Plenum Notes

China’s financial regulators keep reiterating that raising capital is a top task for banks, especially the medium and small ones. This is necessary partly because Chinese banks need more capital to support its 12-13% loan growth, and partly because the People’s Bank of China (PBOC) wants to avoid more bank failures after bailing out three medium banks in 2019. The large scale of capital raising is positive from a cyclical perspective as it removes a key constraint for banks to lend more, but the downside is that some capital instruments are cross held.

The PBOC cut reserve requirement ratio (RRR) by 50bps in anticipation of liquidity withdrawal during Chinese New Year. It is rumored that banks are lobbying for another extension of transition period under the new asset management regulations. We think a three-year extension is too much, but a shorter one is likely.

Following the announcement of the Phase One trade deal, two things are confirmed based on the interviews and texts given by Chinese and US officials. First, the tariff escalation has paused for now and the US agreed to cut the September tariff hike of 15% on $120bn Chinese goods by half, to 7.5%.

As Beijing continues to carry on the de-risking campaign, more troubled firms are getting exposed and started to default in the domestic bond market. By the end of last week, the total amount of publicly-traded bond defaults was RMB 63bn in 2019, and it is on track to surpass last year’s RMB 69bn.