Category Archives: Fiscal & Monetary

Shenzhen forum mulls future of finance in GBA

The Greater Bay Area has a unique opportunity to create new methods of financing industrial growth, a high-powered forum in Shenzhen heard last week.

When Chinese hi-tech firms see difficulties in raising money through traditional methods, the future is there for GBA cities to create efficient financing infrastructure that can support money-burning, fast-developing startups. However, Hong Kong, the world’s No. 1 IPO market, is not doing a good enough job in this regard.

So said Ba Shusong, chief economist at China Banking Association and HKEX, at a conference discussing innovation in the GBA, held by Guangdong’s leading media group on Thursday.

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GBA firms happy, but want more

Over the past year, it has seemed like not a month could pass without a local government pointing out how much it had “given back” to companies via tax cuts and other subsidies, to help them cushion the current economic slowdown. Unsurprisingly, therefore, a survey by the province’s leading business media group has found that a high percentage of companies based in Guangdong’s nine GBA cities are satisfied with the region’s business environment. 

When pressed further, however, most say that they would like more. Further tax cuts and lower labor costs would be nice, they say. Moreover, at least a third of them would like to see “integrated market rules” in the Greater Bay Area.

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LPR makes GBA heads spin

The new Lending Prime Rate is now being used by banks to set mortgage rates, and its launch has been underwhelming, with most banks sticking to the plan or slightly raising their rates. 

This is not to say the gap between the LPR and individual banks’ rates can’t widen over time. But right now, only a foolish bank manager would ask for a target to be placed on their back by thinking they can undercut their competitors aggressively on the first day. 

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Get ready, here comes the D-RMB

SCMP has an interesting story today about a survey that shows little expectation among traders that the Renminbi might become a challenger to the US dollar in international trade. 

As the article says, China’s effort to promote the RMB as a global currency has made only marginal progress in the last three years. According to an international survey conducted by the Bank for International Settlements, the RMB is only the eighth most-traded currency, with a daily average turnover of US$284 billion, up from US$202 billion three years ago. Its share of all currency trades rose to 4.3 per cent from the 4.0 per cent in the 2016 survey.

By comparison, the US dollar was on one side of 88 per cent of all currency trades, little changed from three years ago. It was also the second currency in 95 per cent of all RMB-denominated transactions.

However, far more interesting is the commentary coming out of the mainland about the digital Renminbi, which appears increasingly likely to launch soon. Now that Shenzhen has been tapped with its further development, the question seems to be how soon it will start being deployed among the city’s smartphone-carrying population.

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Shenzhen raises basic income

Shenzhen has decided to raise its basic monthly living allowance, from RMB1,070 to RMB1,160. This will put the city on par with Shanghai, and is retroactive to the start of this year.

To be clear, this is not a minimum wage. While the hipsters of Silicon Valley continue to push the idea of a Universal Basic Income stipend, and at least one US presidential candidate (Andrew Yang) has built his campaign on it, China has been doing it for many years already. It is known as a “minimum living guarantee” (our translation). It is different from the “social assistance standard” for “low-income residents”, which was raised to RMB1,740, and is far less than the “basic living allowance” for “people in extreme poverty”, which was raised to RMB1,856.

This is a concept whose time has not yet come in the West. But one has to wonder, as the central government considers Chinese-style solutions to problems in its Chinese-Western city of Hong Kong, whether a “minimum living guarantee” is on the table for discussion.

Read more in Chinese.

Smart tellers pop up at banks

Forget ATMs. Guangdong has taken the lead on launching “smart tellers” that allow residents to file taxes at their local bank branches. China Construction Bank has rolled out the first.

Taxpayers only need bring their ID cards to the machine. No paperwork is needed: just a formal identity-verification process. It takes under a minute.

The machines, currently installed in 15 locations, offer other services as well, such as social security payments, personal credit reports and more. The bank plans to expand to all 1,100 branch locations in the province, by installing a total of 4,100 smart tellers.

Hang Seng jumps into new LPR-based lending market

Now that China has a benchmark interest rate, called the Loan Prime Rate (LPR), Guangdong banks and companies are wasting no time using it.

The LPR is set to be launched today and then published on the 20th day of every month. It will be set based on quotations submitted by 18 commercial banks. The central bank has added eight medium and small banks, including two foreign-funded banks, to the existing list of 10 nationwide banks that are allowed to submit quotations to the previous national one-year LPR.

Although Hong Kong’s lending behemoth, HSBC, was left off the list, its subsidiary, Hang Seng Bank, has already jumped into the fray and launched a tranche of loans to companies in Guangdong based on the LPR. Over 30% of the RMB150 million the bank is handing out will go to private enterprises, encompassing trade financing and revolving credits, according to the bank.

