one big thing
1. PBoC’s regulatory power bolstered through legislation
Yesterday, we mentioned that draft revisions to the Law of the People’s Bank of China did more than just laying the legal groundwork for the central bank’s digital currency (see October 26 China Markets Dispatch).
- The draft formally codifies the central bank’s (PBoC) place at the top of the heap of China’s financial regulators.
Some context: China’s legislature laid out plans to revise the outdated law in May. It was last updated in 2003.
The draft revisions provide a legal basis for some of the new responsibilities the PBoC has recently taken on, including:
- Managing macroprudential regulation
- Overseeing “systemically important” financial institutions, financial holding companies, and financial infrastructure
- Drafting major laws and regulations for the financial sector
- Coordinating efforts to prevent systemic risks
The revisions would also raise the cap for fines for financial violations, and authorize the PBoC to suspend the operation of a financial institution, if necessary.
Get smart: ThePBoC has been in the driver’s seat when it comes to financial regulation for years, but these revisions further elevate the central bank above its domestic regulatory peers.
Get smarter: Knowing who is calling the shots helps during a crisis.
- With a surge in banks’ non-performing assets looming, the PBoC’s leadership may soon be tested.
2. Tit-for-tat, back-to-back
On Monday, China’s foreign ministry announced that it will impose sanctions on some US defense companies and place new restrictions on American news organizations in China.
The response was prompted by:
- Washington’s announcement on Wednesday that it had approved a USD 1.8 billion arms sale to Taiwan
- The State Department’s decision on Wednesday to designate six Chinese media outlets as foreign missions, thereby subjecting them to additional transparency requirements related to their ties to the Chinese government
The bigwigs in Beijing were not pleased.
During a press conference, foreign ministry spokesman Zhao Lijian blasted the Taiwan arms deal, saying (MoFA 1):
- “U.S. arms sales to the Taiwan region severely violate the one-China principle…and seriously undermine China’s sovereignty and security interests.”
- “China [has decided] to…sanction U.S. companies involved in the arms sales to Taiwan including Lockheed Martin, Boeing Defense, Space Security (BDS) and Raytheon, as well as…U.S. individuals and entities who played an egregious role in the process.”
Zhao then turned his ire on the media decision (MoFA 2):
- “[T]he U.S. government has imposed unreasonable restrictions on…Chinese media agencies and personnel in the United States and has continuously escalated its discrimination against and political repression of Chinese media.”
Zhao announced that in response, Beijing will require the following six American media organizations to submit information on their China operations’ staff, finances, and real estate holdings within seven days:
- American Broadcasting Company (ABC)
- Los Angeles Times
- Feature Story News
- The Bloomberg Industry Group
- Minnesota Public Radio
Get smart: The nature of the new sanctions on US companies was unspecified – so its not clear how strong of a clapback this is by Beijing.
- And on the media front, Chinese authorities are always looking for an excuse to contain – or toss out – foreign media operations on the mainland.
The bottom line: The Chinese side continues to be wary of ramping up tensions with the US further.
- This all fits within China’s recent pattern of a restrained response to perceived US aggression.
3. Finally, a bank IPO
Well, that’s been a long time coming.
Xiamen Bank went public on the Shanghai stock exchange today.
- It’s the first A-share IPO by a bank this year.
Some context: There’s a long line of banks queuing to IPO, but it’s a bad time to sell bank shares.
- All but a handful of China’s 52 listed banks are currently trading at prices below net assets – or book value – per share, meaning they’re valued at less than the sum of their parts.
- Further complicating matters, the authorities prohibit banks from selling new shares at less than book value.
So it’s no surprise that Xiamen Bank’s shares are priced at just RMB 6.71.
- That’s the bank’s book value per share at the time of its last audit, and therefore the lowest possible level at which it can price the IPO.
Get smart: With the banking regulator warning of an imminent surge in bad loans, many banks will want to raise capital by selling shares.
Get smarter: Don’t expect a surge of IPOs. China’s best banks have already listed, and the rest will struggle to sell shares above book value when others are trading more cheaply.
