3988.HK - Bank of China Limited

HKSE - HKSE Delayed Price. Currency in HKD
+0.060 (+1.87%)
At close: 4:08PM HKT
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Previous Close3.200
Bid3.250 x 0
Ask3.260 x 0
Day's Range3.210 - 3.270
52 Week Range2.910 - 3.840
Avg. Volume188,972,145
Market Cap1.1T
Beta (5Y Monthly)1.22
PE Ratio (TTM)4.85
EPS (TTM)0.672
Earnings DateN/A
Forward Dividend & Yield0.21 (6.59%)
Ex-Dividend Date2019-05-23
1y Target Est4.49
  • A Decade of Trying and Yuan Trading Has Barely Scratched Dollar

    A Decade of Trying and Yuan Trading Has Barely Scratched Dollar

    (Bloomberg) -- Sign up for Next China, a weekly email on where the nation stands now and where it's going next.Out of the depths of a global credit crisis that showcased an outsized role for the U.S. dollar, Chinese policy makers forged a plan to raise the profile and influence of their own currency. That hasn’t panned out so well, and the coming decade may see yet new headwinds.A botched mid-2015 move to let the market have a greater role in setting the yuan spooked global investors, eventually pushing Beijing to adopt its current framework. That’s one that welcomes inflows of overseas capital while limiting the outflow of domestic money and promoting the yuan’s role in commerce, if not in finance.The model has helped limit the yuan’s depreciation even in face of the trade war with the U.S., with foreign ownership of China’s bond market hitting a fresh record in September. And some observers see a potential game changer ahead if a swathe of the world’s energy and commodity trade becomes priced in yuan. But key to the currency’s role in the 2020s will be the Communist Party’s stomach for easing control.“The false narrative is the idea that a country running current-account surpluses and strict controls over capital outflows could have a truly internationalized currency in the first place,” said George Magnus, research associate at Oxford University’s China Centre. “It wasn’t true when the internationalization debate started several years ago, and it’s no more possible now.”Magnus, author of “Red Flags: Why Xi’s China Is in Jeopardy,” argued that China’s financial system “would not be able to cope” with ending capital controls and allowing the currency to float, and that’s not likely to change “for some years to come.”Things were quite different when China launched offshore trading in the renminbi, the official name for its currency, with the CNH ticker in August 2010. That came months after it ended a de facto peg to the dollar adopted during the global financial crisis, and amid widespread expectation for the yuan to see sustained appreciation.Later, an offshore bond market denominated in yuan expanded in Hong Kong, known as Dim Sum securities. Yuan deposits in climbed in the city, and China signed agreements with counterparts setting up direct trading between its currency and others. Hong Kong now supplies around half of the world’s offshore yuan liquidity, the Hong Kong Monetary Authority said in an emailed response to questions.Hong Kong serves as an ideal testing ground for yuan internationalization measures, said Darryl Chan, an executive director at the HKMA.A half-decade of progress came to an abrupt end in 2015, when China, battling an economic slowdown and a burst bubble in its stock market, devalued the yuan and overhauled its exchange-rate calculation in a manner that unsettled international investors. An exodus of domestic money saw the nation’s foreign-exchange reserves tumble by about $650 billion, triggering a clampdown on capital outflows that continues today.Depreciation remains a concern, all the more so with the U.S. tariff hikes that began on Chinese goods last year putting pressure on the currency. That leaves little likelihood of major regime changes for the yuan for now. The onshore yuan surged as much as 1% on Friday, the most in a year, as people familiar with the matter said President Donald Trump had signed off on a phase-one trade deal with China.“The current environment may not be ideal to push for full convertibility,” as Wang Ju, director and senior foreign-exchange strategist at HSBC Holdings Plc in Hong Kong, puts it. Still, she says “the journey of yuan internationalization will continue and will never be reversed even though we may see some back and forth along the way.”China continues to work on market-structure issues to encourage broader inclusion of its onshore stocks and bonds in global indexes -- things such as improving hedging tools. It launched oil-futures trading in yuan, open to foreign participation, last year and has followed up with iron-ore contracts.Should Beijing go further and insist on oil imports being paid in yuan, that could help lead to a “turbocharging” of the currency in the global financial system, Mansoor Mohi-uddin, a Singapore-based senior macro strategist at NatWest, wrote in a note this month. While it could eventually allow the yuan to challenge the euro as the main alternative to the dollar, the move could also bring its own problems.“The upward pressure on the exchange rate from capital inflows will not be countered by capital outflows,” if China doesn’t allow mainland investors to buy overseas assets, he said. Over time, that may strengthen the yuan so much that export competitiveness is undermined, he said.The People’s Bank of China said in its annual yuan internationalization report for 2019 it will continue to remove obstacles for investors to use the currency and open up its financial markets. The central bank didn’t respond to a fax seeking comment for this story.For now, the yuan’s share in global payments and in central bank reserves remains low, at about 2% or less on both counts. Total foreign holdings of domestic bonds and stocks stood at 3.95 trillion yuan ($566 billion) at latest count -- or the equivalent of Belgium’s and Brazil’s combined holding of U.S. Treasuries.Read how China’s opening to the financial sector is going: QuickTakeWhat’s becoming less negligible is overseas holdings of China’s stocks and bonds. Again, that carries potentially some vulnerability for the country. When foreign ownership was around 2% or less, as was the case just two years back, overseas investors were marginal to price moves in China’s markets -- and thus to policy makers. But as their role grows, the potential for a withdrawal of that money could pose a risk, and influence borrowing costs.“If foreign ownership gets to 10% or more, China will get concerned about foreign dominance of the market, they won’t want that,” Michael Spencer, chief Asia Pacific economist at Deutsche Bank AG, said in reference to the bond market. The worry would be “we lose monetary-policy autonomy,” he said.Spencer sees China shifting to become more comfortable with offshore use of the yuan in the case of “some kind of resolution” of the trade war with the U.S. If so, it augurs a fresh set of challenges for policy makers as China’s financial integration proceeds in the 2020s.(Updates 10th paragraph with latest yuan move on Friday.)\--With assistance from Ran Li and Selcuk Gokoluk.To contact the reporters on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Livia Yap in Shanghai at lyap14@bloomberg.netTo contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Christopher AnsteyFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • Bloomberg

    ECB Policy Makers Said to Discuss Central Bank Digital Currency

    (Bloomberg) -- Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Apple Podcast, Spotify or Pocket Cast.European Central Bank policy makers meeting in Frankfurt this week will discuss the prospect of launching their own digital currency, according to euro-zone officials familiar with the matter.Governing Council members expect to talk about the topic informally at dinner on Wednesday, a day before their policy meeting under new President Christine Lagarde, the people said, asking not to be named as such deliberations are private. An ECB spokesman declined to comment.While there’s no expectation of an imminent decision, the symbolism of the debate on the eve of Lagarde’s first interest-rate decision shows how far she is willing to shake up the ECB by embracing modern-day challenges, as she has with climate change. It’s another signal that her upcoming strategic review could augur a radical overhaul of the two-decade-old institution.Lagarde has long argued that central banks should consider the merits of issuing their own digital currency. In her previous job as head of the International Monetary Fund, she said it could support public goals such as financial inclusion, consumer protection and payment privacy.The idea has gained momentum in recent years, spurred in part by the rise of cryptocurrencies such as Bitcoin. Facebook Inc.’s plans this year for a global digital currency sparked a backlash among governments, but also fueled the debate that public authorities risk being left behind as consumers turn to private-sector initiatives that skirt the traditional banking system.Retail ReadinessThe ECB said last week that it’ll develop its own digital currency if the private sector can’t make cross-border payments faster and cheaper, arguing that technological innovation is quickly transforming how retail payments are made. In a document prepared for the European Parliament, the central bank said it is analyzing the situation and will be ready to respond if needed.The People’s Bank of China is already working on a digital currency and the Bank for International Settlements, a hub for monetary cooperation, published a survey this year showing most central banks are considering the implications of doing so. BIS head Agustin Carstens said last week that they “have a responsibility to be at the cutting edge of the debate.”Bank of England Governor Mark Carney has gone so far as to suggest that a global central bank digital currency might one day replace the dollar as the international reserve currency.Still, there’s also plenty of skepticism. U.S. Treasury Secretary Steven Mnuchin said only last week that he and Federal Reserve Chairman Jerome Powell don’t see a need to create a Fed digital currency for at least the next five years. Powell previously told a lawmaker that the Fed is studying the costs and benefits of such a move.Within the euro zone, the Dutch central bank carried out two cryptocurrency experiments in 2015, finding that drawbacks included industry fragmentation and self-interest among financial incumbents. In 2016, Germany’s Bundesbank and the stock exchange tested blockchain -- the technology underlying cryptocurrencies -- for transferring and settling securities and cash, concluding that the process was too expensive and slow.Bundesbank President Jens Weidmann has said there is no need for a central bank digital currency for the broad public. He warned it could even weaken financial stability, as people might cause a bank run in a crisis by rapidly shifting their cash to the safer home of a central-bank account.To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net;Paul Gordon in Frankfurt at pgordon6@bloomberg.net;Carolynn Look in Frankfurt at clook4@bloomberg.netTo contact the editor responsible for this story: Paul Gordon at pgordon6@bloomberg.netFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • China’s Credit Supply Rebounds in November After Seasonal Slump

    China’s Credit Supply Rebounds in November After Seasonal Slump

    (Bloomberg) -- China’s credit growth rebounded from October’s slump, with banks lending more than expected and a rise in corporate bond issuance boosting total credit.Aggregate financing was 1.75 trillion yuan ($249 billion), the People’s Bank of China said Tuesday. That compares to about 619 billion yuan in October and 1.6 trillion yuan in November 2018. The median estimate of economists was 1.485 trillion yuan. Financial institutions offered 1.39 trillion yuan of new loans in the month, versus a projected 1.2 trillion yuan.Key InsightsBroad M2 money supply grew 8.2% from a year earlier.Shadow banking continued to shrink, dropping 106.1 billion yuan in total: entrusted loans fell 95.9 billion yuan, trust loans dropped 67.3 billion yuan, and undiscounted banker’s acceptances rose 57.1 billion yuan.The stock of outstanding credit was 221.28 trillion yuan. That was 10.7% larger than a year ago, the same growth rate as in October.The growth in M2 and aggregate social financing growth was faster than nominal GDP growth and that shows the “strengthening of counter-cyclical adjustments has started to support economic growth,” said Ding Shuang, chief economist at Standard Chartered Bank Plc in Hong Kong. “The effect of fiscal stimulus hasn’t been fully reflected,” he said, adding he expects that to kick in next year, along with accommodative monetary policy.(Updates with comment and more details.)To contact Bloomberg News staff for this story: James Mayger in Beijing at jmayger@bloomberg.netTo contact the editor responsible for this story: Jeffrey Black at jblack25@bloomberg.netFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • China’s CPI Inflation Fastest Since 2012 With Peak in Sight

