Staying the course

one big thing

1. Party officials look to stay the policy course

We know all of our readers have been waiting with bated breath for the close of the Fifth Plenum.

• Lucky for you: We have the plenum communique hot of the presses.
• Not so lucky for you: There’s not a lot of meat in the communique.

As expected, Party officials set out some broad development goals out to 2035, including that:

• Economic strength, scientific and technological strength, and overall national strength should see a “sharp rise”
• Per capita GDP will reach “the level of other moderately developed countries”
• The middle-income group will “expand significantly”
• Major breakthroughs in key core technologies will be achieved, and China will “enter the forefront of innovative countries”
• Modernization will be achieved in industrialization, informatization, urbanization, and agricultural

And meanwhile, over the next five years the Party’s development goals include creating:

• A stronger and more resilient domestic market
• A more optimized economic structure
• Significant improvements in the ability to innovate, with a focus on technological self-reliance
• Significant improvements in modernizing supply chains
• More vigorous “market entities” (i.e. companies)
• Significant progress in reforming the property rights mechanism and the market allocation of factors of production
• More market openings for foreign companies and investors

Get smart: This isn’t exactly a barn burner.

• Pretty much all of these goals were already set.

Our takeaway: Policymakers think they are on the right track – so don’t expect any big shifts in the overarching policy trajectory.

• If anything, efforts will be accelerated on all these fronts – under the banner of the “dual circulation strategy.”

What to watch: We should get a more detailed readout once the Plenum Decisions are released in a few days – and perhaps a few nuggets will come at the press conference scheduled for Friday.

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Gov.cn: 中国共产党第十九届中央委员会第五次全体会议公报

macro

2. Expect big climate targets in 14th FYP

Climate targets will be front and center in China’s 14th Five Year Plan (FYP).

That was the message from Li Gao, director of the Ministry of Ecology and Environment’s climate change department, at a press conference on Wednesday.

Some context: Xi Jinping announced bold new climate targets in a speech to the UN General Assembly on September 22.

The big one: China wants carbon emissions to peak in 2030 and to achieve carbon neutrality by 2060.

Li says hitting these targets won’t be easy (MEE):

• “This is a huge challenge, and it reflects our determination and strength in responding to climate change.”

Now, policymakers are busy turning Xi’s goal into concrete plans, including:

• Developing quantitative carbon intensity reduction targets for the national 14th FYP

• Drafting focused environment and climate FYPs
• Developing a 10-year action plan to cap carbon emissions by 2030

The question on everyone’s mind: What will this mean for my industry?

The power sector and large fossil energy users are likely to see a significant impact. Li says plans will include:

• Limits on fossil energy intensity and strict controls on coal
• Replacing small coal and gas generation with electric power
• Support for renewable energy

A national carbon market is on the way. Li says (MEE):

• “We will transition from pilots to…a unified national market…[and achieve] the inclusion of multiple industries.”

And local governments and industries will be under pressure:

• “We must clearly communicate pressure and tasks to local governments and industries.”

• “It is necessary to clarify [emission] peak goals, roadmaps, action plans and supporting measures for localities and key industries.”

Get smart: We’re already feeling the influence of this green policy agenda.

• Just yesterday, we highlighted a new policy document that looks poised to mobilize the financial system to fight climate change (see October 28 China Market Dispatch).

Get smarter: China’s clean environment push will be the key driver behind essentially all policy decisions over the next ten years.

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MEE:生态环境部10月例行新闻发布会实录

finance

3. Xiamen Bank shares suspended

That was a bad start.

On Wednesday, Xiamen Bank shares were temporarily suspended after falling 10%.

• The bank had just completed an IPO, and its A-shares started trading on the Shanghai Stock Exchange Tuesday.

Some context: Over the past several days, investor sentiment has soured toward banks generally, with mainland bank stocks falling for three consecutive days.

• Banks have warned of deteriorating asset quality as the government phases out policies that supported them through the pandemic.

However, Xiamen Bank was probably singled out for special treatment, having priced its IPO significantly higher than the level at which other bank shares are trading.

• Its shares had a price/earnings ratio of 14, double the industry average of about 7.

Some background: As we wrote on Tuesday, the bank priced its shares as low as authorities would permit (see October 27 China Markets Dispatch).

• Banks are prohibited from selling new shares at less than book value.
• Xiamen Bank’s IPO was priced at RMB 6.71 per share, which was its book value per share at the time of its last audit.

Get smart: Chinese banks are in a bind. Deteriorating asset quality means they need to raise more capital, but almost all listed banks are trading below book value, complicating new share issuance.

