Weblog with daily updates of the news on a frugal, fair and beautiful China, from the perspective of internet entrepreneur, new media advisor and president of the China Speakers Bureau Fons Tuinstra
Despite the hope of the international financial community, China is not heading for structural reforms, says leading economist Arthur Kroeber, author of China’s Economy: What Everyone Needs to Know®, to CNBC. Pushing up demand is not high on the agenda for China’s leadership, he says, and they do not want to push up debts levels to new heights.
Some e-commerce firms in China have profited from a rally of their stocks, triggered off by a major financial stimulus, but that might not help the economy to really improve, says financial analyst Shaun Rein at CNBC. It’s a rally of exuberance, he adds, and might only triple down into the economy in six to nine months. The real problem is for example companies cannot fire their staff very easily, and make their lives hard, hoping they will leave by themselves, he says.
Days are gone when Chinese consumers carried large plastic bags of cash to pay for houses, cars, international trips, and other big-ticket purchases. Credit cards are big among especially younger consumers, says Shanghai-based business analyst Shaun Rein at the WSJ.
Financial expert Victor Shih dives into the 2024 figures at the annual NPC and concludes China cannot roll over debts anymore and finance its budget like it did before. He tells Bloomberg that central state policies have increasingly replaced a market-driven economy.
Rating agencies have been lowering China’s rating. Renowned economist Arthur Kroeber, author of China’s Economy: What Everyone Needs to Know®, does not see an acute financial problem for the country, but costs for financing its debts will constrain its economic growth, not only for the quarters to come but for the next few years, he tells CNBC.
Singapore is going to be the financial center of South-East Asia, driven by China investments, says international investor Jim Rogers at the Wall Street Journal.
China’s National People’s Congress (NPC) will this week approve a significant reform of its financial institutions. Financial analyst Winston Ma looks at the background of this sweeping shift, according to Reuters.
Reuters:
Under the new set-up, the China Banking and Insurance Regulatory Commission (CBIRC) will be abolished, with its responsibilities moved to the new administration along with certain functions of the central bank and securities regulator.
As part of the wider government revamp, staff numbers at central level state institutions will be cut by 5%.
“The overhaul of financial regulation framework reflects the new focus on ‘dual circulation’ – both domestic and global circulation of the economy – and ‘uniform national markets’,” said Winston Ma, an adjunct professor at New York University law school.
“Going forward, different financing markets – equity, debt, and insurance – are set to be regulated in a more holistic way, and at the same time financial markets regulation and industry policy-making are more integrated than before,” he said.
The legislature will vote on the institutional reform plan on Friday.
For her part, Chinese financial technology expert Sara Hsu complaint at The Diplomat “structural failures in China’s financial system. “It indicates that the main problem, over-indebtedness, is common for many large institutions in the Asian giant, both banks and state-owned companies. Likewise, it highlights that” the real estate sector in particular has experienced an increase in prices in the last 20 years “, despite the government’s efforts to curb real estate speculation.
“Even after the Evergrande problem is solved, the disease of over-indebtedness is likely to continue of China, since the debt is allowed to function without restrictions in particular areas of the economy until it is too late to avoid any type of consequences “, writes Hsu who describes the situation of the real estate giant as “a symptom, not a cause” of the problem.
China and US regulators have been tightening rules for Chinese companies to list at US stock markets, sending shockwaves through the financial and tech industry. Financial experts Winston Ma and Victor Shihlook at the Wall Street Journal at what has happened over the financial cleaning operation in the past few weeks.
The Wall Street Journal:
On one end are China’s regulators, led by the cyberspace authority, which are moving to make it harder for Chinese companies to sell shares overseas. On the other are American lawmakers, such as Sen. Marco Rubio (R., Fla.), who are stepping up calls to block Chinese firms from going public in the U.S. unless they submit to U.S.-style audit requirements.
In China, “the cyber regulator has become the new securities regulator,” says Victor Shih, a University of California, San Diego, professor of political economy who focuses on Chinese policies. “Investors and companies will find it much harder to manage the listing process.”…
One option being considered by the regulators is to require companies using the VIE structure to seek regulatory approval before selling shares in foreign markets, the people said. That could make it a more cumbersome process.
