HEARD IN BEIJING
"The modern theory of expectations management stresses 'how' and 'what' [a central bank] says, with the the goal of subduing the enemy without fighting."
- Yi Gang, then PBoC Governor
Context: That's what Yi said three years ago. Since that time, the PBoC has gotten much better at communicating with markets, but it still has a long way to go. More in the Tip Sheet below.
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THE TIP SHEET
DRIVING THE DAY
1. Netizens question China's Africa spending
The Forum on China-Africa Cooperation (FOCAC) continued on Tuesday.
Forum participants adopted two documents:
The Beijing Declaration – Toward an Even Stronger China-Africa Community with a Shared FutureThe FOCAC Beijing Action Plan (2019-2021)As we highlighted yesterday, China is pledging USD 60 billion in financing for African countries.
But some Chinese citizens are upset that the country is spending money abroad – instead of at home. Sentiments like these have been prevalent on the web in recent days (FT):“’China is a poor country as well . . . Is there any country that can provide China with $60bn in aid?’ asked [a] blogger named ‘tinyfool’ in a post that was promptly deleted.”Foreign aid is becoming an increasingly contentious topic:“A similar controversy flared in May after a letter circulated online that accused Beijing of spending more on scholarships for foreign students than on domestic primary and high school education.”
Get smart: It not just foreign governments that will act as a check on Xi Jinping’s ambitions to expand China’s global footprint. Public opinion in China will also factor in to some extent.
Get smarter: China is not alone here. Citizens in lots of countries question the worthiness and effectiveness of foreign aid and lending.
Xinhua: Beijing declaration, action plan adopted at FOCAC summit
The Financial Times: China pledge of $60bn loans to Africa sparks anger at home
FINANCE & ECONOMICS
2. Corporate bond woes
Companies are struggling to issue bonds in China.
Data from WIND financial shows that a full 531 corporate bond issuances have been delayed or scrapped so far in 2018 – for a total of RMB 330 billion.
Despite the efforts of Chinese officials to channel more resources to the real economy, the problem only got worse in August.
In August, 75 bonds were scrapped or delayed to the tune of RMB 46 billion – up from an average of 65 bonds, and RMB 41 billion over the previous five months.
Some context: Analysts have been watching interest rates in China’s money markets, which fell dramatically in July and August, and assuming that cheap funding will turn into more credit. But because companies are still struggling, corporate bond yields have been on the rise.
Why it matters: If companies can’t get funding, the economic slowdown is only going to deepen.
Get smart: The targeted loosening that the government has undertaken so far is not translating into new credit – either bonds or loans. So don’t expect the economic slump to end soon.
FINANCE & ECONOMICS
3. The outlook for bank lending
An interesting piece in the 21stCentury Business Herald says that the big four state-owned banks are set to pick up lending in the rest of the year.
But wait…didn’t we just say that cheap liquidity isn’t translating into new lending?
Yes – and that remains the case. The article says the big four are only expanding their lending quotas by about RMB 100 billion each. That’s tiny in an economy where annual credit will be over RMB 21 trillion this year.
What’s more, medium-sized and small banks are still too strapped – in terms of capital and their own funding availability – to increase lending at all. That is one reason why policymakers' efforts to get more credit to SMEs aren’t working.
Smaller banks, which should be the ones lending to smaller companies, don’t have the room on their balance sheets.
Instead, banks are planning to invest in local government bonds – which require much less capital reserves than loans do.
Local government bond issuance might help to get infrastructure spending out of contractionary territory, but it won't be enough to reverse the broader economic slowdown.
21st Century Biz: 四大行拟新增信贷额度 银行下半年重点投向基建、地方债和零售
FINANCE & ECONOMICS
4. Financial authorities want better communication with markets
Central Bank Governor Yi Gang chaired the first meeting of the Financial Stability and Development Committee’s (FSDC) general office on Friday.
Some context: China set up the FSDC last year to coordinate monetary, financial, fiscal, and industrial policies. Vice Premier Liu He heads the overall committee, but the general office that runs day-to-day operations, is housed in the central bank, and is led by Yi.
Top of the agenda: Managing financial market expectations.
Regulators called in a group of experts, including former PBoC governor Zhou Xiaochuan, to discuss issues such as:
How can regulators better understand market thinking?How can outside experts play a better role in the policy making process?How can regulators better stabilize market expectations?
Get smart: As the economy slows, the central bank has had trouble translating new liquidity into actual financing for the real economy. That means that communicating with the market is all the more important.
But this process will take time. The PBoC has gotten much better at communicating with the market since 2015, but there is still a long way to go.
Reuters: China discusses ways to stabilize market expectations: central bank
POLITICS & POLICY
5. Better communication, step one
Yi Gang didn't just meet with the FSDC (see previous entry). He also sought to put better communication into practice by leading a group of officials – including representatives from the country’s big banks – to talk with some executives from private companies yesterday.
The meeting was all about how financial institutions can better service the private sector and SMEs.
One participant offered some suggestions:
More targeted RRR cutsSupport the issuance of corporate bonds (see entry #2)Have local governments provide bridge loans
Get smart: As we have stressed many times, this is a structural issue with China’s banking system. Banks are incentivized to lend to SOEs, not to private companies or SMEs. There’s not much Yi Gang can do about that right now.
The Paper: 央行与全国工商联在京召开民营企业和小微企业金融服务座谈会
POLITICS & POLICY
6. Going after tax evasion
Over the past several days, we’ve been highlighting China’s efforts to improve tax compliance – by both broadening the tax base and focusing on better enforcement.
The latest news is that China has now signed an information sharing agreement with 100 other countries to makes sure that Chinese citizens are paying their taxes abroad, as well.
The agreement is called the Common Reporting Standard (CRS). It is governed by the OECD, and is meant to disclose financial and other assets that individuals hold abroad. China will also provide the same information on foreigners to their home countries.
One small problem: The United States does not operate under the CRS, although it does have bilateral agreements to the same effect.
Get smart: China wants to do a better job fighting tax evasion. It’s tempting to see this as yet another effort to control Chinese citizens living abroad, but this is simply best global practice.
What to watch: Given current economic tensions, can China agree to a similar bilateral deal with the US?
People's Daily: 国税总局本月起与百余国家地区互换居民跨境账户信息
POLITICS & POLICY
7. Li Zhanshu headed to North Korea
National People’s Congress Chairman Li Zhanshu is heading to North Korea this weekend to attend the DPRK’s 70th anniversary celebrations.
That’s probably a disappointment for North Korean leader Kim Jong-un. There had been rumors that Xi Jinping would attend.
Even still, Li’s visit is a big deal (SCMP):
“Li will be the highest level Chinese official to visit North Korea since Xi came to power in 2012. The last Politburo Standing Committee member to go to Pyongyang was Liu Yunshan, in 2015.”
And arguably nobody is closer to Xi Jinping than Li. The two have known each other for over thirty years.
Get smart: Sending Li is an attempt to thread the needle and keep both DC and Pyongyang happy. Kim will understand that the attendance of Li – who ranks #3 in the Party and is close to Xi – is a big deal. At the same time, Xi can tell Trump that he is not getting overly close to Kim.
CPC People: 习近平总书记、国家主席特别代表栗战书将访问朝鲜
SCMP: Xi Jinping to send right-hand man Li Zhanshu to North Korea