    China’s CPI Inflation Fastest Since 2012 With Peak in Sight

    (Bloomberg) -- China’s consumer inflation accelerated to a seven-year high in November while producer prices extended their run of declines, complicating the central bank’s efforts to support the economy.The consumer price index rose 4.5% last month from a year earlier, following a 3.8% gain in October, the National Bureau of Statistics data showed Tuesday. The median forecast was for a 4.3% increase. Factory prices fell 1.4% on year, slower than the 1.6% drop in October while extending the run of negative readings to five.Pork prices, a key element in the country’s CPI basket, drove the gain, surging 110% from a year earlier as a deadly hog virus cut supply. This pushed up the CPI by about 2.64 percentage points. Core inflation, which removes the more volatile food and energy prices, remained subdued at 1.4%, suggesting domestic demand remains sluggish and the central bank can look through the supply shock.The month-on-month rise in pork prices moderated, suggesting a peak in CPI inflation lies ahead, according to economists. Pork prices rose 3.8% in November from the previous month when it rose 20.1%. Some of the reasons of the moderation include higher pork imports alleviating supply shortage and a decrease in news reports of African swine fever, according to ING Bank’s report.“We shouldn’t focus too much on the headline inflation figure. If we look at non-food inflation or core inflation, you’ll find the divergence between CPI and PPI is narrowing,” said Ning Zhang, an economist at UBS AG. “We are not faced with inflation pressure now, but deflation pressure, or pressure from weak inflation.” Zhang expects the CPI to peak at around January next year.What Bloomberg’s Economists SayWith a recent reversal in pork prices -- the main driver of this year’s pickup in consumer prices -- we expect headline inflation to peak in January or February 2020.\-- David Qu, Bloomberg EconomicsClick here to read the full notePeople’s Bank of China Governor Yi Gang this month signaled a continuation of moderate, limited stimulus. Top Communist Party officials are expected to meet this month to set economic goals for 2020. Goldman Sachs Group Inc. economists said China will probably lower its growth goal to “around 6%,” which gives policy makers some leeway to respond to slower growth while still keeping the goal of doubling income this decade within reach.“Factory deflation is a more concerning problem than the higher-than-expected CPI,” said Betty Wang, senior economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “There are no signs the manufacturing sector is recovering and the sluggishness is expected to stay for a while.”(Updates with outlook for pork prices, CPI.)\--With assistance from Tomoko Sato and Miao Han.To contact Bloomberg News staff for this story: Lin Zhu in Beijing at lzhu243@bloomberg.netTo contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Malcolm Scott, Jiyeun LeeFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • China’s Unexpected Export Drop Shows Why It Wants a Trade Deal

    China’s Unexpected Export Drop Shows Why It Wants a Trade Deal

    (Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. The unexpected drop in China’s exports in November shows one reason why the nation wants to agree on a phase one trade deal - U.S. tariffs are hurting China’s exports at a time when global demand is already weak.Total exports in November dropped 1.1% from a year ago, and to the U.S. they were down 23%, the customs administration said Sunday. That was the worst result for exports to the U.S. since February and the 12th straight monthly decline. Overall shipments had been expected to rise 0.8%, as retailers and companies stock up before the Christmas shopping season.About 18 months of tit-for-tat tariffs have damaged both economies, with Chinese companies and American farmers selling less to the other side. When the two sides agreed to work on a ‘phase one deal’ in October there was hope that it would lead to a quick resolution of at least some of the underlying issues. However negotiations have stretched out and even if some of the tariffs are removed, both sides will be economically worse off than they would have been without the conflict.“Weak global demand, especially in major trading partners such as the U.S., EU and Japan, has dragged on export growth” and the weaker yuan in November cut the dollar value of exports, said Wang Youxin, a researcher at the Bank of China Institute of International Finance. “Looking ahead, exports depend on the progress of the trade talks. If the phase one deal is reached, and there’s rollback of tariffs, companies may become more confident and exports could rise.”The latest signs from the talks indicate that negotiators are moving closer to an agreement despite some sharp rhetoric and diplomatic spats over Xinjiang and Hong Kong. The U.S. side expects a phase one deal to be completed before the Dec. 15 deadline when new American tariffs on Chinese goods are scheduled to take effect, according to people familiar with the matter. If those tariffs were to go into effect on products like smartphones and computers, it would further damage China’s exports and raise prices for U.S. consumers.What Bloomberg’s Economists Say...“Exports undershot expectations in November, registering a surprise drop even with a boost from a favorable base effect. The weakness is probably not over, going by the contractionary reading on new export orders in the latest purchasing managers data.”David Qu, economist at Bloomberg EconomicsSee here for the full noteImport GainThe rebound in imports shows there is a short-term stabilization in the Chinese economy, according to Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong.Some of that rise is due to a 2.7% increase in imports from the U.S., which might be linked to increased goodwill purchases of American farm products ahead of a deal. The value of soybean imports was up 41% from a year ago, although the government did not release information on which nations these were from.\--With assistance from Tomoko Sato.To contact Bloomberg News staff for this story: Miao Han in Beijing at mhan22@bloomberg.netTo contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Shamim AdamFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • China Exports Unexpectedly Decline in November, Imports Rise

    China Exports Unexpectedly Decline in November, Imports Rise

    (Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. China’s exports unexpectedly fell in November as global demand waned and a deal with the U.S. continued to elude negotiators, while imports rebounded.Exports dropped 1.1% in dollar terms in November from a year earlier, while imports rose 0.3%, the customs administration said Sunday. That left a trade surplus of $38.73 billion for the month. Economists had forecast that exports would rise 0.8% while imports would drop by 1.4%.Key InsightsThe numbers are a bit surprising as exports unexpectedly fell while imports returned to growth, said Zhou Hao, senior economist at Commerzbank AG in Singapore. Overall these are still soft numbers -- there might be some further import improvement in December due to a favorable comparison with low numbers last year, but in general there is hardly a meaningful improvement in sight.Imports from the U.S. rose for the first time since August last year, while exports continued their slide for a 12th month, dropping 23%. However, the value of imports in 2018 was depressed by the trade war so the increase this year is off a low base.Chinese and U.S. negotiators are moving closer to an agreement despite sharp rhetoric and diplomatic spats over Xinjiang and Hong Kong. U.S. negotiators expect a phase one deal to be completed before the Dec. 15 deadline when new American tariffs on Chinese goods are scheduled to take effect, according to people familiar with the matter.Senior Chinese officials will meet in coming days to set economic policy for next year, including the growth target and plans for monetary and fiscal settings.The soft rebound in imports shows the weakness of the domestic economy. The government has brought forward the sale of some debt so it can start spending the money as early as possible next year, but People’s Bank of China Governor Yi Gang indicated that the nation’s monetary policy will continue to refrain from large-scale easing steps.Get More“If a phase one trade deal is struck and there is no further escalation of U.S.-China trade tensions, the drag on China’s exports from higher U.S. tariffs will likely ease through 2020. Domestic business and consumer sentiment will also improve slightly, supporting investment and consumption, although trade-related uncertainty will likely remain elevated in the short term,” Sylvia Sheng, global multi-asset strategist at J.P. Morgan Asset Management in Hong Kong, wrote in a recent note.(Updates with deck headlines, economist’s comment, data on bilateral China-U.S. trade)\--With assistance from Tomoko Sato.To contact Bloomberg News staff for this story: Miao Han in Beijing at mhan22@bloomberg.netTo contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Keith GosmanFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • China November Forex Reserves Slip on Dollar Strength, Surplus

    China November Forex Reserves Slip on Dollar Strength, Surplus

    (Bloomberg) -- Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Pocket Cast or iTunes.China’s foreign-currency holdings dipped in November on a stronger U.S. dollar and robust trade surplus.Reserves fell to $3.09559 trillion from $3.105 trillion in October, the People’s Bank of China said SaturdayThe supply and demand of China’s foreign-exchange market remained balanced in November, according to a spokeswoman for the State Administration of Foreign Exchange.The forex market was affected by global economic growth, expectations on monetary policy and the trade situation. The slight increase of the U.S. dollar index and decline in major countries’ bond prices are the main reasons for the change in foreign-exchange reserves.Key InsightsThe reading is lower than the median estimate of $3.1 trillion in a Bloomberg survey of economists.Capital outflow pressures may have largely stabilized in November, as the onshore yuan saw limited movement at the end of the month compared with the end of October, UBS Group AG economists wrote in a note ahead of the data release. The value of the reserves probably declined due to a weaker yen and euro against the dollar, although a slightly larger trade surplus and stable net FDI may counteract that a little, they wrote.The value of gold reserves was down to $91.469 billion in November from $94.651 billion a month earlier.Table: China’s End-October Forex Reserves at $3.1052 Tln (Table)To contact Bloomberg News staff for this story: Lin Zhu in Beijing at lzhu243@bloomberg.net;Carol Zhong in Hong Kong at yzhong71@bloomberg.netTo contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Stanley JamesFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • Here's What Bank of China Limited's (HKG:3988) P/E Ratio Is Telling Us
    Simply Wall St.

    Here's What Bank of China Limited's (HKG:3988) P/E Ratio Is Telling Us

    This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios...

  • Traders Look to Profit in China Bond Market That Won’t Move

    Traders Look to Profit in China Bond Market That Won’t Move

    (Bloomberg) -- Making money in a market that moves so little has become a key challenge for China’s sovereign-bond traders.With 10-year notes trading in the narrowest range in seven years, investors are casting their nets far and wide to enhance returns. It’s policy bank bonds for JPMorgan Asset Management and PineBridge Investments Asia Ltd., dollar-denominated debt for Nissay Asset Management Corp. and convertible bonds for Morgan Stanley Huaxin Fund Management Co.China’s 10-year yield has fallen just 11 basis points this year, missing out on a global rally that in August took the world’s stockpile of negative-yielding bonds to a record $17 trillion. The People’s Bank of China helped trigger a sell-off in October when it effectively withdrew liquidity from the financial system, but bonds have since stabilized following a series of unexpected policy-rate cuts and cash injections.But that wasn’t enough to spur a rally: the central bank signaled this week it will continue to refrain from large-scale easing. A supply surge in local government notes is also concerning traders.Here’s how some investors are navigating the market:Policy bank bondsChina’s quasi-sovereign policy bank notes -- particularly in the three-year tenor -- are worth considering, says Jason Pang, a fixed-income portfolio manager at JPMorgan Asset Management. The bonds are in a “sweet spot” as they benefit from any liquidity injections and still provide a decent yield above 3% and greater roll-down returns, he said, referring to the strategy of selling a note as it approaches maturity. Arthur Lau, head of Asia excluding Japan fixed income at PineBridge Investments, also prefers policy bank bonds, as the notes have higher yields than sovereigns. He favors them in five- to seven-year tenors.Dollar-denominated debtToshinobu Chiba, chief portfolio manager of fixed-income investment at Nissay Asset Management, took an overweight position in dollar-denominated China credit in October and sold Chinese government bonds after consumer prices rose by the fastest pace since 2013 in September. He’s looking to buy China dollar bonds, with a view that the central bank has little room to ease monetary policy if inflation remains high. He says dollar corporate debt will remain attractive in the coming six months, with rising demand for it signaled by a tightening credit spread.Investment grade creditWhile Pictet Asset Management Ltd.’s head of China debt Cary Yeung is still positive on Chinese sovereign bonds, he’s also a fan of onshore investment-grade credit for its “low volatility, decent carry and stable” fundamentals. He likes short-dated high-yield bonds issued by property companies, as the sector’s sales have been doing well and it might see more favorable policies in the future.Derivatives and othersLi Yi, a fund manager at Morgan Stanley Huaxin, whose onshore China bond fund has outperformed 95% of peers over the past three years, says to “pay attention to convertible bonds, treasury bond futures and other derivatives to enhance returns.”Better yearFor Manu George, a fixed-income director at Schroder Investment, the current yield of Chinese sovereign debt is already attractive and he has taken a long position. China bonds are likely to see a better year in 2020, he says.The yield on China’s 10-year sovereign bond was down 1 basis point at 3.2% as of 4:55 p.m. local time.(Updates with market moves)\--With assistance from Tian Chen and Jing Zhao.To contact Bloomberg News staff for this story: Livia Yap in Shanghai at lyap14@bloomberg.net;Claire Che in Beijing at yche16@bloomberg.netTo contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, David Watkins, Philip GlamannFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • Top Chinese Economists Spar Over How Slow the Economy Should Go

