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TRIVIUM CHINA: The Tip Sheet


Thursday, January 24, 2019

The Tip Sheet
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HEARD IN BEIJING

"The bottom line is that China is slowing down but it’s not going to be a disaster."

- Fang Xinghai, Vice Chairman, China Securities Regulatory Commission

Some context: Fang said that yesterday at Davos in an attempt to reassure those worried about the Chinese economy. It didn't work. More in the Tip Sheet below.

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THE TIP SHEET

 

DRIVING THE DAY

1. Chinese fail to calm nerves at Davos

It’s World Economic Forum week, and the health of the Chinese economy is the talk of Davos.

Vice President Wang Qishan's Wednesday keynote tried to project confidence (AFR):

"Speed does matter, but what matters more is the quality and efficiency of economic development…What matters is we are actively managing our affairs well.”In a separate panel, vice chairman of the securities regulator, Fang Xinghai, went further (Caixin):“’The bottom line is that China is slowing down but it’s not going to be a disaster,’ Fang said during a panel discussion on global financial risks.”

But the messages aren’t having the intended effect. The argument that “we’ve got it under control” rings hollow.

Officials’ nonchalance in front of the global community is even more jarring when you factor in the increasing frictions between China and Canada.

My how things change.

In 2017, Xi Jinping’s Davos speech was hailed as a defense of globalization, and last year, Vice Premier Liu He was the darling of Davos.

But the global attitude toward China has undergone a marked negative shift over the past year, and the economy’s growth woes aren’t helping.

Top officials are struggling to change the narrative.
 

READ MORE
AFR: China Sticks to upbeat economic Script on Davos Stage  
Caixin: China’s Economy Is Not Collapsing, Regulatory Official Says
 

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FINANCE & ECONOMICS

2. TMLF gets going

On Wednesday, China’s central bank (PBoC) debuted its new Targeted Medium-term Lending Facility (TMLF) – injecting RMB 276 billion into the banking system.

Some context: The PBoC established the new tool back in December (see December 20 Tip Sheet). Interest rates on the one-year funds are 3.15% – 15 basis points below the regular one-year MLF interest rate.

More context: Banks that receive the funds are supposed to use them to create loans to SMEs.

Don't be fooled: Some analysts are describing the use of the TMLF as a backdoor interest rate cut. But it’s not, really. Banks won’t be passing on the 15-basis-point savings to SMEs. That savings is the incentive to get banks to lend where they otherwise wouldn’t.

Get smart: Wednesday’s injection looks like a trial of the new program. Authorities are keen to get it up and running – to see if it is more successful in getting cash to small companies than previous efforts have been.

Why it matters: China’s private sector is still struggling to get funding.

Our take: We doubt this facility to do much to change that.
 

READ MORE
PBoC: 公开市场业务交易公告 [2019]第16号
Xinhua: China's central bank pumps funds into market via TMLF
 

FINANCE & ECONOMICS

3. China’s banks step up write-offs

China’s de-risking campaign has quietly shifted to a new phase over the past few months.

At least that’s according to Jason Bedford at UBS (FT):

“’The deleveraging campaign is now no longer as focused on credit tightening and more fixated on addressing problems in the existing stock of debt,’ said Jason Bedford, a UBS analyst, in a new report on China’s distressed debt market that cites the figures.”“The handling of non-performing loans has become a top priority for Beijing and is viewed as a threat to financial and social stability if it is not dealt with correctly.”Jason is one of the smartest guys around when it comes to what’s happening in China’s banking system.

What’s more, he’s crunched the numbers – and he’s been around long enough to know the scale of what’s happening:“With an estimated Rmb1.75tn in non-performing loans disposed of by banks last year, Mr Bedford noted that such sales have ‘reached highs unseen since the early 2000s.’”

Our take: The de-risking program marches on. But it will take sustained effort by regulators to fundamentally clean things up, given the scale of the problem. There’s a long way to go.
 

READ MORE
FT: China bad debt disposals hit levels not seen for 20 years
 

POLITICS & POLICY

4. Xi gives local officials more leeway

On Wednesday, Xi Jinping chaired a meeting of the Central Commission for Comprehensively Deepening Reform (CCCDR).

Some context: The CCCDR is the most important policymaking body in China. It typically meets every two months.

As per usual, the meeting approved a slew of documents – 15 in total.

Among the documents approved were the commission’s reform priorities for 2019.
The official readout offered no specifics, but did offer more general guidance on how reforms should be carried out.

Three things stuck out to us.

First, Xi wants officials to stay the course laid out at the 2013 Third Plenum:

“[We] must pay special attention to completing the reform tasks…of the Third Plenum.”Second, Xi wants to make sure that reforms are being effective:“[We] must focus more on evaluating how…effective implementation [is].”Third, there is a move towards giving local officials more leeway in shaping policies:“Reform plans…should be adjusted to local conditions.”“What is changed, and how it is changed, should be based on reality; we can’t [apply] a one-size-fits-all [approach].”

