The week in review: China cuts RRR, IOER rates, Jinzhou unveils asset disposal plans, CSRC condemns Luckin
In this round-up, China announces a reserve requirement ratio cut for small banks and a reduction on the interest rate for excess reserves, Bank of Jinzhou will sell some of its assets at a steep discount and the Chinese securities regulator condemns Nasdaq-listed Luckin Coffee for faking its sales record.
The People’s Bank of China (PBoC) cut the reserve requirement ratio (RRR) for small and medium-sized banks by 100bp last Friday. The adjustment will be implemented in two stages — a 50bp cut on April 15 and another 50bp cut on May 15. The move will release approximately Rmb400bn ($56.4bn) into the financial system, the central bank said in a statement.
In the same statement, the PBoC also cut the interest rate it pays on the excess reserves banks hold at the central bank for the first time since 2008.
This is the money Chinese banks voluntarily keep at the PBoC, on top of the amount required by RRR. The rates on the excess reserves have been sliced by 37bp from 0.72% to 0.35%. The new interest rate will kick in on April 7.
The Hong Kong Monetary Authority said last Friday that it will reduce by half the current level of regulatory reserves for banks. This is to help ease the cash flow pressure on small and medium-sized enterprises and support their financing needs.
The move is expected to release a HK$200bn ($25.8bn) of lending capacity, the HKMA added.
The outstanding amount in China’s bond market reached Rmb103tr for the first quarter of 2020 after a 4% year-on-year increase, making it the second largest market globally, data from the PBoC showed.
Some Rmb12tr was new issuance between January and March, 14% higher than what was seen over the same period in 2019.
Corporate bond issuance topped Rmb3tr with net new financing of over Rmb1.7tr, both of which are at a historic highs, according to the central bank. Privately-owned enterprises sold 50% more bonds compared to the first quarter of last year, with volume reaching Rmb210bn. Net new financing of Rmb93bn was at a three-year high, the PBoC added.
Index provider FTSE Russell will keep China on the watch list for entering its flagship World Government Bond Index, it said in a statement last Thursday New York time.
In the statement, FTSE acknowledged the efforts of the Chinese regulators to make Chinese government bonds more accessible to international investors. The index provider said it will monitor the “practical effectiveness of these enhancements” between the March 2020 interim review and the September 2020 annual review.
The PBoC said it will “steadily advance the research and development” of legal digital currency in 2020, according to a teleconference last Friday.
China has been working on launching its own digital currency since 2014 when the central bank put together a research team. Onshore media outlet Global Times reported two weeks ago that the development of the digital currency’s basic function has been completed, with the relevant laws being drafted for its circulation.
Some small and medium-sized banks have chaotic shareholding structures and unqualified shareholders, Zhou Liang, vice chairman at the China Banking and Insurance Regulatory Commission (CIBRC), told reporters at a Friday conference. Zhou’s comments were in response to a question around the risk management capabilities of Chinese small and medium-sized banks.
“Recently, the CBIRC investigated and dealt with the problem of poor shareholder management of some small and medium-sized banks,” Zhou said. “Some banks’ substantial shareholders are the drivers of their directors and chairpeople. Others even have someone’s housemaid as a substantial shareholder.”
In a late evening filing on Friday, Bank of Jinzhou said it has agreed to sell some of its credit and other assets for Rmb45bn to Chengfang Huida, a company that is ultimately owned by China Cinda Asset Management Co.
About 54% of the assets are corporate loans, and the remaining 46% are beneficial interest transfer plans. The latter includes beneficial interests in trust plans and asset management plans issued by trust companies, securities houses, insurance firms and asset managers. The agreement was reached on March 31.
The original book value of the principal amount of the assets is about Rmb150bn. The disposal will lead to an overall unaudited impairment reserve expense of about Rmb30bn. The bank’s debt investment is estimated to increase by some Rmb75bn after the disposal.
Bank of Jinzhou plans to use the proceeds for general working capital, boosting its capital adequacy ratio and liquidity, and improve its asset quality.
The bank published its 2019 financial results on Tuesday last week.
Following the Friday news that Chinese coffee shop chain, Luckin Coffee, fabricated transactions of roughly Rmb2.2bn from the second quarter to the fourth quarter last year, the Chinese Securities Regulatory Commission (CSRC) has come down hard on the company. The regulator issued a statement on Friday afternoon “strongly condemning” the company’s behaviour. Luckin is registered in the Cayman Islands and listed on the Nasdaq.
“No matter where a company is listed, it should always strictly obey the laws and regulations of the relevant markets and disclose information in an honest, accurate and complete manner,” the Chinese securities regulator said. The CSRC also promised to co-ordinate with relevant offshore regulators to look into the situation.
Luckin issued a formal apology on Sunday through its official Weibo account, the Chinese equivalent of Twitter. The company said that the relevant executives and employees have been suspended and are now being investigated. It added that its board of directors has also appointed a special committee made up of independent directors and a third-party independent organisation to conduct a “complete investigation” into the matter. In the meantime, Luckin Coffee will keep its stores operating normally.
Lu Zhengyao, chairman of the board, also apologised on his personal WeChat account, saying that he will “accept all inquiries and criticism”.
Lu’s response to the scandal came into the spotlight when he posted “today we should be even more full of energy” on his personal WeChat account on Saturday, the day after Luckin admitted to falsifying transactions.
Luckin’s woes have also spilled over to Hong Kong-listed Car Inc. Trading in its stock was halted at the company's request from 10.14am local time on Friday last week, after the share price dropped by over half from the previous close of HK$4.29. It was last traded at an all-time low of HK$1.96 on Friday. Trading was still suspended on Monday, pending the release of a clarification announcement.
Luckin and Car have close ties, as Lu is the chairman of both companies. Additionally, many of Luckin’s senior executives were former employees of Car, including chief executive Qian Zhiya and chief operating officer Liu Jian. Liu is accused by Luckin for fabricating the transactions along with several employees reporting to him.The price of Car’s two outstanding dollar bonds also plummeted following the Luckin scandal by over 30 points in the secondary market.