    Top Chinese Economists Spar Over How Slow the Economy Should Go

    (Bloomberg) -- Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Apple Podcast, Spotify or Pocket Cast.Chinese economists with influence in government circles are beginning to set out their positions over how much the nation should support growth next year, ahead of a key economic planning meeting.China’s gross domestic product expanded 6% in the third quarter, the slowest rate in decades and the expansion is forecast to fall below that level next year. Supporting the economy will likely be top of the agenda at this month’s Central Economic Work Committee, which will decide 2020’s targets, including how much the government should spend and what growth rate should be aimed at.The economists’ debate has taken place in articles or speeches at a series of conferences held in Beijing over the past week, with positions diverging over how to balance growth and the desire to reduce financial risks. This year, the government has prioritized the latter, and has held off on large scale stimulus with little sign of a change of course.Former central bank adviser Yu Yongding argued that growth can’t be allowed to drop below 6%, proposing more stimulus to stop the downward trend in the economy.“The most pressing and prominent problem is to prevent the economy from slowing further,” Yu wrote in an article published in Caijing Magazine on Sunday. “The more important matter is that there are no signs that the economy is bottoming out.”Growth needs to be stabilized, Yu wrote, even at the expense of a temporary deterioration in fiscal conditions. The consequences of a slowing economy include insufficient jobs, inability to hedge against risks from a protracted trade war with the U.S., and little room for structural reforms.4% GrowthSome of Yu’s view were echoed by Song Yu, Chief China economist at Beijing Gao Hua Securities Co, Goldman Sachs Group’s local partner. He voiced concern that if no effective measures were taken, China’s economy might continue plunging indefinitely.“How’s it possible that growth is a bad thing?” he asked rhetorically at the China Finance Annual Forum last Friday.“Some people have started saying that a high economic growth rate is bad. That lower is better. A 6% growth rate is better than the old 8%. What about in two years? Are we going to say 4% is better than 6%?”On the opposite side are economists who are comfortable seeing China’s economy gradually slowing to below 6%.Xia Bin, an economic adviser to the State Council, said a target range of 5.5% to 6% for 2020 is the result of an “extremely reliable” analysis of the current situation.2020 GoalThis target range can not only ensure China reaches the goal of doubling per capita GDP and household income from the level in 2010, but also serve the purpose of stabilizing employment, Xia said at a forum co-hosted by Renmin University on Saturday. A conservative growth target would be around 5.8%, he said.Besides the goal of doubling GDP by 2020, next year is an important year for China’s economic planning - it’s the last year of the current “five-year plan” and also the final year of the ‘three critical battles’ against debt, poverty and pollution.The government has to manage the inevitable slowdown as the nation moves to being a middle-income country, try to counteract the effects of the trade war, balance risks from debt and stimulus, plus achieve those fixed goals.Huang Qifan, a vice president at China Center for International Economic Exchanges, also opposed loose monetary policy, arguing that it’s only effective in combating cyclical problems, not structural ones.“Competitive zero interest rates, quantitative easing and excessively loose monetary policy are harmful in the long run. We will never replicate that path,” Huang said at the China New Financial Summit Forum on Sunday.That’s similar to what People’s Bank of China governor Yi Gang wrote over the weekend when he argued that China should stick to a conventional approach as long as possible.“The world’s economic downturn will likely stay for a long time,” Yi wrote in an article in a Communist Party magazine. “We should stay focused and targeted, while not competitively lowering interest rates to zero or engaging in quantitative easing.”To contact Bloomberg News staff for this story: Lin Zhu in Beijing at lzhu243@bloomberg.netTo contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James MaygerFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • PBOC Signals Policy to Stay Cautious Amid Uncertain Data

    PBOC Signals Policy to Stay Cautious Amid Uncertain Data

    (Bloomberg) -- China’s central bank governor sounded a cautious tone on the health of the global economy, while signaling that the nation’s monetary policy makers will continue to refrain from large-scale easing steps.Policy should be prepared for a “mid- and long-distance race” and stick to a conventional approach as long as possible, according to the article by Governor Yi Gang published Sunday on the WeChat account of Qiushi, the Communist Party’s flagship magazine.The comments were published a day after an factory gauge showed an unexpectedly strong improvement in November on a rebound in new orders. China is seeking to strike a balance between supporting a slowing economy that has been affected by tensions with the U.S., and controlling financial risks. The nation also needs to be wary of a contraction in credit as downward pressure increases, according to comments from a banking regulator in state media over the weekend.The official manufacturing purchasing managers’ index rose to 50.2, according to data released by the National Bureau of Statistics. That’s the first reading indicating expansion since April, and may give support to the idea that the world’s second-largest economy is stabilizing amid stimulus measures and better external demand. Seasonal factors influenced the rise though, and downward pressures on China’s economy, including factory deflation, remain.“The world’s economic downturn will likely stay for a long time,” Yi wrote. “We should stay focused and targeted, while not competitively lowering interest rates to zero or engaging in quantitative easing.”Economic development “should not be simply judged by gross domestic product growth,” Yi said, adding that the mission of monetary policy is to keep prices stable and protect people’s money from inflation. He also repeated a pledge to keep the yuan flexible and not engage in competitive depreciation.The outlook for China’s economy remains particularly uncertain as long as a so-called “Phase One” deal on trade with the U.S. remains outstanding. While officials have made positive noises in the past week, the nationalist tabloid Global Times restated China’s position at the weekend that a roll-back of tariffs is necessary for an accord to be reached.Relations have otherwise been strained in recent days over the ongoing political unrest in Hong Kong.Yi’s comments come ahead of a high level economic meeting expected in December where top leaders and senior officials will lay out growth targets for 2020. Economists anticipate the economy will slip to sub-6% growth in 2020, a situation Beijing may be comfortable with as long as employment is strong and risks are in check.In the purchasing manager report, a sub-index of new export orders climbed to seven-month high at 48.8 on easing trade tension, but was still in contraction. Overall orders rose back above 50 and was at the highest level since April. Businesses showed across-the-board improvement regardless of size, although small and medium-sized enterprises are still shrinking. Employment at factories remained unchanged at 47.3.What Bloomberg’s Economists SayIt’s important to emphasize that considerable downward pressures remain on the economy. And it’s unwise to read too much into a single month’s reading. Large jumps in activity are not unusual following China’s week-long holidays, such as the Chinese New Year and in October. The trade talks with the U.S. will be a crucial swing factor for the outlook. Policy support is likely to be kept up.\-- Chang Shu, Chief Asia EconomistFor the full note click hereThe central bank has maintained a fairly neutral policy stance compared to its global peers, trimming interest rates for commercial lenders only moderately. The PBOC has also held back out of concern on surging consumer inflation, which analysts expect to peak at 5% or 6% in early 2020. Recent policy steps have been more aimed at preventing an undue tightening of market conditions during tax payment season, rather than easing conditions significantly.Yu Xuejun, chairman of the supervisory board for key state-owned financial institutions at the China Banking and Insurance Regulatory Commission, was cited in an article published at the weekend warning that effective transmission of monetary policy remains a problem, and that a contraction in credit remains a risk.Yangtze PlanIn Sunday’s article, Yi extensively reviewed the history of global monetary policy since the Great Depression. He said overly loose policy can harm long-term development, because it delays necessary reforms and fuels bubbles.Meanwhile, further initiatives to promote investment are being developed. Beijing will encourage local governments in the Yangtze River Delta around Shanghai to jointly set up investment funds for major infrastructure projects and ecological development, according to a plan issued by the state Xinhua news agency Sunday.The focus will be on big data, artificial intelligence, new-energy vehicles and the internet of things, according to the lengthy plan for the region spanning Jiangsu, Zhejiang and Anhui provinces in east China.(Updates with warning from banking regulator on credit in third paragraph, details of PMI in tenth paragraph.)\--With assistance from Ran Li and Gao Yuan.To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.netTo contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Paul JacksonFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • The Big Question on Hong Kong: How Will China Hit Back at Trump?

    The Big Question on Hong Kong: How Will China Hit Back at Trump?

    (Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. China is making a habit of issuing vague retaliation threats. So far, however, it hasn’t actually done much.The foreign ministry gave another warning on Thursday after President Donald Trump signed bills backing Hong Kong’s protesters, using language that mirrored a statement last week.China issued similar threats earlier this year after the U.S. approved arms sales to Taiwan, sanctioned companies over human-rights abuses in Xinjiang and put Huawei Technologies Co. on a blacklist.“We suggest that the U.S. stops sticking obstinately to its course or China will take resolute countermeasures,” the foreign ministry said. “The U.S. side will bear all responsibility for the consequences.”Later, foreign ministry spokesman Geng Shuang dodged questions on when China would reply or whether it would impact trade talks, telling reporters to “stay tuned.”“What will come will come,” he said.The failure to flesh out the details despite having weeks to prepare shows the difficulties China faces in hitting the U.S. without also hurting its own economy, which is growing at the slowest pace in almost three decades. Apart from implementing retaliatory tariffs against the U.S., China has largely stuck to a policy of “strategic composure” when it comes to other aspects of the relationship.Trade Talks ImpactMei Xinyu, a researcher at a think tank under China’s Commerce Ministry, said that the Hong Kong issue will definitely be discussed at the trade negotiation table and China will likely ask the U.S. side to clarify its stance, or even make some promises on refraining from using the bill.He added that China will prepare some countermeasures at the same time, echoing the Foreign Ministry’s remarks earlier, without elaborating on what specific measures will be taken.“It’ll bring a certain degree of uncertainty to the ongoing trade talks,” Mei said. “But it won’t necessarily make or break a deal.”While slowing down the trade talks is the most obvious way China could retaliate, it’s clear that until now Beijing has tolerated a lot just to keep them on track. Without a phase one deal, China faces the prospect of another tariff hike in mid-December.There are other options, though most of them also carry the risk of backfiring economically.That’s something President Xi Jinping may not want to risk with economic troubles mounting at home and the Hong Kong unrest showing no signs of abating.Unreliable EntitiesIt could hit out at U.S. companies by releasing a long-threatened “unreliable entities” list, stop buying American products, unload Treasuries or curb exports to the U.S. of rare earths, which are critical to everything from smart-phones to electronic vehicles.On the diplomatic side, China could take measures such as halting cooperation on enforcing sanctions related to North Korea and Iran, recalling the Chinese ambassador to the U.S. or downgrading diplomatic relations.Hu Xijin, the editor-in-chief of state-run Global Times, said in a tweet Thursday that China was considering putting the drafters of the law on a no-entry list.“Hong Kong has increasingly become a card in China-U.S. trade war,” E Zhihuan, chief economist at Bank of China (Hong Kong) Ltd, said at a briefing in Beijing. “Now that Trump has showed his card, how we should react tests our wisdom. It’s a very complex and difficult situation.”Trump himself had little choice but to sign the bills, which required sanctions against any officials deemed responsible for human rights abuses or undermining the city’s autonomy, as well as banning the export of crowd-control items such as tear gas and rubber bullets to the city’s police. Near-unanimous support in Congress meant lawmakers could override a veto, and Trump doesn’t want to give Democrats an opening for attack ahead of the 2020 election.In signing the bills, Trump signaled to Xi that action wouldn’t be imminent. He expressed concerns with unspecified portions of the new law, saying they risked interfering with his constitutional authority to carry out American foreign policy.“I signed these bills out of respect for President Xi, China, and the people of Hong Kong,” the president said in a statement Wednesday.Internal AffairsFor China, however, the bills represent an interference in their internal affairs and could even encourage protesters who have become increasingly violent in recent months. While the trade talks are separate, the overall relationship could suffer, according to He Weiwen, who previously served as a commercial attache at the Chinese consulates in New York and San Francisco.“The U.S. has damaged China’s sovereignty and China will of course retaliate,” said He, who is now a senior research fellow at the Center for China and Globalization in Beijing. “Sovereignty prevails over trade for China.”When asked what China is likely to do, however, He didn’t elaborate.“I don’t know what specific moves they will make,” he said. “But there will likely be some consequences.”\--With assistance from Yinan Zhao and Carolynn Look.To contact Bloomberg News staff for this story: Peter Martin in Beijing at pmartin138@bloomberg.net;Lin Zhu in Beijing at lzhu243@bloomberg.netTo contact the editors responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net, Jeffrey Black, James MaygerFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • U.S.-China Trade War Timeline: What’s Happened Since May 2019