“This would be a significant tightening of Chinese securities regulations,” said Winston Ma, an adjunct law professor at New York University and author of The Digital War, a book about China’s growing technological prowess. “Almost every U.S.-listed Chinese company that foreign investors like pension funds and endowments can buy is listed through a VIE structure.”
China's government has been trying to phase out shadow banking as a risky form of lending money. But now the country's economy is hit by a trade war, COVID-19 and other mischiefs, shadow banking might make a return, says financial analyst Sara Hsuat the East Asia Forum.
Sara Hsu:
There are signs that this risk may be tolerated to some extent. Head of the China Banking and Insurance Regulatory Commission Guo Shuqing supported the crackdown on shadow banking but recently changed his tune and is allowing banks to increase their tolerance of bad debt during the coronavirus outbreak. Banks have also been directed to increase lending and extend repayment schedules in areas strongly affected by the coronavirus. At the beginning of February 2020, regulators granted a grace period for banks that are struggling to meet the tightest shadow banking rules.
Shadow banking will be a double-edged sword for the Chinese economy. While it may temporarily give the economy the nudge it needs to maintain target GDP growth levels, granting permission to banks to lower lending standards is likely to result in the doubling of bad debts. It is a desperate measure fit for desperate times.
Guo remarked before the coronavirus outbreak that China should continue to dismantle shadow banking by focussing particularly on high-risk shadow banking. This suggests that the industry will experience renewed suppression when the crisis is over. Shadow banking is unlikely to make a major comeback or to remain in vogue past the conclusion of the coronavirus pandemic.
Shadow banking is one of the riskiest aspects of China’s financial system and has been subject to extensive regulation. Whether more shadow bank activity will be tolerated due to the coronavirus outbreak is yet to be seen. But a resurgence in shadow banking is unlikely to last.
The ongoing coronavirus in China is going to disrupt the regular auditing process, warns Beida professor Paul Gillison his weblog Chinaaccountingblog. Even for companies who do not get into financial problems, some guidance on how to deal with this crisis and the auditing process is urgently needed, he adds.
Paul Gillis:
Even when there is no going concern issue because the company is adequately capitalized, the issue of whether to accrue corona virus related losses in 2019 or to report them in 2020 is important. There are two significant components to this:
Most companies will have done little business in January and February, 2020 first because of the normal Chinese New Year holiday and then because of mandatory closures related to the virus. Companies, however, are required to continue to pay employees. Should losses related to the virus be accrued as of December 31? The event that caused the loss began in 2019. By the time that financial statements are issued (April or later) the amount of loss can likely be determined.
Secondly, each company must determine in the preparation of 2019 financial statements if any assets are impaired. Any impairment is recorded as an expense. Of particular concern will be intangible assets such as goodwill. Many Chinese companies have considerable goodwill on their balance sheet due to acquisitions. Goodwill is typically tested for impairment by looking at future cashflows from the related business. Those cash flows have been altered by the virus, and potentially significantly enough that goodwill must be impaired.
I think it would be useful if accounting standard setters or the Emerging Issues Task Force would issue guidance as to the application of the subsequent event rules to the facts of the corona virus.
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Under president Xi Jinping the state has again dominated China's economy, with private companies holding a second place, says economist Arthur Kroeber at the Edge Markets. And for the coming ten years, he does not see a substantial change.
The Edge Markets:
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One of the things that has been surprising, particularly since Xi Jinping took over, is the degree to which the state has held onto its huge position in the economy and in many cases reinforced it. The lack of progress away from a state driven economy to a more private-sector one has been disappointing but it has also been surprising that they have been able to maintain the pace of growth that they have, even with the state sector.
Ten years from now, I don’t think we are going to be in a much different place as far as the internationalization of the Chinese currency. As long as they have this problem of high leverage and a somewhat fragile domestic financial system, they are going to have very little incentive to allow full fluidity of capital flows into and out of the country.
What is Beijing's worst nightmare? The trade war? The troubles in Hong Kong? No, says political economist Shirley Ze Yu. China's real nightmare is a collapse of the property market, she writes in the South China Morning Post. "China’s property market is the grey rhino, overfed on massive liquidity steroids."