4. Financial Holdco rules draw nearer
On November 1, the central bank’s new requirement – that non-financial companies controlling two or more financial institutions must register as financial holding companies – will take effect.
On Monday, People’s Bank of China (PBoC) deputy governor Pan Gongsheng shared some thoughts on the new rules.
- “When non-financial companies blindly expand into the financial industry, sometimes problems emerge, such as complex shareholding and organizational structures, cross-shareholding, fake capital injections, and huge capital extractions.”
Pan said that under the new rules, regulatory oversight would focus on:
- Checking shareholders’ qualifications and their sources of capital
- Ensuring shareholders’ investment funds are legal
- Clarifying capital adequacy requirements
- Simplifying shareholder structures
- Improving corporate governance
- Cracking down on related-party transactions
Some background: In recent years, entities like Tomorrow Group – which formerly controlled Baoshang Bank – were able to build up stakes in many financial institutions.
- Regulators only recently realized that they need greater transparency in order to avoid risk being created by, or spread through, a controlling shareholder.
Get smart: The new financial holding company rules are yet another step in regulators’ unrelenting campaign to de-risk the financial system.
Get smarter: They also fit neatly within the more recent regulatory focus on improving corporate governance among financial institutions.
5. Steeling ourselves for winter
Steel producers in Tangshan and Handan felt the first chill of the season as production restrictions kicked in due to poor air quality last Friday.
Some context: Since 2017, authorities have issued strict winter smog control plans that curtail industrial production on highly polluted days. The Beijing-Tianjin-Hebei region, and the Yangtze River Delta, see particularly strict restrictions.
This year’s restrictions are highly tailored by company and region.
- Regulators hope to avoid one-size-fits-all bans that could cripple an entire sector and severely disrupt employment.
As a result, on polluted days:
- Some companies are ordered to stop operations altogether
- Others are allowed to continue operating at reduced capacity
Exact rules vary by city, and at times, even differ by county within the same city.
Unsurprisingly, National Bureau of Statistics data shows prices of basic steel products – like rebar, cables, plates, and sheets – crept up this month.
- But inventories of both steel and iron ore are running high, with supply outpacing demand.
Still, despite the policy, steel production is on track to grow this year (Caixin):
- “China’s crude steel output will exceed a billion tons for the first time in 2020, a y/y increase of 3-5%, said Qu Xiuli, vice chairman of the China Iron and Steel Association (CISA).”
- “CISA also confirmed that, according to their survey, companies’ fourth quarter orders were relatively robust.”
Get smart: Environmental protection is a major goal for Beijing, but maintaining employment is this year’s absolute highest priority. If regular shutdowns result in layoffs, policymakers will backtrack.
Also worth keeping an eye on: How will these curbs impact coal demand?
6. Hainan introduces QFLP program, SAFE considers nationwide update
On Monday, authorities in Hainan issued interim measures that make it easier for foreign investors to invest in Hainan through a Qualified Foreign Limited Partnership (QFLP) program.
Some context: QFLP programs allow foreign institutional and individual investors to invest in the Chinese private equity market after placing foreign currency into an onshore RMB fund.
The interim measures intend to make Hainan attractive to foreign investors, with:
- A simplified registration process that doesn’t require joint reviews
- A negative list mechanism that clearly delineates prohibited activities
- No minimum registered capital or subscribed capital requirements
- Equal treatment of foreign and domestic investors
- Tax incentives
Quick take: Compared to QFLP programs in other geographies, Hainan’s will be more attractive to smaller institutions due to the lower financial threshold for entry.
But Hainan wasn’t the only one with a QFLP-related announcement recently.
Last Friday, Wang Chunying, deputy head of the State Administration of Foreign Exchange (SAFE), said the regulator is considering a pilot reform plan for its national QFLP program, which would:
- cut red tape for the program
- expand the range of investment options for foreign investors via the QFLP channel
Get smart: These are tiny moves, at the margins of China’s capital account, but they add up.
- More importantly, they may build momentum behind some level of genuine capital account opening – a topic of increasing discussion in China’s financial regulatory circles.