    U.S.-China Trade War Timeline: What’s Happened Since May 2019

    (Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. More than a year into the trade war between the U.S. and China, negotiators are still working toward a deal to defuse the tensions.Here are the events we expect to happen in the coming months, plus a timeline of what has happened since May, in reverse chronological order:How the U.S.-China Trade War Got to This Point: QuickTakeClick here to read what happened in Jan.-April 2019.Click here to read what happened last year.To contact Bloomberg News staff for this story: Miao Han in Beijing at mhan22@bloomberg.netTo contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James MaygerFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • China’s $40 Trillion Man Has the Toughest Job in Global Finance

    China’s $40 Trillion Man Has the Toughest Job in Global Finance

    (Bloomberg Markets) -- Two months into his tenure as China’s top banking regulator, Guo Shuqing did something his staffers had never witnessed from a senior Communist Party leader. Speaking in Beijing to officials and industry executives from across the country, he pledged to resign if he failed to snuff out the excesses that had been accumulating in China’s $40 trillion banking system for almost a decade.“This is a leader’s responsibility,” Guo said, according to people familiar with the April 2017 speech who asked not to be named discussing an internal matter.His comments jolted the audience. Not only is it extremely rare for a high-ranking Chinese official to admit the possibility of defeat, but those listening also understood the enormity of Guo’s task. As steward of the world’s largest banking system—it’s twice the size of the U.S.’s—the 63-year-old arguably has the hardest job in global finance. And it’s getting more difficult by the day. China faces its most uncertain economic environment since the global recession a decade ago, a state of affairs further complicated by the civil unrest in Hong Kong.Guo’s priorities—keeping China’s financial system stable and chipping away at the implicit state guarantees that underpin everything from asset-management products to bank deposits—are maddeningly contradictory. To create a more sustainable system where financial risk and return go hand in hand, he must convince investors, lenders, and local governments that Beijing won’t come to the rescue when asset prices fall or borrowers default. But removing the government backstop could trigger a “rapid and chaotic” repricing of risk that results in exactly the kind of crisis Guo is trying to prevent, says Michael Pettis, a finance professor at Peking University and former banker at Bear Stearns Cos. Walking that tightrope would be difficult in the best of times, but Guo is doing it with a trade war and a record-high debt burden hanging over China’s $13 trillion economy. What’s more, he may need to get it done by sometime in 2021; officials at his level typically retire at 65, though there have been exceptions.To the dismay of China bears everywhere, Guo seems to be pulling off the balancing act. Since becoming chairman of the China Banking Regulatory Commission in early 2017, he’s published sweeping rules that ban implicit guarantees on $14 trillion of asset-management products, shuttered thousands of struggling peer-to-peer lenders, allowed local companies to default on their debt at a record pace, and imposed losses on a troubled bank’s creditors for the first time since at least 1998.Although his unprecedented campaign to rein in moral hazard has caused bouts of financial turbulence and contributed to the Chinese economy’s deepest slowdown in decades, the country has yet to experience anything approaching a crisis. China’s gross domestic product rose 6% in the third quarter, slightly below estimates but still within the government’s target range. Of course, if growth takes a dramatic turn for the worse, Guo will have much less room to maneuver. But for now, the outlook for further reforms looks positive. Investors, policymakers, and academics who’ve worked with Guo say his financial overhaul is far from over.“There is still a long way to go,” says David Loevinger, a managing director of emerging markets at TCW Group Inc. and former senior coordinator for China affairs at the U.S. Department of the Treasury. Loevinger, during his stint at the Treasury from 2006 to 2012, met with Guo, a fluent English speaker, several times. He describes Guo as “very disciplined and thoughtful,” with a “deep understanding of China’s financial challenges.” At the same time, Loevinger says, Guo recognized “that you couldn’t always take a cookie-cutter approach and drop Western regulatory systems into China’s financial system.”QuickTake: How China Is Bracing Itself for More Bank Bailouts Guo was born in China’s remote Inner Mongolia autonomous region in 1956, only a few years before Mao Zedong embarked on the Great Leap Forward, the disastrous industrialization push that led to one of the greatest famines in history. He spent his formative years sowing crops as part of a government program that sent millions of young Chinese to rural areas in the 1970s. After the chaos of Mao’s reign subsided, Guo studied philosophy at Nankai University in Tianjin and received a master’s degree in Marxist and Leninist theory at the Chinese Academy of Social Sciences.Guo, who declined to be interviewed for this story, knew he wanted to be a reformer from an early age. In 1984 he published one of his earliest articles, a 35,000-word opus titled “Investigations on Reforming the Chinese Economy,” and sent it, unsolicited, to the State Council, China’s cabinet, in hopes that top policymakers would learn from its recommendations. He attended the University of Oxford as a visiting scholar two years later, after which he embarked on a tour of Eastern Europe that left him shocked by the bleakness of the region’s economies as Soviet communism faltered. He returned to China more convinced than ever about the need for change, including measures to loosen the grip of local governments on the economy, according to a memoir of his travels written in 1987.Guo landed his first big government job at the State Planning Commission, a predecessor to the National Development and Reform Commission, and climbed steadily through the ranks of Chinese officialdom to become one of its most prominent pro-market reformers. His résumé includes senior positions at the central bank, the securities regulator, China’s second-biggest state bank, and the governors’ offices of Guizhou and Shandong provinces.As head of the State Administration of Foreign Exchange, he liberalized cross-border capital flows and made China’s currency more flexible. “Not only does he see the right direction, he also matches it with political reality to make reforms truly workable,” says Guan Tao, who worked under Guo as head of international payments at SAFE in the early 2000s and is now managing director at the China Society for Finance and Banking.People who know Guo, including some who didn’t want to be named when talking about a senior member of government, describe him as one of the few high-ranking Chinese officials with both a strong scholarly bent and a knack for navigating the country’s tricky politics. Guo “was never shy about disagreeing,” Loevinger says. “But always in a very thoughtful way.”Married, with a daughter, Guo has written at least 300 essays and 14 or more books. During his rare downtime, he’s said to enjoy listening to classical music and discussing topics such as the role of exchange rates in China-U.S. trade relations. Andrew Sheng, an international adviser to the China Banking and Insurance Regulatory Commission, who’s known Guo for more than 30 years, summed him up this way: “He can think, he can listen, and he can act.”Guo’s political savvy was evident in March 2018 when he won a major vote of confidence from Chinese President Xi Jinping and Vice Premier Liu He, Xi’s top economic adviser. They merged the banking and insurance regulators and named Guo as chairman of the combined China Banking and Insurance Regulatory Commission, or CBIRC. He also became party secretary of the central bank, the People’s Bank of China. Altogether, this arrangement gave Guo more power than any of his predecessors.He hasn’t been shy about using it. Among his biggest targets has been China’s sprawling shadow-banking system, a collection of loosely regulated lenders, fund managers, and other financial institutions that ballooned in recent years thanks in large part to the widespread belief that the government wouldn’t let them go bust. The fixed-return, high-yield asset-management products that form the backbone of this financial network have lured trillions of dollars from Chinese savers, most of whom assume that they’ll get bailed out if the products face losses.Guo has steadily chipped away at that assumption by allowing shadow-banking products to fail, particularly in the peer-to-peer lending sector where standards were especially lax. New rules governing wealth-management products—set to take effect at the end of 2020—would shift the industry away from a fixed-return model to something more akin to mutual funds in the U.S., where investors bear the risk of fluctuating market prices and can track their funds’ net-asset value every day.Guo is “trying to diffuse any potential systematic financial risks by letting the market set the appropriate price for risk,” says Zhu Ning, a professor at Shanghai Advanced Institute of Finance, who advises the central bank and other economy-related ministries and has written a book on implicit guarantees. Guo has focused much of his recent attention on tackling problems at the hundreds of small banks that dot China. In May he oversaw a dramatic break with precedent by seizing control of Baoshang Bank Co., a troubled lender from Inner Mongolia, and imposing losses on some of its creditors. The episode triggered a wholesale repricing of credit risk for all but the largest Chinese banks. Proponents of this kind of policing say it will put the financial system on a more sustainable path by forcing markets to differentiate between weak and strong lenders.Although Guo’s enforcement action was widely applauded by China watchers, some economists and traders criticized the opaque way in which it was handled. In the days surrounding the Baoshang Bank seizure, the CBIRC and the central bank didn’t communicate clearly what was happening, causing chaos in interbank markets and raising questions about how thoroughly policymakers had planned for the repercussions.As of mid-November, it was still unclear to what degree Baoshang will serve as a blueprint for China’s troubled banks. The issue is likely to flare again: In July, UBS Group AG estimated that the Chinese lenders it monitors faced a capital shortfall of $349 billion.The government’s threshold for financial-market pain may be too low to allow Guo to enact major reforms, says Victor Shih, a professor of political economy at the University of California at San Diego. At Baoshang, for example, even though some creditors suffered losses, 99.98% of them were eventually made whole by the government. Policymakers have subsequently orchestrated full bailouts for several of Baoshang’s embattled peers. “He will always come down on the side of ensuring stability,” Shih says.Shih says Guo’s balancing act doesn’t just limit “big moves on reform”; it also holds back new ways of doing things. “He has tackled an issue that was deemed very important by the leadership,” Shih says, “and that was financial risk. Especially in shadow banking. But in the process of doing so, he in effect stifled what was previously a very vibrant and risky part of China’s financial system, which is shadow banking and financial innovation.”Investors seeking reform in the way China manages risk are pushing for a number of changes. They include a clear-cut mechanism for allowing weak financial institutions to fail, more aggressive measures to detect and dispose of bad loans on banks’ balance sheets, increased incentives for big banks to boost lending to nonstate companies, and continued efforts to level the playing field for foreign financial companies.How Guo handles the rollout of China’s new rules on asset-management products will be a major test of his mettle. Some of the biggest Chinese banks are already lobbying regulators to delay implementation as lenders struggle to make existing products compliant and bring off-balance sheet loans onto their books, according to people familiar with the matter. In an unusually pointed speech in September, Xiao Gang, the former head of China’s securities regulator who’s an adviser to the government, said the 2020 deadline for compliance was “unrealistic and unfeasible.”Guo’s success may hinge on his ability to keep financial reform at the top of the Communist Party agenda by cultivating support from Xi on down. One sign of optimism, according to a September report from Beijing-based policy research firm Trivium China: At least 13 officials with strong backgrounds in finance have taken high-ranking provincial government posts in the past three years.Ultimately, however, the health of China’s vast banking system doesn’t rest on the shoulders of a single bureaucrat, no matter how skillful or respected or well-connected. “Financial reform is not a one-man issue,” says Pettis, the professor at Peking University. “It’s a national effort.”  To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.netLucille Liu in Beijing at xliu621@bloomberg.netDingmin Zhang in Beijing at dzhang14@bloomberg.netTo contact the editor responsible for this story: Stryker McGuire at smcguire12@bloomberg.net, Michael PattersonFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • Reuters

    UPDATE 5-China raises $6 billion in its biggest ever international bond sale

    BEIJING/HONG KONG/LONDON, Nov 26 (Reuters) - China raised $6 billion in its biggest ever international sovereign bond sale on Tuesday, as it pounced on the year's sharp dive in borrowing costs. The finance ministry sold the bonds in four tranches. A 3-year issue priced 35 basis points above benchmark U.S. Treasuries, a source at one of the managing banks said.

