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TRIVIUM CHINA: The Tip Sheet on China


"Listen to the Party's command."

- Party secretaries of various provincial tax authorities.

Context: That's a phrase we used to only hear from China's armed forces. But now the Party wants more control over the tax system. More in the Tip Sheet below.

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1. PBoC addresses herd behavior

The central bank (PBoC) is gradually upping its intervention game in currency markets.

On Friday, the PBoC announced that it would raise reserve requirements for forward FX purchases (see Monday’s Tip Sheet).

Yesterday, we flagged that the PBoC was likely to re-introduce its countercyclical element to the morning fixing rate.

But we didn’t think it would happen this fast (Bloomberg):

"The People’s Bank of China made another move to stabilize the yuan on Monday, urging some lenders to prevent any “'herd behavior' and momentum-chasing moves in the currency market, according to people familiar with the matter.""The central bank has plenty of tools to stabilize the market, will keep the yuan flexible and allow it to move in both directions, a PBOC official told the lenders in a meeting on Monday morning, according to the people."

Get smart: These are informal talks, but they will have the same effect as an official re-imposition of the countercyclical factor. The PBoC talked to the 14 banks that help to set the morning fixing rate, effectively telling them to counteract market pressure.

Get smarter: The moves are already starting to ease the pace of depreciation, but it’s not clear how long that will last. 


Bloomberg: China Is Asking Banks to Avoid Yuan Market ‘Herd Behavior’


2. Data dump – FX reserves

While the PBoC has stepped up its intervention in the past few days, the fact that it stayed on the sidelines for so long is still pretty remarkable.

The official FX reserve data released Tuesday is a testament to the central bank’s patience.

The details (Marketwatch):

"Reserves rose $5.82 billion in July from the previous month to $3.118 trillion, after inching up $1.51 billion in June, according to data released Tuesday by the People's Bank of China.""Economists polled by The Wall Street Journal had expected a $5 billion decline."

Get smart: Reserves would likely fall if the central bank was intervening to prop up the currency – it would have to sell USD to defend the CNY.

Get smarter: It was already fairly evident that the PBoC stayed on the sidelines in July, thanks to the pace of CNY depreciation. But the fact that reserves rose in the process, further underscores the central bank’s so-far cautious approach.


Market Watch: China forex reserves up for second straight month


3. Data dump – trade

The Customs Bureau release trade date for July on Wednesday morning.

The stats:

Exports grew by 12.2% y/y – up from 11.2% in June.Imports grew by 27.3% y/y – way up from 14.1% in June.

Quick take 1: The US-China war still isn’t showing up in the data. The trade war officially started on July 6, so if there was going to be a significant effect on overall Chinese exports we’d be seeing it in the July data.

Get smart: We continue to expect the overall effect on Chinese exports and economic growth to be minimal, which means the trade war could last a while – that’s bad for financial markets.

Quick take 2: We aren’t quite sure what is behind the jump in imports. At least part of that will be down to the fact that import prices jumped, thanks to CNY depreciation, making imports more expensive. But beyond that, we hesitate to see July’s numbers as indicative of a new trend for super strong imports.


FXStreet: China’s July trade data (USD): Surplus narrows to 28.05bn, misses estimates


4. Trade war with US chugs along

The past few days have seen more developments in the trade war with the US.

The US announced the imposition of the next round of USD 16 billion in tariffs (Reuters):

"The United States will begin collecting 25 percent tariffs…on Aug. 23.""USTR said that only five product lines were deleted from a list initially proposed on June 15, but semiconductors, among the largest categories, remained on the list.""The latest list brings to about $50 billion in goods that now face a 25 percent tariff."The Chinese were quick to respond. Official media had already been needling Trump on Tuesday (Reuters 2):"A [state-backed] newspaper on Tuesday described as 'wishful thinking' Trump’s belief that a fall in Chinese stocks was a sign of his winning the trade war."

Official media took things further on Wednesday. The People’s Daily published a call to arms for the nation to withstand the “wind and rain” from the trade war – which China will “undoubtedly” win (see link).

What to watch: China should imminently announce its final list to match this round of tariffs.

Get smart: For now, there is no end in sight.


Reuters: U.S. finalizes next China tariff list targeting $16 billion in imports
Reuters: Chinese newspaper mocks Trump's claim of winning trade war as 'wishful thinking'
People's Daily: 风雨无阻创造美好生活


5. 2018 corporate deleveraging priorities

China’s macroeconomic coordinator, the National Development and Reform Commission (NDRC), has unveiled a task list for corporate deleveraging in 2018.

The focus is on state-owned enterprises (SOEs). 

The game plan:

The government will specify red lines for debt-to-asset ratios for SOEs in different sectors.For companies that have crossed the red line, deleveraging targets and timelines will be set.The government will assist SOEs in replenishing their capital through strategic investments and debt-for-equity swapsThis is more important: The government will also take steps to make it easier for companies to go bankrupt. That includes revising the Corporate Bankruptcy Law and changing related tax policies. 

Get smart: The approach to SOEs is nothing new. It has seen some initial success, but an administrative approach is not sustainable.

Get smarter: Starting to resolve the technical issues that obstruct efficient and professional bankruptcy procedure is one step forward.


NDRC: 关于印发《2018年降低企业杠杆率工作要点》的通知


6. The latest problem with debt-for-equity swaps

Speaking of debt-for-equity swaps (DES), an interesting piece in the Securities Times takes a look at the key impediments to China’s ever-struggling DES program.

The program has been pushed as one element of the deleveraging effort for two years now, but it just isn’t getting much traction.

One key reason is that new asset management rules are slowing down the process:

"Previously, the main sources for the banks’ implementation of debt-to-equity swaps depended on the banks’ financial funds.""But the restrictions…[in the new asset management] regulations have hindered the financial funds 'blood transfusion' to the market."

Get smart: There are lots of hurdles to getting the DES program off the ground. But the fact that asset management regulations are offsetting the DES push underscores the difficult balancing act that regulators are attempting to pull off. 


Securities Times: 独家!5000亿"债转股"降准资金落地满月为何仍未启用?看真相


7. The party holds its coffer closer

China's tax authorities are undergoing an overhaul. Over the past month, previously separate bodies for collecting national and local taxes have been merged.

But that’s not the only change. Leading Party groups (党组) within tax authorities at all levels have been changed to Party committees (党委).

What that means, per the Party constitution:

"Party committees may be set up in state organs which exercise centralized leadership over their subordinate units."

In plain English: The Party committee at the top of the tax authority now has direct control over the whole system, all the way down to the lowest level – at least in theory.

Why that matters: In the past, local tax authorities had significant amounts of independence.

What it could mean in practice: Stricter enforcement of tax laws and regulations.

Get smart: The Party used to keep a tight grip over two levers of power: the "gun", aka the military; and the "pen", aka propaganda. Now it's adding a third – the wallet.

The big picture: This signals that the central government should have more leverage over local governments in reforming the fiscal system.


SAT: 国家税务总局党委召开第一次会议


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