory crackdown. To make up for lost funding, banks have increased borrowing from each other using negotiable certificates of deposit.
Zheng’s last word?
- “Given that the economic recovery is unstable…there’s little space for bank funding costs to go any higher.”
Get smart: Zheng isn’t arguing for the central bank to loosen monetary policy. But he is urging monetary officials not to over tighten in their zeal to exit support policies rolled out in response to the pandemic.
Our question: Are PBoC officials listening?
3. Developers prepare for tighter real estate financing
Regular CMD readers will know that there’s a new property policy in the pipeline, set to clamp down on developerfinancing (see August 21 China Markets Dispatch).
- Apparently, many developers have already started to brace for impact.
Why the rush? Although the policy is only set to be trialed witha select group of developers for now, insiders expect an industry-wide rollout in not-to-distant the future.
Some firms are scrambling to grab as much funding as possible before the new rules kick in:
- Real estate trusts raised RMB 9.9billion just last week, an increase of 352% m/m.
Meanwhile, firms with stable finances and healthy debt levels look less concerned.
- Top management from major developers came out saying that given their healthy debt levels and financials, they will not be heavily affected by the new policy.
- They added that thepolicy willplay a positive role in the stable and healthy development of the industry.
Hmmm…to us, that sounds more like toeing the Party line than true confidence.
Get smart:Still, it is true that big state-owned developers will generally be less affected by the new rules than their smaller privately-owned counterparts.
What to watch: That should mean the recent consolidation we’ve seen in the property sector is set to go into overdrive once the new policy fully kicks in – likely in early 2021.
4. Digital currency wallet launched and removed at CCB
On August 29, China Construction Bank (CCB) clients found a new surprising feature inside the bank’s mobile app – a digital renminbi wallet.
The fun didn’t last long though: While some users were able to make small transactions, the feature was soon disabled.
So what’s going on? More likely than not, this was the result of the bank testing out its infrastructure and accidentally making it live.
- But the mistake revealed a few interesting features of DCEP functionality and digital wallets.
Here’s what we found out:
- Payments can be made through scanningQR codes or NFCs
- There will be app-based wallets and hardware wallets
- There will be four types of wallets
The four types of wallets are distinguished by their various limits on balances and payments.
Type one wallet:
- No limits
Type two wallet:
- RMB 10,000 upper balance limit
- RMB 5,000 single payment limit
- RMB 10,000 daily cumulative payment limit
- RMB 300,000 annual cumulative payment limit.
Type three wallet:
- RMB 2,000 upper balance limit
- RMB 2,000 single payment limit
- RMB 20,000 daily cumulative payment limit
- RMB 50,000 annual cumulative payment limit
Type four wallet:
- RMB 1,000 upper balance limit
- RMB 500 single payment limit
- RMB 1,000 daily cumulative payment limit
- RMB 10,000 annual cumulative payment limit
Get smart: None of this signals a major change in the central bank’s digital currency (DCEP) pilot,nor does it signal imminent rollout. But the more we learn about the DCEP now, the better we can assess how the program is shaping up.
- So far, things look to be very much on track for the PBoC to lead its global peers in rolling out a national digital currency.
Get smarter: That said, theDCEP is still in the early-ish stages of testing and development. The next step will be to widen the currency’s pilot program (see next entry).
5. Two more state-owned banks join DCEP pilot
Thought we were done with updates on thecentral bank’s digital currency (DCEP) pilot (see also previous entry)?
Not by a long shot.
On Monday, Caixin reported that Postal Savings Bank of China (PSBC) and China CITIC Bank have joined the DCEP pilot.
Some context: Banks already participating inthe pilot program include:
- Industrial and Commercial Bank of China
- Agricultural Bank of China
- Bank of China
- China Construction Bank
More context: China’s DCEP program operates on a two-tier structure with the central bank issuing the DCEP to commercial banks, who then circulate it to the public.
- Involving more of the big commercial banks in the pilot is therefore crucial to ensuring that processes and infrastructure will be fullytested before launch.
- For its part, PBSC works especially closely SMEs and small depositors, so its inclusion in the pilot will be particularly important fortesting their access to– and their propensity to use– the new digital currency.
What’s next: The central bank is reportedly also working with internet-based services providers such as Didi Chuxing and Bilibili to explore applications of the DCEP.
Get smart:Achieving widespread public adoption of the DCEP shouldn’t be too difficult in a country where mobile payments are already ubiquitous. But user engagement is certainly still a key variable in the DECP’s ultimate success– or failure.
- To that end, the more institutions that are ready to offer DCEP services to the public when it goes live, the better the odds of success.
The information contained in this newsletter does not constitute investment advice.