  • A Too-Big-to-Fail Toxic Monster. China's Plan C?

    A Too-Big-to-Fail Toxic Monster. China's Plan C?

    (Bloomberg Opinion) -- China’s small bank problem may be about to get a lot bigger. The slowing economy is exposing vulnerabilities built up by years of aggressive lending — and Beijing’s plans to preserve stability by merging weak lenders with each other could end up creating an even worse headache.The country’s hundreds of rural commercial and city lenders account for 27% of banking assets, but their influence is far larger than this because of their web of connections to the wider system. Small banks are significant players in the interbank market, relying on larger lenders for funding. They are active in selling wealth management products, through which companies raise financing and individual savers seek returns. And their bonds are widely held by insurance companies.Cracks in the sector emerged in May when the government seized Baoshang Bank Co., its first takeover of a lender in more than two decades. An orchestrated rescue of Bank of Jinzhou Co. followed in July, involving state-owned financial institutions that included Industrial & Commercial Bank of China Ltd. And the following month, local media reported that Shandong province’s government would become the largest shareholder in Hengfeng Bank Co. Authorities are considering a sweeping package of measures to shore up smaller lenders, including merging those with less than 100 billion yuan ($14 billion) of assets and making them accountable to local governments, Bloomberg News reported earlier this month. Consolidation makes sense: China has more than 3,000 small banks, many of which are struggling to cope with rising bad loans and a government crackdown on shadow banking. Bigger banks attract more deposits, aren’t so dependent on interest income, and have the luxury of prime clients that don’t fail, such as state companies.Disruption stemming from the tremors at smaller banks has shown the need for action. Spreads on negotiable certificates of deposits spiked after the Baoshang rescue — another key funding source for many lenders. Authorities have injected liquidity into other institutions, and tamped down speculation that some were on the brink of insolvency in an effort to prevent runs. Small banks have always been weaker than their larger counterparts, but the divide has widened since 2015 as liquidity tightened, according to analysts at Natixis SA. City commercial banks are particularly vulnerable, given a thinner deposit base than rural lenders. The devil will be in the details. The danger for Beijing is that mergers will be poorly executed and fail to impose root-and-branch changes on lenders’ culture and risk-management practices. The result could be a plethora of small, weak banks stapled together into one too-big-to-fail toxic institution. The banking regulator’s ability to monitor large mergers, particularly on the country’s peripheries, is uncertain. Jinzhou is headquartered in the northeast rustbelt province of Liaoning while Baoshang is based in Inner Mongolia, Bloomberg Intelligence analyst Matthew Phan notes.Addressing ownership and lines of accountability will also be crucial. Baoshang was part of Xiao Jianhua’s Tomorrow Group, an investment conglomerate that was under investigation in China — feeding speculation that the bank’s downfall stemmed from loans made to connected companies.Part of Beijing’s solution should be to take the stronger players public. There were 15 city or rural commercial banks awaiting approval to list as of Nov. 1, according to Michael Chang of CGS-CIMB Research. Only 35 currently trade in either Hong Kong or on the mainland exchanges of Shanghai and Shenzhen.Selling shares is no panacea — after all, Jinzhou trades in Hong Kong. Still, listing does expose companies to the scrutiny and discipline of public markets. Listed banks tend to be better run and more profitable. Shenzhen-listed Bank of Ningbo Co., for instance, has posted higher net income gains and lower nonperforming loans than many of its peers.Forced mergers may well be necessary, but the evolution of China’s approach is more suggestive of policy being made on the fly than of a carefully thought-out strategy. After the Baoshang takeover spooked markets, authorities kept themselves at one remove and leaned on state-owned companies to act as rescuers. This is now Plan C. The price of failure could be huge. To contact the author of this story: Nisha Gopalan at ngopalan3@bloomberg.netTo contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.netThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.

  • Reuters

    UPDATE 2-China cbank warns high financial risks amid rising economic headwinds

    China needs to resolve outstanding financial risks, and must counter risks from "abnormal" market fluctuations that stem from external shocks, said the central bank on Monday, as Beijing prioritises financial stability amid increasing challenges. Financial markets are highly sensitive to global trade situations and rising uncertainties in global liquidity, said the People's Bank of China (PBOC) in its annual financial stability report, adding that it will step up real-time supervision on stock, bond, foreign exchange markets to prevent cross-sector risk contamination. Beijing has stepped up daily supervisions and assessment on potential "black swan" and "grey rhino" events that may occur in the future and has prepared contingency plans, as downward pressure on the economy rises, said the PBOC.

  • China’s Economy to Stabilize in 2020, Goldman Sachs Says

    China’s Economy to Stabilize in 2020, Goldman Sachs Says

    (Bloomberg) -- Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Apple Podcast, Spotify or Pocket Cast.An easing in trade tensions, a bottoming-out of global manufacturing activity and the continuation of cautious policy support will aid the stabilization in China’s economy next year, according to Goldman Sachs Group Inc.The world’s second-largest economy will grow by 5.8% next year, and will be helped by resilient consumer spending, economists including Andrew Tilton and Hui Shan wrote in their 2020 outlook published Friday. The consensus among economists surveyed by Bloomberg for 2020 output growth is 5.9%Stabilization, or even a “weak sequential reacceleration” as seen by Goldman next year would represent a good outcome for China’s policy makers, who have grappled with the combined downward effects of their own efforts to curb financial risks and the confidence-sapping impact of the trade war through the course of 2019.Acknowledging that the People’s Bank of China and the fiscal authorities have stepped up support this year, the Goldman economists still see the need for further easing in 2020, “with an emphasis on fiscal measures.”There has been a “shift in domestic policy towards a more conservative stance that puts relatively more weight on risk control and sustainability, and accepts slightly lower growth as the price for reduced tail risk,” the economists wrote. “Chinese policy makers appear to be increasingly focused on “playing the long game” in terms of their policy settings.”The rise in China’s consumer price inflation in the course of the swine fever outbreak this year has presented a challenge to policy makers as it has been coupled with deflation in the industrial sector. For 2020, that situation is likely to continue, the economists wrote, with a recovery in the stock of sows aiding an easing of headline inflation in the second half of 2020. Only a moderate improvement in producer-price deflation is expected, they argued.The biggest risk to this picture of stabilization is a breakdown in the U.S.-China trade talks.“Both sides have an incentive to bargain aggressively and each appears to perceive it has the advantage,” according to the report. “We see the next few weeks as the critical phase, before the scheduled December 15 tariff implementation.”To contact Bloomberg News staff for this story: Jeffrey Black in Hong Kong at jblack25@bloomberg.netTo contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Jiyeun LeeFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • China Still Has Policy Space Amid Trade Spat, PBOC Adviser Says

    China Still Has Policy Space Amid Trade Spat, PBOC Adviser Says

    (Bloomberg) -- Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Apple Podcast, Spotify or Pocket Cast.China still has room to adjust its fiscal, monetary and real-estate policies if uncertainty over trade with the U.S. generates further downward pressure on the economy, central bank adviser Ma Jun said Friday.“In the short term, there is still a lot of uncertainty about China-U.S. trade tensions. If there is a mini-deal, it would be a boon for China’s economy next year. If not, and the tensions worsen, there will be rising downward pressure,” Ma, a member of the People’s Bank of China’s monetary policy committee, said on the sideline of the New Economy Forum in Beijing. “China still has room to adjust its counter-cyclical policies including fiscal, monetary and for real estate.”Local governments should have space to tailor property policies to the local situation, as different localities face distinct supply and demand pressures, Ma said.“While there is no need to change the goal stated by the central government, local government could have some flexibility to conduct counter-cyclical property policies,” he said.In response to a massive increase in housing prices, China’s leadership has repeatedly said that “houses are for habitation, not for speculation.”Ma also noted that surging pork prices are a concern as they could drive up inflation expectations, potentially changing the consumption behavior of companies and consumers. However, it’s only a matter of time until the issue is resolved, he said.The Forum is being organized by Bloomberg Media Group, a division of Bloomberg LP, the parent company of Bloomberg News.To contact Bloomberg News staff for this story: Heng Xie in Beijing at hxie34@bloomberg.net;Miao Han in Beijing at mhan22@bloomberg.netTo contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Michael S. ArnoldFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • Bloomberg

    Stuck in Global Rut, Inequality Capital, China Optimism: Eco Day

    (Bloomberg) -- Welcome to Friday, Asia. Here’s the latest news and analysis from Bloomberg Economics to help get you through to the weekend:The global economy is stuck in a rut that it won’t exit unless governments revolutionize policies and how they invest, rather than just hoping for a cyclical upswingAtlanta is the capital of U.S. inequality for the second year in a row, with average income for the top 5% of households exceeding $663,000 while families in the bottom half earned less than $65,000 -- a ratio of 10.2 to 1China’s chief trade negotiator indicated he was “cautiously optimistic” about reaching a phase one deal with the U.S.The world economy wasn’t as bad as it seemed in August, but may not be as good as it seems now, argues Peter CoyOur dashboard gauging the People’s Bank of China’s stance continues to signal the need for monetary accommodation, writes David QuMario Draghi’s tenure as ECB president ended with an impassioned plea that policy makers stop airing differences in public and display a united front in the fight to revive inflationIndonesia left its key interest rate unchanged while pumping more liquidity into the financial system to stimulate the economyGlobalization isn’t so scary for Europeans anymore, according to the latest edition of Terms of TradeIn the case of China, this chart shows commodities deflation bears watchingBrazil is drawing up plans to curtail a surge in deforestation of the Amazon rainforest that’s provoked an international outcryTo contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.netTo contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Jason ClenfieldFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • Inside the PBOC’s Struggle to Balance China’s Growth and Debt