Get smart: That last point – about giving local officials more latitude – represents a course correction from the centralization of Xi’s first term.
 

READ MORE
CPC People: 习近平:对标重要领域和关键环节改革 继续啃硬骨头确保干一件成一件
 

POLITICS & POLICY

5. Shanghai Stock Exchange to set up new tech board

The CCCDR pass two documents – a plan and a guideline – regarding the establishment of a new technology board on the Shanghai Stock Exchange.

Some context: Xi announced the creation of the new board at the import expo in November (November 8 Tip Sheet).

The goal of the new board: Get more funding to companies developing “key and core technologies."

What’s different about the exchange: It will use a registration-based IPO system. That means that companies will not have to get regulators’ approval to list. Instead, like in most developed stock markets, it will be up to consumers to decide whether or not a company’s stock has value.

Why it matters: The new board lets regulators test the registration-based IPO system in a relatively controlled setting. If it’s successful, we will likely see all of China’s equity exchanges adopt a similar system.

The bigger picture: China’s leaders want more of their tech companies to seek funding at home, instead of in Hong Kong and New York.
 

POLITICS & POLICY

6. The full list of documents passed by the CCCDR

Xinhua has a list (in English!) of the 15 documents passed by the CCCDR yesterday:

a plan and a guideline both on launching a science and technology innovation board at the Shanghai Stock Exchange and experimenting with the registration-based IPO system;a guideline on establishing a system of protected natural areas with national parks as its mainstay;a guideline on deepening educational and teaching reform and comprehensively improving the quality of mandatory education;a guideline on encouraging and guiding the flow of personnel to remote areas with harsh conditions, local communities and the frontline;a guideline on deepening overall reform in the domains of politics and law;a guideline on advancing the reform of the property right system for natural resource assets;a guideline on building a national territorial space planning system and supervising the implementation;a guideline on setting up a market-oriented green technologies innovation mechanism;a plan on the protection and restoration of natural forests;a plan for building Hainan into a national ecological civilization pilot zone;a plan for experimenting with the national park mechanism in the tropical forests in Hainan;the key points of the reform committee's work in 2019;a report summarizing the reform committee's work in 2018;a report summarizing and assessing the implementation of deepening reform in all areas since the 18th CPC National Congress.

Get smart: What the CCCDR passes today, becomes government policy tomorrow.
 

READ MORE
Xinhua: Xi presides over 6th meeting of central committee for deepening overall reform
 

POLITICS & POLICY

7. Possible changes at the top of the securities regulator

Change looks imminent at the top of China’s securities regulator (CSRC).

Some context: Rumors that current CSRC Chairman Liu Shiyu will step down have been circling for a while.

Yi Huiman – the chairman of ICBC, China’s largest state-owned bank – has the inside track to take the job.

Local media is reporting that Yi passed Party vetting for a new ministerial-level post.

A little about Yi:

He’s 55 years old.He worked his way up through ICBC – from a junior-level job in Hangzhou 30 years ago – to the top spot today.He never got a formal education in banking or finance, buts is nonetheless regarded as savvy operator, and a key architect in driving growth at the bank.

Fun fact: Every CSRC chairman since Zhou Xiaochuan in 2000 has come from one of the big state-owned banks.

Our question: How fast they can Yi get up to speed on the complexities of the securities market?

Get smart: The CSRC’s key priority for 2019 is to improve the functioning of China’s equity markets – and become less interventionist. If he gets the gig, that will be Yi’s mandate.
 

READ MORE
NBD: 工行董事长易会满21日通过考察 新的变动将很快公布
 

TECH

8. China blocks last accessible foreign search engine

It’s official – Microsoft’s search engine Bing has finally been blocked by the Great Firewall.That’s according to an announcement by the company yesterday (Reuters):

“We’ve confirmed that Bing is currently inaccessible in China and are engaged to determine next steps.”Until now, Bing was the last major foreign search engine accessible in Mainland China.

The ban comes as a surprise, given the great pains Microsoft has taken to comply with China’s censorship laws (and to avoid walking in Google’s footsteps).

Whether the block will stay in place remains to be seen, but (NYT):“If the block proves to be permanent, it would suggest that Western companies can do little to persuade China to give them access to what has become the world’s largest internet market by users.”

You can say that again.

The bad news for Microsoft: There are precious few examples of foreign websites that made the blacklist and were later reinstated.

So why now? It’s too early to tell, but Bing may well be a hostage in the intensifying US-China trade war; or it may simply be a reminder that Beijing is slowly, steadily turning off the tap.
 

READ MORE
Reuters: Microsoft says Bing search engine blocked in China
NYT: China Appears to Block Microsoft’s Bing, Despite Company’s Own Censorship
 

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