Shirley Ze Yu:
“The only force that can defeat China is from within. No exterior force can.” On October 2 this year, the Communist Party’s leading journal of political theory, Qiushi, published in full a 2018 speech by President Xi Jinping, highlighting in stark language China’s coming challenges as the People’s Republic enters its 71st year. Indeed, in 2020, China’s primary economic risk is most likely to come not from the trade war, but from its inflated property market.
“Black swans” and “grey rhinos” dominated China’s financial lexicon this year. Few in the population know what they are but most know what they mean. They mean fear.
China’s property market is the grey rhino, overfed on massive liquidity steroids. One injection was the massive stimulus introduced in response to the 2008 global financial crisis. Another injection was from the six consecutive interest rate cuts in the 12 months to November 2015.
Awash in liquidity, Chinese stock markets took off too, but by late 2015, the bubble had burst and the benchmark Shanghai Composite Index tumbled about 50 per cent from its 2015 peak. Real estate, however, partied on.At the annual Caixin Summit earlier this month, China’s top economic policymaker Liu Shijinsaid that the targeted 6 per cent growth in gross domestic product is still “within reach” this year but for next year, worryingly, “drastic measures would be needed”.
Experts have drawn comparisons between China’s overheated property market and Japan’s housing bubble that burst in 1991, plunging the economy into the “lost decades”. Like Japan, China has risen to become a major trading nation thriving on a massive trade surplus. Both are today among the world’s top creditor nations with a culture of high savings rates and heavy reliance on bank lending, creating a highly leveraged economic growth model.
Former United States Federal Reserve chairman Ben Bernanke concluded that Japan’s post-bubble deflation was due to ill-timed and ill-measured monetary-policy responses from its central bank. China, however, has attributed this to the Plaza Accord, a 1985 currency pact that set off Japan’s currency demise.
With Japan’s fate in mind, China is expected to resist any attempt by the US to introduce a Plaza Accord 2.0 in the interim trade deal under negotiation. Any clause on exchange rate stability will therefore remain symbolic in both language and execution.
Local governments in China have amassed an amazing amount of debt. Dropping revenue and disappointing economic performance is a major challenge, writes financial analyst Sara Hsu in the China-US Focus. "The outlook for local government financials is not positive."
Sara Hsu:
The outlook for local government financials is not positive. So far, over one-third of China's provinces have not met growth targets this year. Many of the provinces experiencing slow growth are those poorer regions that have been left behind. This means that local governments will continue to have relatively low levels of revenue while under a massive debt overhang.
The trade war with the US hasn't helped. Local governments took responsibility for maintaining employment in the face of the trade war by boosting business tax cuts and ramping up infrastructure spending once again. This was funded by the sale of municipal bonds. The scale of municipal bond debt has risen massively from $34 billion in 2017 to $183 billion in 2019. Supply has mounted while demand for municipal debt has declined. It seems likely that state-related entities will be forced to hold municipal debt if market demand is insufficient, but this will only exacerbate the drag on growth.
Short-run challenges may create yet another stumbling block for local governments. Most ominous is the fact that local government municipal debt matures in 2020. This debt load amounts to $283 billion. Circumstances under which local governments took on the debt are not much different from the current situation, meaning that there are few to no sources of new growth. Although the central government has canceled a scheduled decrease in revenue sharing to local governments, the local government fiscal burden is high.
The local government debt burden is likely to persist due to the overall revenue shortfall and high debt loads faced by local governments. Something has to give, whether it is debt repayments, maintaining full employment, or buoying GDP. It may take more than a financial expert to get local governments on the track to fiscal sustainability once and for all.
Wall Street is going to be the next casualty in the trade war after it moved from tariffs to tech, says Beijing-based analyst Andy Mokin the New York Times. Corporate China is already preparing for a decoupling of both financial markets, he says.
The New York Times:
As the United States ramps up other barriers to trade, the outlook for the financial sector on both sides of the Pacific is starting to change, part of a broader decoupling between the two economies.
“There are growing calls on the U.S. side for complete decoupling, which is causing Chinese enterprises to re-evaluate their reliance not just on U.S. technology but also on other U.S. resources, including financial markets,” said Andy Mok, a senior fellow at the Center for China and Globalization, a leading research group in Beijing.
China has long considered Wall Street an ally...