    Inside the PBOC’s Struggle to Balance China’s Growth and Debt

    (Bloomberg) -- Sign up for Next China, a weekly email on where the nation stands now and where it's going next.Deep in the government compound in Beijing, China’s State Council was in session, debating a complicated proposal to help struggling domestic companies.The cabinet meeting in Zhongnanhai, a walled expanse of ornamental lakes and pavilions adjacent to the Forbidden City, took place late in May, days after U.S. President Donald Trump heaped yet more tariffs on China’s exports and restricted the sale of goods to Huawei Technologies Co.On this day though, officials were grappling not over the fallout from the trade war, but how to tackle a home-grown adversary: about $35 trillion in corporate, household and sovereign debt.An official from the National Development and Reform Commission, the modern-day incarnation of the once-mighty State Planning Commission, was suggesting that the People’s Bank of China should release a bolt of cash that could be used by banks to buy stakes in companies, which would then use those funds to repay some of their debt.The central bank governor Yi Gang was present at the meeting, but before he could speak, Premier Li Keqiang dismissed the proposal on the grounds that yet more central bank liquidity wasn’t the answer.For Yi, it was one more small victory. In his 20 months in office, the University of Illinois alumnus has persistently argued against a “flood” of stimulus, instead releasing just enough liquidity to keep the economy on its gradual glide path from the double-digit growth rates of the mid-2000s toward the sub-6% rates expected into the 2020s.Even with worsening data pointing to the risk of a sharper decline, the PBOC is staying the course, for now. While the U.S. Federal Reserve has slashed broad borrowing costs by 75 basis points since July, the PBOC is maintaining the most gradual of approaches, constrained by the fear of re-inflating debt bubbles or stoking already resurgent inflation.That approach has been confirmed this month. A 5 basis point cut to the key 7-day reverse repo rate on Nov. 18 followed a tweak of similar magnitude to the rate the PBOC charges banks to borrow for a year. The loan prime rate -- based on the interest rate for one-year loans that 18 banks offer their best customers -- was set at 4.15% for November, down from 4.20% in October, according to a statement from the PBOC on Wednesday.For the global economy, which has relied on China for about a third of its total growth in recent years, Yi’s moderation has meant there will be no big support to world demand that marked past binges from Beijing. If Yi can pull off his tightrope walk between keeping growth stable and avoiding a debt crisis, China will continue its march toward being the “moderately prosperous” society that the Communist Party wants it to be. Fail, and all bets are off.Yi is building on the work of his predecessor, Zhou Xiaochuan, who in the latter years of his tenure argued that controlling debt had become more important than hitting sky-high economic growth rates. That insight appears to have become internalized at the highest levels.“The balance between debt and growth is a task that Chinese policy makers will need to address over the longer term, for 10 years or more, unless there can be fundamental structural reform to get rid of some of it,” said George Wu, chief economist at Changjiang Securities Co in Beijing, who served 12 years in the PBOC’s monetary policy department. “Otherwise, the debt will just be rolled over, not removed, like an ostrich burying its head in the sand.”From his office at the bank’s headquarters -- a squat office block at the gateway to Beijing’s financial district covered in bronze reflective glass -- Yi is also trying to continue Zhou’s decade-and-a-half quest to modernize the institution from its roots as the only bank in Maoist China to one of the must-watch monetary guardians of the world.Foreigners are already more invested in China’s economic future than ever before, and that’s only set to deepen as its financial barriers come down. In September, executives from JPMorgan Chase & Co., and Goldman Sachs Group Inc. were among outsiders that met with Yi and other regulators at the Ritz-Carlton Hotel about a kilometer from the PBOC headquarters -- evidence that the trade war has done little to derail the rush to gain a share of an estimated $9 billion in annual profits.International investors are already directly exposed to the ups and downs of its stock market through indexes like MSCI Inc’s and are set to own as much as 20% of its sovereign bonds by 2023 according to Citigroup Inc. As those asset prices swing around on PBOC actions, global investors will demand more transparency from Yi, and he’ll need to provide it if he wants to keep the money pouring in.Hampering Yi’s ability to explain his policies and pave the way for any change in direction is the fact that he doesn’t have the formal independence enjoyed by the world’s other major central banks. While day-to-day operations such as liquidity management in money markets are assumed to be at the PBOC’s discretion, it’s the State Council that has the final word on benchmark interest-rate settings.Indeed, opacity is a feature of the policy-making process in China, not a bug. Unlike the formally independent Fed or European Central Bank, the PBOC must painstakingly build consensus for its proposed course of action with a range of other ministries, and then win approval from the top leadership.For now, the leadership is on his side. Yi’s boss is the silver-haired Liu He, who’s been leading the nation’s trade negotiations with the U.S. Liu is widely believed to have been the “authoritative person” interviewed in a landmark piece in the nation’s flagship People’s Daily back in 2016 arguing policy makers should prioritize de-leveraging ahead of short-term economic growth. In a somewhat complex structure, Guo Shuqing, a high-profile banking regulator, is the Communist Party’s secretary for the PBOC.The bureaucratic system of policy making, known as “countersignature,” means that debates with the rest of government are just as important as those within the central bank. To maintain room for negotiating, very little is let into the public domain about how policy makers think before an initial consensus is reached. Where investors can pick over the details of the ECB or Bank of Japan’s economic modeling and the viewpoints of officials, the PBOC’s internal procedures are confidential like those of any Chinese government ministry.As a result, investors can be wrong-footed, sometimes dramatically. Like the botched yuan devaluation of 2015 that sent global markets plunging. Or, to a lesser extent, a bond rout this year due to dashed expectations of larger stimulus that has yet to arrive.“For China to properly make its financial markets more international, the PBOC ought to take the lead to adopt a more proactive and international posture in communicating with their ‘clients,’” said Stephen Jen, founder and co-chief investment officer of Eurizon Slj Capital. “Sometimes the timing and the nature of the actions taken by the central bank confuse the market as they are not accompanied by any statements or explained in speeches.”The PBOC, NDRC and State Council declined to comment on the content of the cabinet meeting. The PBOC did not grant a request for comment on monetary policy and transparency issues. Governor Yi conducted his first interview with foreign media with Bloomberg Television in June.A sliver of light is beginning to penetrate the black box. The central bank widely consulted and spoke publicly about a reform of the interest-rate system introduced this year and its daily liquidity operations are now accompanied by commentary on the PBOC’s view of the market. More press conferences with foreign media attending have been held this year than before, and more information is also released in English.But market participants still have to guess the timing and content of major liquidity operations. There are no regular policy meetings that decide on official interest rates. And the interest-rate reform has added to the complexity of the central bank toolkit and left observers with even more policy levers to keep an eye on without any single one being decisive.When Yi has spoken publicly, investors would have done well to listen. In an interview with Bloomberg News in June, Yi warned against that “flood” of liquidity and signaled officials weren’t wedded to defending any particular level of the yuan. The nation’s currency weakened past 7 per dollar about two months later and he’s kept his word on stimulus restraint.Barring some unforeseen crisis, like a marked worsening in the trade standoff with the U.S. or a blow-up in the property market, Yi appears set to continue his tightrope walk.“Starting with Governor Zhou and continuing with Yi Gang, they have convinced the top leadership that it is very important to reduce financial risks,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington. “It would appear President Xi Jinping has bought the idea.(Updates LPR rate in eighth paragraph)To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net;Jeffrey Black in Hong Kong at jblack25@bloomberg.netTo contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, James Mayger, Jeffrey BlackFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • End of Line for BOJ Has Kuroda Talking Up Fiscal Firepower

    End of Line for BOJ Has Kuroda Talking Up Fiscal Firepower

    (Bloomberg) -- Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Apple Podcast, Spotify or Pocket Cast.Bank of Japan Governor Haruhiko Kuroda’s role as the prime focus for efforts to revive the world’s third-largest economy is coming to an end.An unprecedented level of concern about damaging side effects of Japan’s multi-decade experiment with ultra-low interest rates has gripped policy makers, regulators and legislators. The key takeaway: fiscal policy is set for a more prominent part during the next economic downturn.Why the change? A tense meeting in the BOJ’s drab annex building Sept. 26 helps illustrate the central bank’s predicament. Recognizing the importance of public support for any move to cut the -0.1% policy rate, officials sought understanding from representatives of the “Shinkin” regional cooperative banks. But rather than accept more monetary easing may be needed, one key banker tersely warned such a move would intensify pressures on the lenders, and even pressed for a hike, according to people familiar with the exchange.The pendulum swing away from monetary measures is part of a global shift seeing calls for increased government spending after a decade of easy money inflated asset prices, elevated debt levels and worsened wealth gaps, but did little to generate sustained wage and price gains. It marks a turnaround, with BOJ officials being confident as recently as mid-September that Japan was prepared to accept more deeply negative interest rates.“When Abenomics started, I wouldn’t have thought about me talking about the importance of fiscal stimulus,” said Koichi Hamada, a member of Prime Minister Shinzo Abe’s original brain-trust of reflationists, who had advised on the nomination of Kuroda and other BOJ board members. “Monetary policy was very effective right after Abenomics began, but it’s very hard to make a significant impact on its own now.”Signs of a shift in thinking were evident in remarks by Kuroda following the last two BOJ policy meetings. Five days after the September gathering, the BOJ chief talked up the power of lower short-term interest rates. But five days after the October one, he hailed the effectiveness of “more aggressive” fiscal policy, supported by ultra-loose monetary settings.Data last week underscored the economy’s ongoing need for support. Gross domestic product grew an annualized 0.2% in the three months through September from the previous quarter, stuttering from a 1.8% expansion in the April-June period as exports fell amid trade tensions and a shopping splurge before a sales tax increase ran down stockpiles of goods. Inflation figures for October due Friday are set to show core prices rose just 0.4% from a year earlier -- still way below the BOJ’s 2% target.Speculation among economists of extra BOJ stimulus in the coming months has cooled since the central bank changed its forward guidance rather than take action in October. That decision further indicated the high hurdle for additional easing, though BOJ watchers warn that the bank could still move if the U.S.-China trade war takes a turn for the worse or financial markets slide, causing a jump in the yen. Kuroda said in both speeches that he was willing to take extra action if needed.Speaking in parliament on Tuesday, Kuroda said there was still room to lower interest rates further, but added that he had never claimed the BOJ’s easing ammunition was endless or that that there was no limit on how low rates could go.Fiscal PersuasionFiscal policy has always been one of the “three arrows” of Abe’s economic-rejuvenation program, with monetary easing and structural reform being the other two. But it has something of a checkered history in Japan. Spending in the 1990s was assailed for being wasteful and politically driven, and left a legacy of the world’s largest public debt burden. The powerful Ministry of Finance, or MOF, has successfully persuaded politicians to enact two sales-tax hikes since Abe took charge in December 2012.Kuroda, 75, was a MOF bureaucrat for most of his career, and reinforced an impression of emphasizing fiscal discipline early in his tenure at the BOJ, when he endorsed the first of those consumption-tax rises. Lawrence Summers, the ex-U.S. Treasury secretary, later quipped about him that you can take the man out of MOF, but can’t take MOF out of the man.But Kuroda’s path of promotion at MOF was through the International bureau, not Budget, which is the nerve center of fiscal austerianism in Tokyo. After stepping down from MOF, he gained a broader perspective on policy coordination working at the Cabinet Office -- something like the executive office of the U.S. president, where top aides to the prime minister work with associated senior staff.Leaving that post in 2005, Kuroda literally wrote the book on coordinating monetary and fiscal efforts. His “Success and Failure in Fiscal and Monetary Policy” faulted the BOJ for failing to act in coordination with the government to address Japan’s slump into financial crisis and economic stagnation.BOJ board members certainly haven’t ruled out further monetary measures, and actions such as accelerating asset purchases are still on the table as well. At the same time, they have clearly been reticent to follow peers across the world in easing policy this year. For some, that’s a hint the days of shock and awe from Kuroda’s BOJ are over.“It must be a widely shared view at the BOJ that fiscal policy has to take a lead in the next recession,” said Kazuo Momma, a career BOJ staff member who served in roles including executive director for monetary policy and left in 2016. “The government also understands that the BOJ is approaching its limits after being so aggressive, and it’s becoming too much to ask more. You haven’t heard from politicians calling for more action by the BOJ for a while.”As Momma says, changed attitudes are evident in the Diet. For years, lawmakers would badger BOJ officials called up to parliament, criticizing them for not doing enough to support the economy. Before Kuroda took office in 2013, there was even talk of revamping the law governing the central bank. Those days are long gone.Kuroda was instead asked in a Nov. 13 Diet appearance about Modern Monetary Theory, or MMT, which says countries can be confident in deploying government spending if they borrow in their own currencies and inflation is subdued. (Both conditions apply in Japan.) The central bank chief said there was no such basis for such a theory, and the government last month underlined in a statement that MMT isn’t the foundation for discussing spending. That release also stressed “we are working to restore fiscal health.”For all its big-debt reputation, Japan has actually steadily tightened the fiscal screws over the years -- including through the introduction of an individual tax-identification number. Its deficit as a share of gross domestic product has hit the lowest in a quarter century, at less than 3%.Continued reluctance to deploy that fiscal firepower can be seen in the limited supplementary budget the Abe administration is currently assembling to address damage from a powerful typhoon and the sales-tax hike in October. Much of it is expected to be repackaged appropriations previously approved, rather than net new spending.“Fiscal policy has the capacity to be effective, what’s lacking is the will to deploy it” in force, says Izumi Devalier, head Japan economist at Bank of America Merrill Lynch in Tokyo. “For those very reluctant to lean on fiscal policy, it’s going to be a choice between pushing the financial system further beyond the limit -- pushing on a string -- or doing fiscal stimulus,” she said.Though Japan’s financial system is far from crisis, strains are intensifying as a result of the nation’s prolonged experience with rock-bottom interest rates. Ten-year Japanese government bond (JGB) yields have averaged just under 1% since the start of 2000, compared with 2.7% in Germany and 3.4% in the U.S. They were about -0.10% Tuesday.Such low yields have gradually pushed institutional investors and regional banks out of the JGB market and into riskier assets. Many analysts see bankruptcies looming among beleaguered regional banks, where the old model of borrowing short and lending long has been upended both by a flat yield curve and a diminished demand for credit.Worries about the downside of mega monetary expansion surged in 2016, the last time that Kuroda surprised with a big new policy-easing move. The shock introduction of a negative short-term policy rate stoked howls of protest from the banking industry. It also set off such a precipitous decline in long-term bond yields (10-year rates hit -0.30%) that the BOJ overhauled its entire policy framework months later, targeting 10-year bond yields at around zero.“Side effects were becoming larger and it was a sign that the BOJ was hitting its limit,” Hamada says of that period. “Nowadays when I meet Prime Minister Abe, I advise him to use fiscal policy.”Kuroda himself still argues that momentum toward his inflation target is in place. And two of the BOJ’s current board members consistently dissent in favor of stronger action. But such calls are now lonely voices in a capital where the increasing focus is on how to limit damage to the financial system.“Abe and most Liberal Democratic Party members have given up on the original reflation policy -- stimulus only through monetary policy boosting growth and inflation, raising tax revenue,” says Shigeto Nagai, chief Japan economist at Oxford Economics in Tokyo, who previously worked at the BOJ. “That dream has disappeared.”What Bloomberg’s Economist Says“Public spending could be the only thing between Japan’s economy and a contraction next year -- putting the government in the driver’s seat to keep reflation going. The BOJ’s policy options to support the economy for now probably lean toward fiscal coordination and its communication with the market, rather than diving into additional monetary stimulus alone.”\--Yuki Masujima, economistClick here to read more.(Adds current 10-year yield in third paragraph after second chart.)To contact the reporters on this story: Christopher Anstey in Tokyo at canstey@bloomberg.net;Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;Sumio Ito in Tokyo at sito58@bloomberg.netTo contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul JacksonFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • China Bond Traders Still on Edge After Rate Cuts Spur Mini Rallies

