one big thing
1. No funny business
On Tuesday, the Beijing branch of the China Banking and Insurance Regulatory Commission (CBIRC) issued a statement outlining how banks should deal with non-performing loans (NPLs).
- New loans shouldn’t be used to cover up bad loans.
- Banks can’t use off-balance-sheet sources of funding – including, but not limited to, interbank credit, wealth management products, or fake sales – to “dispose” of their NPLs.
Some context:The CBIRC has been fretting for months about an impending surge of NPLs.
More context: That’s because this spring, banks were encouraged to help borrowers through the pandemic by exercising forbearance on loan repayments.
- Banks were permitted to extend due dates to the end of March 2021.
- At that point, banks will be forced to recognize many of these loans as NPLs.
The CBIRC has already put banks on notice that it expects NPL disposals to increase by roughly 50% in 2020 compared to last year, and to rise further in 2021 (see our August 27 Macro-Policy Note).
- Many banks will see profits eroded by the disposals; some may be forced to raise new capital.
Tuesday’s statement also said NPLs can be reclassified as healthy when:
- Arrears have been paid in full, and two consecutive servicing payments have been made in a six-month period
Get smart:China’s banks have a long history of hiding bad loans, but this time regulators want NPLs dealt with, not papered over.
- This will require regulatory vigilance to ensure banks don’t slip back into their old ways.
2. China falls further behind on trade deal purchases
Remember the halcyon days of mid-January 2020?
- In that distant golden age, COVID-19 was barely on the radar, and a deal between the US and China declared a ceasefire in the acrimonious trade war, bringing with it a faint hope for the future of Sino-American ties.
- Under the terms of the phase one deal, China agreed to increase purchases of US goods – especially energy and agricultural products – by USD 200 billion over 2017 levels in the 2020-2021 period.
A lot has happened since then, and media is once again zeroing in on the fact that China is behind…way behind…on meeting its purchase obligations.
The SCMP broke it down:
- “Exponential increases in purchases of…American goods such as soybeans, corn and cars have failed to significantly move the needle towards meeting China’s annual import commitments.”
- “In the agricultural sector…China met only 43 per cent of its purchase targets through August. It also met only 60 per cent of its purchase targets for manufactured products, and 27 per cent of its targets for energy products.”
Bloomberg had more details:
- “By the end of August, China had purchased about 32.8% of the full-year target of more than $170 billion — meaning it must buy about $115 billion of goods in the remaining four months of the year to comply with the agreement.”
Get smart: Yawn. Even in January, few expected that China would be able to meet these purchase obligations. The economic dislocation caused by COVID-19 has made them an even bigger ask.
Get smarter:The media is focused on China’s purchase obligations, but that was only one small part of the original agreement.
- Officials from both countries regularlyunderscore that steady and active progress is being made on the more technical aspects of the deal.
The bottom line:As we’ve said before, both sides have a vested interest in keeping the deal afloat.
- And ironically, the trade issue continues to now be the most positive aspect of the US-China relationship.
3. Ministry of Natural Resources tells departments to pay up
The Ministry of Natural Resources (MNR) has a message to its subordinate bureaus and agencies:
- Pay what you owe to small and medium-sized enterprises (SMEs).
In a notice published on Tuesday, the MNR set forth guidelines on how its affiliated entities should contract work to SMEs.
The notice was adamant that agencies should clear existing debts and avoid new ones (MNR):
- “All units should…attach great importance to the work of clearing debts [to SMEs].”
- “[Departments should] establish an accountability mechanism to ensure that there will be no new arrears.”
It also laid out expectations for future contract work for SMEs:
- “When purchasing goods, projects, or services from [SMEs], each unit shall make payment within 30 days from the date of delivery of the goods, projects, or services.”
- “If the contract stipulates otherwise, the maximum term of payment shall not exceed 60 days.”
Departments that fail to get it together will face consequences:
- “The Ministry has incorporated the implementation of the payment regulations and the work of clearing debts into the key issues of internal audit and financial inspection.”
- “For units with new arrears, necessary restrictive measures will be taken in the aspects of [the budget], the use of office space, and fund allocation.”
Get smart:Welcome to the party, MNR! Other ministries have been prioritizing clearing debts to SMEs for some time now.
Get smarter: Even as China’s economy continues to rebound, SMEs are still struggling. The government is looking for ways to ease their burden – including coughing up what itowes.
4. A few new views on macropru
On Tuesday, Pan Gongsheng, the head of the State Administration of Foreign Exchange and a central bank deputy governor, published a very long piece on macroprudential regulation in Caixin.
- But while the piecewas long, it was short on the kind of substantive detail that gets those of us here at China Markets Dispatch excited.
Still, Pan is one of our favorite policymakers, and if he feels this was something worth publishing in China’s leading financial weekly, then we figure it’s worth a second look.
So what does Pan think China needs to do next with regard to macroprudential supervision?
- “Pay close attention to marginal changes in financial risk… and look into establishing an early warning system.”
- “Improve macroprudential monitoring and assessment in key areas such as real estate, foreign exchange, bond markets, and cross-border capital flows.”
- “Develop and implement plans for the disposal and recovery of systemically important financial institutions.”
- “Formulate regulations for financial holding company supervision.”
Get smart:China’s financial regulators have been unrelenting in their efforts to bring risk under control. Pan’s comments give some insight into where they might take things next.
5. Evergrande signs supplementary agreements with investors
Finally, after a tough few days — some good news from Evergrande.
On Tuesday, Evergrande announced that it hascome to an agreement with investors that willeliminate its January repayment deadline.
Some context:Over the last three years, Evergrande has raised RMB 130 billion from strategic investors on the condition that it will repay these funds if it fails to secure thelisting of its subsidiary, Hengda Real Estate, in Shenzhen.
More context: If it doesn’t get the listing by January 31, 2021, it must repay its investors the RMB 130 billion, plus a bonus of RMB 13.7 billion (seeSeptember 25 China Markets Dispatch).
Evergrande’s announcement included a progress update:
- The company has already signed supplementary agreements with investors holding approximately RMB 86.3 billion in convertible debt.
- It is close to finalizing agreements with holders of an additional roughly RMB 15.5 billion in convertible debt.
- It is still in active negotiations with holders of the remaining RMB 28.2 billion in convertible debt.
Recall:Since a leaked document purportedly showed Evergrande was requesting government support for asset restructuring, the company’s domestic bond and share values have nosedived(seeSeptember 28 China Markets Dispatch).
Get smart: Evergrande most likely traded its old obligations for new ones.
- So the company looks to have bought time, but not necessarily found a long-term solution to its debt challenges.
What we don’t know yet: Just what, exactly, did Evergrande promise in those supplementary agreements?