Graph of the Week | Economics | Policy
China’s non-performing loans (NPL) have risen modestly during the outbreak, with balances climbing to 1.91% of total outstanding commercial debt at CN¥210 billion by the end of Q1 2020. Beijing has attempted to reshape balance sheets by restructuring NPL standards, lowering reserve requirements, and shoring up private debt.
NPL fluctuations are typically aftereffects of economic shifts. New debt is issued in periods of stress to inject liquidity into the market, with a portion defaulted on – as seen in the graph. The significant drop in China’s NPL ratio from 2.4% to 1.13% between 2008 to 2010 was due to loan write-offs and reissuance to risky borrowers, though the consequences can be seen by outstanding NPL totals doubling between 2013 and 2015.
Weary of repeating past mistakes, Beijing has been cautious to initiate fiscal stimulus packages akin to those seen in ’08 and instead opted for policy adjustments to attract foreign capital as a subsidy to central stimulus. As a result, there was only a modest uptick in commercial debt levels throughout Q1 2020; however, officials have recently been greenlighting domestic infrastructure projects and looser lending practices, which will likely lead to a familiar spike in NPL figures.
Economics | Policy
The EU and China Discuss the US, HK, and the Fate of the World
Monday marked the beginning of the 22nd annual China-EU Summit, the first since the inauguration of new EU leadership. Leaders had hoped the event could serve as a symbol of confidence during a period of strained multilateral relations. Due to the outbreak, the event was held over video.
The outlook for the Summit was fairly positive, with key discussion topics including how to manage trade and investment as well as the post COVID-19 global economy. Leaders had also hoped to work out some kinks in an otherwise successful trade treaty to be penned by the end of 2020.
The bottom line is that both regions rely deeply on each other economically, and with US-China relations on the fray, the Summit presented an opportunity to re-establish some stability to ease the transition into a post-pandemic world.
Economics | Policy
The EU and China Discuss the US, HK, and the Fate of the World Pt. 2
Reality fell short of anticipation, with the Summit concluding without as much as a joint statement. Talks between the EU and China hit a wall, with Monday’s video Summit leaving European leaders frustrated at the lack of progress.
With EU member economies still ailing in the wake of the outbreak and Beijing attempting to shore up reliance on global trade partners, increasingly frustrated negotiators have been tiptoeing to voice their disapproval while ensuring the US$633 billion exchange of goods between the two partners remains undisturbed.
With the lines between ‘partner,’ ‘competitor,’ and ‘rival’ blurring for China and the EU, along with a stark absence of the US – a historically steady hand in global trade initiatives and long-time EU ally, it remains to be seen what, if any, opportunity there may be for the two nations to find common ground in the current frigid global environment.
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Economics | Policy
PBOC Says: ‘If You Build It, They Will Come(?)’
According to the Chinese Academy of Social Sciences (CASS), China could see economic growth of 3% for 2020. The projection comes to a surprise for many as top officials broke from precedent at the Two Sessions to omit annual GDP growth targets among the country’s first economic contraction since the early 90s.
China has failed to achieve a “V-shaped” recovery amid weak domestic consumption and ailing global demand for Chinese exports. CASS anticipates the PBOC will continue firing on all fronts to inject much needed liquidity into the lagging economy – gambling economic stability for increased lending flexibility through lower interest rates and slashed required reserve ratios.
Though the measures could help spur domestic consumption, a little over 17% of China’s total GDP comes from exports. Until global demand picks up and the US-China relationship thaws, dwindling overseas orders will continue to weigh on the Chinese economy, leaving the Middle Kingdom little choice but to draw a trick from their old playbook – artificial growth through increased domestic infrastructure spending.
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Economics | Finance
Winner Winner, Peking Duck Dinner
Foreign M&A in China has reached new highs over the past 18 months, with investment in the Middle Kingdom up by 7.5% from one year ago. Companies and investors alike are betting on the Middle Kingdom’s growing middle class and the long-term growth it will bring.
Looking to attract new capital, Beijing has gradually relaxed regulation in certain industries to allow for foreign institutions to buy out their JV partners – paving the way for unprecedented majority-owned stakes. JPMorgan, for example, is taking full control of its Chinese mutual fund joint venture for about US$1 billion, while many other financial institutions are also taking the bait.
Additionally, foreign companies are beginning to acquire stakes in complementary Chinese firms, validating the maturity that certain Chinese industries have reached. Volkswagen is buying a 26% stake in a Chinese battery maker for US$1.2 billion, while Pepsi is spending ~US$700 million to buy a Chinese snack brand.
While stories of Luckin Coffee and similar brands leave a bitter taste in investors’ mouths, many MNCs are still pushing along – albeit cautiously so.
Markets | Policy
Time for Some Good Ol’ Fashioned Spring Market Cleaning
China’s revamp of its benchmark equity index is the latest measure to bolster capital markets. This update intends to introduce more high-tech companies and remove loss-making companies through a risk warning alert.
The Shanghai Composite Index has not been updated since 1991, which has led to traditional companies like those in energy and banking holding overweight positions. Beijing hopes market reform will spur investor trust while further driving resources to emerging domestic industries and drive self-sufficiency.
The “cleaning-up” of the index is part of a long series of reforms that China is implementing to restore market confidence. Just recently, China finalized rules that allow the market to immediately determine IPO pricing for companies seeking to list on Shenzhen’s ChiNext board. As China seeks to continue attracting players to its markets, additional measures in this direction are to be expected.
Economics | Finance
When the Liquidity Wells Run Dry, Lenders Turn Shy
Cracks are appearing in China’s banking system, a key pillar of support in Beijing’s policy response to the pandemic-induced slowdown. As economic activity remains lukewarm and debt continues to pile, savers have increasingly rushed to the bank to withdraw their money. In turn, this trend could further strain a key pressure point for many banks amidst the crisis: liquidity.
Non-performing loans, a major driver behind the bank runs, have been on the rise for both provincial and large state banks, though have disproportionately affected local city banks. According to the China Banking and Insurance Regulatory Commission, the average NPL ratio at local levels was about 1.7 times higher than the average of the big five state banks, reaching 2.45% in Q1 2020.
Local anxieties arise at a time when Beijing is relying on small lenders to relax lending practices and spur growth. Although a slowdown in loans for regional banks is predicted, central government involvement may become necessary as city commercial banks’ lower profitability is unlikely to help replenish market capital.
Business | Industry
China’s Live Streaming E-Commerce Reaches New Heights
The ‘Era of Live Streaming E-Commerce’ first blew up in 2019, creating a new industry at the intersection of e-commerce and live streaming. The pandemic has proven to be a major opportunity for this industry, both in terms of attracting new potential consumers and capturing shifting consumption habits. But one question stands: ‘Will it last?’