“The private sector is highly active in Guangdong and SMEs’ financing needs are strong,” said Qu Weiquan, head of commercial bank at Hang Seng Bank (China). “Thanks to the openness of Guangdong’s finance market, the financing solutions targeted at these companies have always had more flexibility and the market is more acceptable to the new LPRs.”

According to the state media, under the new system, banks will submit their prices in terms of basis points added to the interest rates on funding they receive from the central bank in the open market to form an LPR, which represents a shift away from the current practice of referring to the more expensive one-year benchmark lending rate.

The move, aimed at lowering borrowing costs for the economy, is considered as a milestone in reforms started four decades ago to loosen state control of the economy.

The banks’ lending interest rates will be linked to the interest rates on the PBOC’s lending to the banks through open-market operations, giving the central bank a way to still affect the cost of borrowing.

The PBOC said the goal of the move is to make the national LPRs a more market-oriented mechanism so as to lower borrowing costs in the real economy.

Some analysts believe the new LPR regime could favor big state-owned borrowers while delivering few benefits to SMEs as looming growth headwinds and financial risks have been making banks more risk averse.

Still, few banks will be able to turn their nose up at the PBOC. Economists from Nomura were quoted by Caixin Global as saying banks may need to do some “national service” by lowering their average loan rates, but they may try to make up for their lower profits by increasing the price of riskier loans to the private sector and SMEs.

Economists at China Merchants Securities also think that if the implicit floor on lending rates is eliminated, the borrowing costs of big companies will probably decline substantially. But more policies will be needed to lower the borrowing costs of SMEs, which are relatively high risk and have little bargaining power.

Majority of enterprise loans go to private sector

Loans to private companies in Guangdong rose 15.12% to RMB4.29 trillion in the first half, accounting for the majority (54%) of total lending to companies, official data shows. 

Guangdong banks remain the country’s richest. At the end of June, the province’s balance of domestic and foreign currency loans was RMB15.88 trillion, a year-on-year increase of 16.2%; the balance of various deposits was RMB22.54 trillion, a year-on-year increase of 11.9%.

Private SMEs are getting the attention they deserve, apparently. As of the end of June, the balance of small and micro loans was RMB1.35 trillion, up 17% since the beginning of the year. 

Guangdong to boost SMEs with loans

The central government has for months been exhorting the country’s banks to get credit flowing towards the part of the economy that needs it most: the private sector. Guangdong has answered the call, announcing today that it will ensure at least RMB45 billion in low-interest loans are made available via the provincial branch of Bank of China to help fund the growth of small and micro enterprises (SMEs). 

From today until 2021, the project will offer support to more than 30,000 SMEs based in Guangdong. Qualified candidates will get loans within three days at an annualized interest rate of less than 5%. Evaluation and intermediary expenses will be exempted. 

These loans come in different shapes and sizes. “Fast-Growth Loans” are, as the name suggests, for companies currently working out of their apartment who want to be the next Tencent. They will be able to apply for RMB1.5 million of mortgage-free credit loans during their incubation period, and another RMB1.5 million for a year after they graduate. Best of all, they can apply and draw down the cash online.

“High-Growth Loans” are different. These are for enterprises recognized nationally and those established in “innovative areas” such as high-tech zones. Amounts are flexible.

“Technology Reform Loans”, meanwhile, are aimed at specific enterprises recognized by the government as being in need of an upgrade. 

And last but not least, “Liquidity Loans” are for SMEs who already have current accounts or deposits in the Bank of China’s Guangdong branch. Simple application procedures will facilitate access to credit lines of up to RMB 2 million with a one-year balance settlement term.

What are you still reading this for? Get online and grab your cash while stockpiles last.

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China eases funding curbs on key projects

Hard on the heels of weak trade data showing a sharp fall in imports, the central government is easing restrictions on local governments’ borrowing for major infrastructure investments.

According to Caixin Global, local governments will be allowed to use proceeds from special-purpose bonds to raise project capital for major and strategic investments in highways, railways, electricity and gas projects. Citing a document issued by the central government, Caixin says it also encourages local authorities and financial institutions to expand funding sources for major projects through market-based financing methods “as long as they follow the rules”.

Special bonds must be used for projects that are proven to make certain returns on investment, according to the statement. Local officials should strengthen risk controls for special bond issuance and project management, it added.

China previously prohibited local governments from using any borrowed money as project capital put up by investors for initial investment in infrastructure to curb local debt surges.

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