    China Bond Traders Still on Edge After Rate Cuts Spur Mini Rallies

    (Bloomberg) -- While China’s central bank is helping stem the panic that in October drove its sovereign bond yield to five-month highs, the buoyant mood in the market is unlikely to last.A series of unexpected policy-rate cuts and liquidity injections keep triggering mini rallies in China’s sovereign-debt market this month. China’s 10-year benchmark yield fell 1 basis point on Tuesday to 3.18%, the lowest in a month, after the People’s Bank of China injected 120 billion yuan ($17 billion) to the banking system in open market operations.The yield slid 5 basis points on Monday when the central bank lowered borrowing costs on short-term loans for the first time since 2015 and injected 180 billion yuan.It’s deja vu for bond investors who saw yields drop twice before in November following similar supportive actions from the central bank. But any bond rally will be limited as Beijing’s prudent approach to stimulus hasn’t changed, while a trade agreement may boost risk sentiment, according to Tommy Xie, an economist at Oversea-Chinese Banking Corp.“The rate cuts are helpful in turning around the negative sentiment but they’re not a game changer,” Xie said.The small adjustment to the rates -- Monday’s cut was just 5 basis points -- signal a continuation of the PBOC’s restrained stimulus policy that prevented Chinese bonds from joining in a global rally this year. That’s even as data continues to show weaker economic growth across the board.The central bank will release November’s loan prime rate -- the base rate for new corporate loans -- on Wednesday. It’s linked to the rate at which the central bank will lend financial institutions cash for a year and is made up of submissions from a panel of 18 banks, though Beijing has a role in setting the level. Citigroup Inc. expects the one-year rate to decline by at least 5 basis points.Inflation remains a top concern for investors, said Zhou Hao, a senior emerging markets economist at Commerzbank AG. Accelerating inflation due to soaring pork prices in China have depressed real yields, taking them negative for the first time in seven years. Beijing will want to avoid adding too much liquidity, which risks stoking prices even more.“It’s difficult to be very bullish on the outlook for bonds because the issue of rising inflation can’t be ignored,” he said. “I don’t think this is a turning point for bonds.”(Updates with open market operations in second paragraph and details of loan prime rate in sixth paragraph)To contact Bloomberg News staff for this story: Livia Yap in Shanghai at lyap14@bloomberg.netTo contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Philip GlamannFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • China Crypto Crackdown Elicits Binance, Tron Weibo Appeal

    China Crypto Crackdown Elicits Binance, Tron Weibo Appeal

    (Bloomberg) -- Crypto giants Binance Holdings Ltd. and Tron have been banned on China’s largest micro-blogging service amid what appears to be fresh steps to crack down on digital currency trading.The official accounts of exchange operator Binance and blockchain platform Tron were suspended by Twitter-like Weibo last week. At the same time watchdogs in Shanghai issued notices calling for a cleanup of companies involved in cryptocurrency trading, while one in Beijing warned against illegal exchange operations.The latest crackdown came after President Xi Jinping urged faster development of blockchain last month, hailing it as one of the core technologies requiring China-led innovations. Xi’s remarks spurred companies to jump on the blockchain bandwagon to drive share prices. State media have warned against the frenzy.The Shanghai headquarters of China’s central bank and the city’s financial regulator said in a notice they co-signed on Nov. 14 that local government agencies should work with any companies under their supervision that are tied to cryptocurrency to exit such business immediately, Bloomberg News has reported.A Binance spokeswoman said Monday that Weibo suspended the exchange’s account last Wednesday, before the notice was issued, adding that the social media platform didn’t give a reason. Binance is appealing the decision, she said. Tron founder Justin Sun told Bloomberg on Monday that he doesn’t think the Weibo account shutdown is related to the government notice. Tron is working to restore the account.Weibo didn’t respond to requests for comment.In the notice, the Shanghai regulators cited an order from China’s top internet-finance watchdog, which they said is concerned about the resurgence of speculative bubbles after the recent promotion of the blockchain technology that underpins cryptocurrencies such as Bitcoin.A representative with the Shanghai branch of the People’s Bank of China confirmed the authenticity of the notice, which has been circulating online, but referred to the city’s financial-stability office for comment. Calls to that office went unanswered.A separate announcement, published on the website of Beijing’s financial regulator on the same day, warned against the risks of illegal operations of financial-asset exchanges in the capital -- but didn’t cite crypto specifically.Bitcoin fell 0.3% on Tuesday to $8,191 as of 8:08 a.m. Hong Kong time, dropping a fifth straight day amid concern about China’s restrictions.Read more: From Pigs to Party Fealty, China Harnesses Blockchain PowerWhile China is an avid supporter of blockchain -- the central bank is working on its own digital currency -- authorities have waged a two-year campaign to restrain crypto activities amid concerns like speculation, fraud and capital flight. In 2017, China ordered an end to exchange trading of digital currencies, but trades are still rampant through alternatives like over-the-counter channels offered by exchanges Huobi and OKEx. Malta-based Binance also recently started to host OTC yuan trading.“We want to follow the recommendations very closely, and we want to promote the blockchain research and development,” Binance Founder and Chief Executive Officer “CZ” Zhao Changpeng told Bloomberg Television last week about its China strategy. “We just want to help where we can.”Zhao said Binance doesn’t have an office in Beijing, following a recent report from industry publication CoinDesk that it’s planning to open one that cited two unnamed sources. The Binance spokeswoman said Monday that the exchange doesn’t have fixed operations in mainland China at the moment.As for Tron, its controversial Chinese founder apologized in July for “excessively” promoting his charity lunch with Warren Buffett, noting it raised concerns among authorities. The lunch that Sun had won with a more than $4.6 million bid at auction was delayed and still appears not to have been rescheduled.(Updates Bitcoin level in 10th paragraph.)\--With assistance from Joanna Ossinger.To contact the reporter on this story: Zheping Huang in Hong Kong at zhuang245@bloomberg.netTo contact the editors responsible for this story: Joanna Ossinger at jossinger@bloomberg.net, Colum Murphy, Dave LiedtkaFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