Get smarter: As the outlook for banks’ assets deteriorates, the gap between share price and book value is only going to widen.

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Caixin: Trading of Xiamen Bank Shares Halted Day After IPO

4. CBIRC warns of finance livestreaming risks

Financial innovation is alive and well in China. Sadly, it’s not the kind regulators want.

On Wednesday, the China Banking and Insurance Regulatory Commission (CBIRC) issued a statement warning against the marketing of financial products via livestreaming.

Say what?

• Believe it or not, livestreaming is a hugely important platform for marketing retail goods – including financial products – to Chinese consumers.

Caixin explains it like this:

• “Livestream shopping [is] similar to the American TV shopping channel QVC.”
• “Viewers buy goods online from influencers who show off their latest finds – from lipsticks to toilet paper – in real-time videos.”

Marketing financial services using livestreaming involves getting viewers excited about a product, then having them invest via a link.

But now, the CBIRC is warning that:

• Some livestreamers fraudulently pass themselves off as financial professionals, then prey on people with weak financial knowledge.
• Some offer great sounding deals to lure viewers before trapping them in high cost products.

Get smart: Based on the CBIRC’s list of complaints, financial livestreaming sounds a lot like some of the fringe financial activities that flourished during the Wild West days of shadow banking.

Get smarter: In recent months, regulators have repeatedly warned of the need to stay vigilant against the reemergence of shadow banking.

• This is a good example of why.

The bigger picture: Protecting consumer rights has become a key policy priority over the past two years – in the financial sector and beyond.

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CBIRC: 关于防范金融直播营销有关风险的提示

Caixin: China Warns of Risks in Livestreaming Sales of Financial Products

commodites

5. Mongolian coal edging out the Aussies

There’s still no official confirmation that Australian coal imports have been suspended, but it’s starting to show up in the data.

• September trade data shows Mongolian coking coal imports increased more than 26% m/m, while Australian coking coal imports fell by more than 34%.
• That means Mongolia had already replaced Australia as China’s largest supplier of coking coal last month.

Some context: On October 9, the first reports of a rumored verbal ban on Australian thermal and coking coal imports emerged (see October 13 China Markets Dispatch).

• Since then, the industry has been scrambling to figure out what’s going on (see October 22 China Markets Dispatch).

Still, it’s not clear that Mongolian coal will be a long-term replacement for Aussie coal (SCMP).

• “[U]sers in northern China will largely be able to make the change, [but] those in southern China will find it more difficult … because of the logistical difficulty and expense of transporting coal from Mongolia.”

But logistics are manageable for the moment due to a China-Mongolia cross-border “green channel,” set up in July to improve freight clearance in the context of the pandemic (Sina Finance).

And here’s the kicker: Last week, Mongolia signed onto the Asia-Pacific Trade Agreement, meaning it will cut tariffs on 366 categories of Chinese exports.

• We can’t help but wonder if Chinese trade officials thought a captive coal market would sweeten the deal.

Get smart: It looks like China is confident enough in its domestic coal supply – and its Mongolian trade relationship – to forgo Aussie coal for a while.

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Sina: 蒙煤的进口是否能填补澳煤的进口？

SCMP: China’s ban on Australian coal causes surge in imports from Mongolia, but difficulties remain

China Embassy in Mongolia: 中蒙边境口岸“绿色通道”实施办法

property

6. Double-digit growth in real estate bond financing in September

Real estate developers are rushing to get hold of financing while they still can.

On Wednesday, Centaline Property Agency released the latest numbers for real estate financing:

• Domestic bond issuance by real estate developers exceeded RMB 100 billion in September.
• That’s up 48.6% on the same period last year, and continues the surge in growth we’ve seen since July.

One reason for the big jump is the relatively low cost of financing.

• The average bond coupon rate is around 4-5% compared to 6-8% during the same period last year.

Another reason is the “three red lines” policy.

• Developers are trying to load up on financing before the industry-wide rollout in 2021.

Some context: The “three red lines” are a new set of restrictions on the amount of debt developers can hold.

• The limits went into effect on a pilot basis for 12 developers on September 1 (see August 18 China Markets Dispatch).

Get smart: The “three red lines” policy limits annual debt growth as a percentage of existing debt, so loading up on debt now will provide a larger base for future increases.

Get smarter: Developers need to walk a fine (red) line here:

• Loading up on too much debt now might push them over one of the red lines, which would further limit future debt raising capacity.

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21st Century Biz: “三条红线” 冲击波：房企融资继续井喷 投资规模骤降

Shanghai Securities News: 9月以来房企债券融资超千亿元