one big thing
1. The PBoC’s priorities
On Monday, the People’s Bank of China (PBoC) announced that its monetary policy committee hadgottentogether on Friday, for their quarterly meeting.
Some context: Unlike at other central banks, the PBoC’s monetary policy committee is an advisory board, not a policymaking body.
More context: The readouts of thesemeetings tend to simply restate the central bank’s prevailing policy direction, and this one was no different.
- Still, it’s always worth hearing what the PBoC sees as its priorities.
The following made the list:
- Monetary policy should be more flexible, moderate, and precise; and liquidity should be reasonable and sufficient.
- The proportion of small and micro loans should increase.
- Small and micro loans should have their maturities extended wherever possible.
- Monetary policy tools geared to help small firms will continue to be employed.
- New credit will be directed toward manufacturing firms.
- New policies should aim to reduce interest rates on bank loans.
- Broader financing costs for companies should be reduced.
Get smart: This list is a broad summary of measures the central bank deployed to combat the fallout from the pandemic.
Get smarter: What the monpol committee didn’t say in its statement is that the PBoC is looking to exit from its pandemic response.
- So think of this as more of a recapthan a policy projection.
What we’re watching: Some pandemic-related measures must go. Loan forbearance policies expire at the end of March, and while the authorities could conceivably extend them, the banking regulator’s warning that a surge of bad loans is coming in the new year suggests that forbearance will probably end on schedule.
- But other policies could stick around in one form or another. In particular, after years of frustration, the authorities seem pretty happy with having finally been able to meaningfully boost lending to small firms.
One last thought: The PBoC’s readout makes it sound as though it’s business as usual at the central bank. In reality, we’re at a moment of transition as the central bank tries to work out how to put the pandemic behind it.
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PBoC: 中国人民银行货币政策委员会召开2020年第三季度例会
macro
2. Politburo sets date for fifth plenum
Mark your calendars, folks. The date for the Party’s fifth plenum has been officially set.
On Monday, Xi Jinping presided over a meeting of the Politburo, which announced that the important policy summit willbe held from October 26-29.
Some context: Officially called the fifth plenary session of the 19th CPC Central Committee, the fifth plenum will serve as a forum for top leaders to chart the future of China’s economic policy in the coming years.
More context: In particular, the fifth plenum will focus on hammering out the details of the 14th Five-Year Plan (FYP), as well as longer range policy targets leading up to 2035.
- The plenum will then produce a full proposal for the 14th FYP to be finalized and approved by the government in March.
The meeting’s readout couldn’t resist a bit of self-congratulation (Gov.cn 2):
- “The gathering of public opinions [for the 14th FYP] has given full play to democratic values and considered the views and suggestions of Party members and those outside the Party.”
- “It is a vivid practice of China’s socialist democracy.”
Get smart: Expect China’s new dual circulation strategy (DCS) to figure prominently in the 14th FYP.
What to watch: That means we should start to know the finer contours of what exactly DCS will entail over the next three months.
- We’ll get some details from the plenum readout in late October, and more when the Party’s Central Economic Work Conference convenes in late December.
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Gov.cn: 习近平主持中共中央政治局会议 讨论拟提请十九届五中全会审议的文件 审议《中国共产党中央委员会工作条例》
Gov.cn: CPC leadership meets to discuss key document
Reuters: China’s Communist Party to hold key meeting in late October
rates
3. SPC’s usury rules continue to reverberate
In late August, the Supreme People’s Court (SPC) slashed the maximum lending rate on private loans that it was willing to legally sanction.
Some context: Previously, lenders were legally protected if they charged interest up to 24%.
- At the end of August, the SPC declared that the ceiling will now be capped at four times the loan prime rate, so the cap is currently 15.4% (see August 21 China Markets Dispatch).
The court’s intention: To reduce borrowing costs for the private sector.
- However, it was immediately clear that the decision would ripple through the financial system in ways that would take time to fully understand.
A month on, the fallout is starting to become clear.
On Monday, Caixin published a post-mortem on everything that had gone wrong, painting a pretty bleak picture.
- “The impact of the judicial interpretation on microcredit companies has been like a nuclear bomb, industry veterans told Caixin.”
- “It has prompted many lenders to stop handing out credit as they wait for…clarification…one industry insider said.”
- “Up to one-third of microlenders may end up quitting the market…said Ji Shaofeng, the founder of [a] fintech startup.”
Get smart: The fallout from the SPC’s decision is just starting. Financial regulators are going to have to clean up after it for some time to come.
- That will mean finding new, better regulated avenues for channeling small loans to small companies — something regulators have already been attempting for a while.
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Caixin: In Depth: Top Court’s Interest-Rate Ruling Sends Shockwaves Through Financial Sector
equities
4. SZSE president backs biotech IPOs
On Monday, Sha Yan, president of the Shenzhen Stock Exchange (SZSE), pledged to support biotech companies to go public.
Some context: In August, the SZSE’s tech-focused ChiNext board debuted the first batch of registration-based IPOs (see August 24 China Markets Dispatch) in an effort to dismantle the bureaucratic and corruption-prone approvals-based system.
More context: Biotech is already the biggest sector of the ChiNext board, accounting for nearly 15% of the board’s entire market cap.
Sha wants to see even more biotech companies go public (21st Century Biz):
- “Driven by technological progress and increasing demand, the biotech industry has entered the golden age of its evolution.”
- “ChiNext is an important platform for serving the biotech industry.”
To this end, Sha said the SZSE will:
- Fully support biotech companies to go public via IPOs and MA
- Help biotech companies broaden their financing channels
- Encourage venture capital to cultivate biotech startups
Get smart: Sha, like other financial regulators before her, acknowledges that a free capital market is the best way to finance and drive innovation.
Get smarter: With China’s rapidly aging population, domestic demand for an innovative biotech market will not be lacking.
- Should China manage to address issues in the sector – including limited RD spending and weak clinical infrastructure – it would be set to challenge the US as the number one global biotech breeding ground.
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21st Century Biz: 深交所：创业板将放宽上市财务指标 一年后允许亏损医药健康企业上市
PhIRDA: 第五届中国医药创新与投资大会盛大开幕 后疫情时代共话医药创新发展新趋势
property
5. Regulatortells banks to limit real estate loans
On Sunday, local financial media began reportingthat some of China’s major banks havereceived notice from an unnamed regulator to limit the amount of real estate loans they make.
No official document has been issued, but according to the reports: Banks are required to prevent real estate loans from exceeding 30% of all new loans.
This could spell trouble forexpectant home-owners.
- Abank insider noted that loans to real estate developers are small compared to personal mortgage loans, especially in areas where the property market is hot.
Some context: According to data from the People’s Bank of China, personal mortgage loans account for 68% of all real estate-related loans.
More context: In the months since the pandemic, growth of personal mortgage loans has been outpacing overall lending.
- Banks are happy with that, as personal mortgage loans are secured, and their provision coverage is low.
- Butregulators aren’t crazy about it, as they are trying to keep housing prices contained.
Get smart: This move will negatively impact property sales in October, which is typically one of the peak property purchasing months.
Get smarter: Combined with the recent restrictions on developer financing, this move means regulators are squeezing the market on both sides.
Our take: While policymakers want to keep property prices contained, they must be careful not to overdo the tightening.
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Yicai: 监管严控涉房类贷款规模增长，个人房贷额度也收紧