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China Economic Review

📌  _1. IMF warns China slowdown could damage “systemic financial stability”_

The International Monetary Fund said that a larger-than-expected weakening in the world’s second-largest economy would pose risks to the global financial system, as the lending body lowered its 2019 forecast for economic growth worldwide, Caixin reports.

In the latest World Economic Outlook (WEO) report, the IMF projected that the world economy will grow by 3.5% this year, down from the previous 3.7% forecast. The initial forecast was 3.9% earlier in 2018.

The China growth forecast held at 6.2% in 2019, after being cut in October as effects of trade tensions and tighter financing conditions became clearer. This would be a notable drop from the 6.6% growth recorded for 2018, which was already the lowest annual pace since 1990.

“Concerns about the health of China’s economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets that place its trading partners, commodity exporters, and other emerging markets under pressure,” the report said.

Managing Director Christine Lagarde also said that the IMF continues to “flag that it is important for China to ring-fence its financial sector to make sure that credit growth is sustainable, that there is financial regulatory reform, and there is still rebalancing of the economy away from industry services.”


📌2. China’s stock exchanges ask lenders to roll over share-pledge agreements

China’s main stock exchanges have asked banks and other share-based lenders to be more lenient in extending agreements on loans in which shares have been undertaken as collateral, as authorities attempt to bring stability to the world’s worst performing securities market, reports the Financial Times.

Putting up a large proportion of a listed company’s stock in order to access loans is a common practice in China, with many small- and medium-sized companies having been known to pledge more than 40% of their companies’ stock. Pledges skyrocketed in 2017, but eventually dropped from its peak in October 2018.

When borrowers are unable to pay back their loans, or when share prices drop below a certain level, banks can take over the shares, and should the bank decide to sell those shares, the consequence could end up being a sudden drop in stock value. 

This has led to RMB 4.4 trillion ($650 billion) worth of shares being on the line, or about 9.75% of total market capitalization, according to Wind Info.

China has been aiming to avoid sharp sell-offs, a factor that added to the more than 25% decline in China’s benchmark CSI 300 last year. It was the worst-performing major market in the world in 2018 but the index is up more than 7% since the start of this year.

“It alleviates some risk for a disorderly sell-off in stocks,” said Felix Lam, a senior fund manager of Asia-Pacific equities at BNP Paribas Asset Management. “By delaying the process [of selling off stocks] it could help stabilise the market.”


📌3. China birth rate falls to 60-year low

The number of newborns in China last year was the lowest since the rule of Mao Zedong, Bloomberg reports, demonstrating that Beijing’s decision to lift the one-child policy has had little effect.

In 2018, 15.23 million Chinese babies were born, according to the National Bureau of Statistics, marking a decline of 2 million from the previous year.

This is the lowest level since 1961, when China was recovering from the government’s disastrous ‘Great Leap Forward’ campaign to boost industrial capacity and accelerate rural collectivisation, which led to widespread famine.

The threat of an aging population comes at a time when China is facing a prolonged slowdown in its economic growth rate. One Chinese research institution has even forecast that the population could begin to contract as early as 2027 if the current birth rate persists.

“China should not only fully relax the family planning policy, but also introduce policies to encourage births,” said demographer He Yafu. “Long-term low fertility rates will bring a series of negative effects on the economy and society, leading to the increasingly serious aging of the population, a decreasing labor force and a higher dependency ratio.”


📌4. China ramps up funding for offshore coal plants

Chinese institutions lent $36 billion for coal power stations outside the country in 2018, according to a new report seen by the Financial Times, acting at odds with the government’s domestic push towards cleaner energy.

The report, published by the Institute for Energy Economics and Financial Analysis in the US, revealed that the funds accounted for 26% of the new coal-fired capacity installed worldwide last year, mainly in emerging markets with fewer clean alternatives and less public demand to invest in green policies.

Coal, considered one of the dirtiest fossil fuels, has been increasingly rejected by international development banks in line with their stances on social responsibility. China, meanwhile, has become the top lender for coal projects, while spending billions of dollars back home to foster clean energy industries such as electric vehicles.

“We’re at a juncture where the rest of the world has shifted to renewable energy investments, but we’re seeing a whole set of legacy patterns for coal – patterns of the last generation – are being clung to and subsidised by Chinese institutions,” said Melissa Brown, who co-authored the report.


📌5. Investment in China’s real economy should drive lending, urges central bank official

Chinese banks must actively increase funding for the real economy and not wait for the government’s direction to boost lending, said the head of the People’s Bank of China’s monetary policy.

In a commentary in the central bank’s China Finance Magazine, Sun Guofeng wrote that problems with capital replenishment, bank liquidity gaps and poor rate “transmission” were three major constraints on banks’ credit supply, according to Reuters.

Banks also face “changes in the foreign exchange situation” which place mid- and long-term limits on banks’ liquidity, Sun said, adding that the bank is working to ease these limits on credit availability.

“If capital is not replenished in a timely manner it can restrict reasonable credit availability for the next stage” of lending, Sun wrote.


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