Hong Kong, so it is not clear what role, if any, the trade war had in its considerations. Jack Ma, the co-founder of Alibaba, had said at a conference in January last year that he would consider whether to do another stock listing in Hong Kong.
For Alibaba, a Hong Kong share sale could allow more Chinese investors to put their money in a company that many of them use in their daily lives. Alibaba’s stepped-up discussions over listing in Hong Kong were reported earlier by Bloomberg.
With the trade war going on, Mr. Mok, at the Beijing research group, said Chinese companies were now more likely to think twice about depending on American financial markets.
“There is no desire on the Chinese side for decoupling,” he said, “but it is maybe a prudent management decision to reduce risk exposure.”
Yujiapu, Tianjin's financial district, is building China's Manhattan, with loans since most inhabitants still have to arrive. That goes well, says financial analyst Victor Shih, as long as the project has the political goodwill in Beijing to subscribe giants loans, he tells in the New York Times.
The New York Times:
For now, Tianjin can continue to borrow for projects like the Juilliard campus because it has a powerful patron in Beijing, said Victor Shih, an associate professor at the University of California, San Diego, and an expert on the Chinese economy. That official, He Lifeng, was once the No. 2 Communist Party official in Tianjin. Mr. He now heads the central government agency that approves all major development projects, meaning he can authorize banks to lend more money to Tianjin.
“If the political will collapses for the Binhai area, then the bank loans will begin to dry up and the whole area is in trouble,” Mr. Shih said.
Officials at the National Development and Reform Commission, the agency where Mr. He works, did not respond to a request for comment.
After a lengthy crackdown on shadow banking, this risky financial tool seems to be back in grace as China's economy is slowing down. It is the pragmatic way China's financial authorities deal with the economy, financial analyst Sara Hsu says. Shadow banking will be allowed, as long as it works, she writes in China Focus.
Sara Hsu:
Of the major shadow banking sectors, the trust industry appears to be the most suited for endorsement, and the other sectors do not. Asset management products, entrusted loans, and internet finance are still pretty risky. While they do provide funds to businesses that would otherwise not be able to obtain them, and returns to investors who have few viable alternatives, these areas are prone to risks solely due to their nature. For example, in the case of entrusted loans, in which businesses lend to other businesses, the ease of investing in risky ventures remains problematic. In the case of P2P lending companies, the lure of setting up a platform without providing sufficient credit checks is pretty strong. Finally, in the case of asset management, especially wealth management, products, major precedent has been set in the past eight years or so to create attractive returns based on opaque and super risky underlying assets.
While the trust industry is not perfect by any means, it does serve the real economy to some extent. This sector also has regulatory support behind it. The China Banking and Insurance Regulatory Commission stated in 2018 that, “trust companies to transform from high-speed growth to high-quality development and to vigorously support the development of the real economy." The CBIRC has stepped up monitoring and policy guidance of the sector.
So, while shadow banking on the whole remains too risky to fully legitimize as a reliable form of finance for China’s economy, there is one aspect that, under strong supervision, may provide a pressure valve for financing needs that banks cannot fully satisfy. Trust companies may prove to be worthy of regulators’ efforts to improve their practices. As we have seen, however, this not guaranteed.
In 2018, the growth of China’s peer-to-peer (P2P) lending sector dramatically reversed: 1,407 internet platforms that offered P2P lending services shut down due to increased regulation between July 2017 and June 2018.
This year, the government has continued to lead a reorganization of the industry:
More companies will die: As of February 17, only 60 percent of online lending institutions had disclosed their operational information for January 2019, including five problematic platforms.
However, the current asset quality of the online lending industry has improved significantly according the data from firms that did report.
As of the end of January 2019, the accumulated amount of the online P2P online loan industry was about 7.78 trillion yuan ($1.16 trillion). The total loan amount in January was 91.4 billion yuan ($13.61 billion), down 55.1 percent year-on-year and down 1.3 percent from the previous month.
Further consolidation of industry players is certain. Some experts quoted in media reports predict that the scale of future online loans will continue to shrink because of regulation.
Rating agencies have been lowering China’s rating. 
, does not see an acute financial problem for the country, but costs for financing its debts will constrain its economic growth, not only for the quarters to come but for the next few years, he tells CNBC.