  • Bloomberg

    EM Review: Trade Talk Uncertainty Dominated Amid Mixed Signals

    (Bloomberg) -- Emerging-market currencies had the first weekly decline in seven last week as positive developments on a “phase one deal” between the U.S. and China failed to reverse days of largely risk-off sentiment. President Donald Trump’s administration signaled late Thursday that talks with China over the first phase of a broad trade agreement are entering the final stages, though added caveats a day later that a deal is close but not completed. Stocks in developing nations halted a month of weekly gains, falling the most since late September.The following is a roundup of emerging-markets news and highlights for the week ending Nov. 18.Read here our emerging-market weekly preview, and listen to our weekly podcast here.Highlights:U.S. and Chinese trade negotiators held “constructive discussions” in a phone call on Saturday to address each side’s core concerns of phase one of the trade deal.White House economic adviser Larry Kudlow said negotiations over the first phase of a trade agreement with China were coming down to the final stages. Kudlow said a deal is close though “not done yet”President Donald Trump said the U.S. will increase tariffs on China in case the first step of a broader agreement isn’t reached. He also said China is devaluing its currency, supply chains are cracking and they are “dying to make a deal”Trump said trade talks are moving “rapidly”A U.S. demand that China spell out how it plans to reach as much as $50 billion in agricultural imports annually has become a sticking point in negotiations, according to people familiar with the matterChina lowered the cost it charges on open-market operations for the first time since October 2015. The People’s Bank of China cut the interest rate on its seven-day reverse repurchase agreements to 2.5% from 2.55%The country’s economy slowed further in October, signaling that policy makers’ piecemeal stimulus is failing to boost output and investmentFederal Reserve Chairman Jerome Powell stuck to his view that interest rates are probably on hold after three straight reductions, while signaling that the U.S. central bank could resume cutting if the growth outlook faltersTrump renewed his assault against the Fed, saying it was hurting the U.S. by not copying other central banks in deploying negative interest ratesTrump said Wednesday that Turkey’s purchase of a Russian anti-aircraft missile system presents “some very serious challenges” for the U.S., and directed Secretary of State Michael Pompeo to work on resolving the impasseThe Lebanese army was deployed heavily across the country on Wednesday and banks and schools remained shut for a second day as protesters incensed by a call to go home began to converge on the presidential palaceS&P downgraded Lebanon’s long-term foreign currency debt rating to CCC from B-Major political parties agreed to name businessman and ex-finance minister Mohammad Safadi as the country’s new premier, local media reported, a choice that was immediately rejected by anti-government demonstrators pressing for deeper change. Mohammed Safadi put an end to his bid just two days after winning the backing of Lebanon’s major political partiesThe central bank has no plans to impose formal restrictions on the movement of money or force depositors to accept losses, its governor said, but will offer “unlimited” dollars for commercial lenders to finance trade and meet customer demandBanks agreed to lift a restriction on new money coming from abroad and set a withdrawal limit of $1,000 a week for accounts denominated in foreign currency, according to a statement issued Sunday by the Association of Banks in LebanonPresident Michel Aoun appealed to Arab neighbors on Tuesday for help to revive his country’s economyFranklin Templeton said the government will have to renegotiate its debt to stave off an economic collapseEgypt cut its main interest rates by a full percentage point with inflation at the lowest in almost a decade. The deposit rate was reduced to 12.25% and the lending rate to 13.25%Mexico cut the benchmark rate for a third consecutive meeting after inflation slowed to target and economic growth stumbledTwo German citizens were detained by Hong Kong police amid the continuing protests, Deutsche Welle reported, citing an official at Germany’s foreign ministry. The two Germans are receiving assistance from the country’s consulate in Hong Kong, according to the report.Chinese President Xi Jinping called an end to violence Hong Kong’s “most urgent task,” as a scuffle involving the city’s justice minister and the second protest-related death in a week heightened tensions in the paralyzed financial centerHong Kong officials and Chinese state media warned of consequences if violence continuedChilean stocks and the peso rallied the most in a decade on optimism an agreement over a new constitution will help end protests and riots that threatened to upend the country’s economyThe Chilean peso slumped to a record low amid a wave of social unrest and investor concern about a new constitutionCentral bank announced a $4 billion swap program to ease liquidityChile’s government is willing to increase the minimum pension by more than a proposed 20% in response to the biggest civil unrest in a generation, President Sebastian Pinera said in a televised address late SundayOptimism about a trade deal between the U.S. and China encouraged investors to add $1 billion to emerging-market exchange-traded funds in the week ended Nov. 8, the biggest weekly inflow since Feb.Asia:China wants to balance functionality with concerns about anonymity as it works toward launching a digital version of the yuan, according to an official from the People’s Bank of ChinaForeign companies continue to invest more in China even after Trump called on U.S. firms to look elsewhere, as the rising spending power of 1.4 billion people proves too hard to resistSouth Korea will try to achieve economic growth of more than 2.2%-2.3% next year by providing momentum for an economic rebound, Finance Minister Hong Nam-ki saidBank of Korea board member Lim Ji-won said global data in the past few months show the manufacturing slump is easing slightlyHoldings of overseas alternative assets such as real estate, infrastructure, private equity and debt, and hedge funds by investors rose to at least about 201 trillion won ($172 billion) this year, a record, according to data compiled by Samsung Securities Co. and Korea Investors Service Inc.The U.S. and key allies are seeking to hold a United Nations Security Council debate on North Korea’s human rights record after failing to do so last year, according to diplomats familiar with the discussionsIndia’s trade deficit widened less than estimated last month, as a third-straight month of decline in exports offset a sharp plunge in imports amid weak global demand conditions.The country’s retail inflation quickened for the third straight month in October, breaching the central bank’s 4% medium-term target and possibly slowing the pace of monetary policy easingThe nation is considering changes to its dividend distribution tax that will raise returns for investors, according to people familiar with the matter, as authorities try to revive foreign fund inflowsFactory output shrank to the lowest level in eight years, as a sharp fall in capital goods production underlined weak demand in Asia’s third-largest economyIndia plans to reduce its stake in Indian Oil Corp. to below 51% while ensuring the government and state-run companies retain control of the nation’s largest oil refiner, people with knowledge of the matter saidArcelorMittal won approval from India’s top court to complete its $5.8 billion purchase of a bankrupt steel mill, clearing the way for tycoon Lakshmi Mittal to enter the world’s second-biggest marketIndonesia’s customs cleared nine firms to export nickel ore after briefly suspending shipments for inspection, according to Heru Pambudi, director general of Customs and ExciseExports fell 6.1% in October from a year earlier, while trade balance came in at surplus of $161 millionSoutheast Asia’s largest economy may post higher-than-expected budget deficit next year as govt seeks to maintain growth momentum amid lower revenue, according to Finance Minister Sri Mulyani IndrawatiThai Finance Minister Uttama Savanayana said he plans to issue measures to help boost the economy, while adding past steps didn’t do enough for small businesses. The economy will continue to face high risks next year, so the government needs to be well-prepared, he also saidThailand will try to find new markets for products affected by the suspension of some trade preferences under the U.S.’s Generalized System of Preferences, Commerce Minister Jurin Laksanawisit said. The two nations will speak on the issue in late NovemberMalaysia’s economic growth eased in the third quarter to its slowest pace in a year amid declining exports and weaker factory outputA Malaysian judge ordered ex-premier Najib Razak to defend himself against all charges in the trial involving a former unit of troubled state-owned fund 1MDBThe Philippines central bank kept its key rate unchanged at 4%, opting for what it described as a “prudent pause” to monitor how previous easing steps are filtering through to the economy. It trimmed its 2019 inflation forecast to 2.4% from 2.5%Business process outsourcing may grow between 3.5%-7.5% annually from 2020 to 2022, IT and Business Process Association of the Philippines President Rey Untal saidThe candidate representing Taiwan’s China-friendly opposition party in January’s presidential race called for free elections in Hong KongPresident Tsai Ing-wen on Sunday named former premier Lai Ching-te as her running mate in January’s electionEMEA:Istanbul may sell at least $500 million of bonds to fund six metropolitan projects, people with direct knowledge of the plan said, in what would be Turkey’s first municipal debt issuance in 27 yearsTurkish industrial output expanded on an annual basis for the first time in 13 months in September, a sign that the economy is finding its footing after a recession last yearPresident Recep Tayyip Erdogan said interest rates will fall further and again boasted that his firing of the central bank governor has permitted a sharp drop in borrowing costs since JulyPoland’s Premier Mateusz Morawiecki picked Tadeusz Koscinski, a former banker, to become the country’s fifth finance minister in as many months as the ruling Law & Justice party shuffles its cabinet after last month’s electionTens of thousands of Czechs thronged the streets of Prague in one of the largest anti-government protests in the country since the fall of communism, calling on their billionaire prime minister to step downRussian economic growth accelerated to 1.7% in the third quarter, the fastest pace this year, after the central bank delivered four consecutive rate cutsRussia is planning to cut the dollar’s share in its $125 billion sovereign-wealth fund, following a major move last year out of U.S. assets by the central bankThe nation skipped a weekly sale of fixed-coupon bonds for the first time since December, citing rising market volatility as bond yields climbedEgypt sold its longest Eurobond on record, part of a $2 billion deal, as it seized on appetite for riskier assets and spread out the burden of servicing its debtMorocco hired a consortium to arrange a euro-denominated bond offering of 12- or 20-year maturity to investors, according to a person familiar with the matterSaudi Aramco’s gigantic initial public offering could see retail investors returning to the Riyadh stock exchange as local individuals snap up shares in the world’s most profitable companySaudi Arabia put a preliminary valuation on its state-owned oil giant Aramco of between $1.6 trillion and $1.71 trillion, short of the $2 trillion target set by Crown Prince Mohammed bin Salman in 2016Efforts to resolve the standoff between Qatar and a Saudi-led bloc are gathering momentum, with an upcoming soccer tournament in Doha helping to pave the way for a possible breakthrough, according to a Gulf official with knowledge of the matterIsrael’s economy accelerated thanks to both public and private spending, overcoming disruptions in world trade that have threatened local growthSouth African retail sales climbed at the weakest pace in six months in SeptemberGhana will ramp up spending by a fifth next year and plans to raise as much as $3 billion in international markets as it prepares for an election in 13 monthsYields on Nigeria’s one-year Treasury bills fell on Thursday to the lowest since April 2016, while demand for three-month debt surged to a record as local funds pile into the debt after the central bank restricted their access to its higher-yielding securitiesKenya’s 47 counties can begin raising state-guaranteed debt next year, potentially heaping more liabilities on the over-leveraged East African economyLatin America:Chile took a major step toward solving the social crisis that has convulsed the nation for the past month when lawmakers from almost all the parties agreed early on Friday to a mechanism to rewrite the constitutionChile’s government said that it backed plans to rewrite the constitution, weakening the peso by almost 4% in the week, the worst performance among all currencies in emerging marketsGovernment has also said it would pull $1 billion from its sovereign wealth fund in the next few days to help finance increased spendingThe $4 billion credit line opened by Chile’s central bank Thursday fueled a rise in the peso forward marketBrazil launched an employment program that could generate 1.8 million new jobs by 2022, according to an estimate by the Economy MinistryPresident Jair Bolsonaro confirmed he will leave the PSL party and create a new one called “Aliança pelo Brasil,” meaning “Alliance for Brazil”After a pension reform became law this month, Bolsonaro’s administration is now prioritizing measures that increase control over the federal budgetBrazil’s economy likely grew in the third quarter according to a key gauge, indicating a record-low policy rate and government measures are buttressing demandRetail sales notched the fifth straight monthly increase in SeptemberFormer President Luiz Inacio Lula da Silva, who left jail earlier this month after a Supreme Court decision, used a more radical tone in his speechesThe hacker behind a cyberattack that has crippled Petroleos Mexicanos’s computer systems is hoping to squeeze almost $5 million out of the company and appears to have set a deadline of Nov. 30Bolivia’s Evo Morales accepted Mexico’s offer of political asylum, thrusting leftist President Andres Manuel Lopez Obrador’s government into the center of a crisis that has split Latin America’s government allegiancesOpposition lawmaker Jeanine Anez declared herself interim president as the ouster of Morales plunged the nation into a constitutional crisis, triggering a clash between the police and Morales supporters in La PazNew finance minister Jose Parada ruled out changes in the level of the currencyArgentine President-elect Alberto Fernandez is preparing to task the country’s central bank with trying to boost the crisis-torn economy through a weak exchange rate, according to two people with direct knowledge of the strategyFernandez said he will probably announce the economic team on Dec. 10 when he takes officeFernandez said he’ll review the government’s spending plans for 2020 and suggested his predecessor’s draft budget was faultyArgentina bondholders are so worried that the country’s new leader may default that they’ve pushed yields on local notes due two days after his Dec. 10 inauguration to an ear-popping 100%Three hedge funds are demanding more than 384 million euros ($425 million) from Argentina in a U.K. lawsuit that alleges the country restated economic figures to avoid paying out on securities tied to its growthArgentina is lifting controls on crude oil and fuel prices, leaving drillers and refiners to work out how to get back to market levels, according to two people familiar with the matterColombia’s economy grew at its fastest pace in four years as migration from Venezuela and accelerating credit growth boost consumer demandParaguay plans to issue a global bond for approximately $500 million in the first quarter of next year, according to Finance Minister Benigno Lopez\--With assistance from Selcuk Gokoluk, Colleen Goko and Carolina Wilson.To contact Bloomberg News staff for this story: Yumi Teso in Bangkok at yteso1@bloomberg.net;Netty Ismail in Dubai at nismail3@bloomberg.net;Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.netTo contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Karl Lester M. Yap, Joanna OssingerFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.