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China markets round-up: Local governments asked to recapitalise smaller banks, Bond Connect celebrates three-year anniversary, Luckin fails to ouster chairman

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By Addison Gong, Rebecca Feng
03 Jul 2020

In this round-up, local governments are encouraged to use debt raised to improve smaller lenders’ capital ratio, the Bond Connect scheme launched three years ago helps foreign holding in Chinese bonds to top Rmb2.6tr, and Luckin Coffee’s Lu Zhengyao holds on to his chairman role.

The Ministry of Finance (MoF) tapped its existing ‘anti-pandemic’ special treasury bonds this week, adding Rmb50bn ($7.08bn) to its outstanding 2.41% five year bond at a yield of 2.4454% and another Rmb50bn to the 2.71% seven year at 2.7254%. It also tapped the 2.77% 10 year notes twice, for Rmb70bn each. 

The MoF has planned another two reopenings of the 2025 bond, on July 8 and 14, respectively. The 2030 deal will be tapped seven times between July 7 and July 30.

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The People’s Bank of China (PBoC) conducted a Rmb5bn central bank bills swap on Monday. The swap is effectively a repo operation, allowing commercial banks to temporarily swap bank perpetual bonds with more liquid central bank bills. Banks using the exchange have a pay a fee of 0.1%.

The central bank first introduced the central bank bills swap programme in February last year to improve the liquidity of Chinese banks’ perpetual bonds.

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The PBoC cut the re-lending and re-discount rates, which became effective on July 1. It slashed the re-discount rate by 25bp to 2%.

The re-lending programme allows the central bank to fund certain city-level and rural-level commercial banks, which will then re-lend the money to local corporations. Through offering re-lending funds at a reduced rate to these banks, the central bank encourages them to lend the money out to small and micro-enterprises.

There are various re-lending programmes, each targeted at different sectors and carrying different interest rates. The central bank has cut the interest rate for the three month, six month and one year re-lending designated for agricultural companies and small and medium-sized enterprises by 25bp to 1.95%, 2.15% and 2.25%, respectively. It also cut the interest rate on the re-lending programs for the purpose of maintaining financial stability by 50bp to 1.75%.

The re-discount programme is simply a way of the PBoC buying loans from banks ─ applying a second discount on top of that applies when the bank first made the loan. It will hold these deals for a maximum of six months, earning the new rate of 1.75% on these deals.

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China will continue to open up its domestic bond market, providing easier access for international investors, the PBoC said on Friday (July 3) — the third anniversary of the launch of the Bond Connect programme.

According to the central bank, the amount of bonds outstanding onshore has reached Rmb108tr, making it the second largest bond market in the world.

By the end of June, there were nearly 900 foreign institutions from over 60 countries in the interbank market, holding Rmb2.6tr of notes. They have invested in 2.4% of the total outstanding volume onshore, or 9% in Chinese government bonds.

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The latest data from the China Central Depository & Clearing Co showed that by the end of June, the foreign holding of domestic bonds has been on the rise for 19 months in a row. The net increase for the first six months of 2020 was Rmb319bn, around 2.3 times the amount during the same period last year.

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Chinese local governments can now issue special purpose bonds to recapitalise small and mid-sized banks in their respective regions, according to minutes of the Wednesday State Council meeting posted on the government’s website.

Using part of the proceeds from special purpose bonds to purchase convertible bonds issued by banks was listed as one way of helping banks recapitalise, according to the readout. However, the minutes did not specify how much of the quota is assigned for such activities or which banks are qualified for the programme.

The annual quota for special purpose bonds this year stands at Rmb3.75tr.

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The official manufacturing Purchasing Managers’ Index (PMI) edged up to 50.9 in June from 50.6 in May, according to data released by the National Bureau of Statistics on Tuesday. Non-manufacturing PMI also rose to 54.4 in June from 53.6 in May.

The improvement in June manufacturing PMI was driven by a sharp rise in the new export orders sub-index from 35.3 in May to 42.6 in June. However, the employment sub-index declined slightly from 49.4 in May to 49.1 in June.

“Despite the strong recovery between March and mid-June, we believe a full economic recovery remains distant,” Ting Lu, chief economist at Nomura, wrote in a Tuesday note. “In our view, it is too early for Beijing to reverse its easing stance.”

Meanwhile, the Caixin manufacturing PMI, which focuses more on medium and small-sized firms compared with the official one, increased to 51.2 from the May reading of 50.7, reaching the highest level since December 2019, analysts noted.

The June Caixin services PMI climbed even more than the manufacturing PMI, jumping to the highest level in a decade to 58.4. 

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China’s revenue from international trading goods and services in May reached Rmb1.59tr. Meanwhile, the cost totalled Rmb1.17tr, according to data published by the State Administration of Foreign Exchange on Monday.

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The total volume of service imports and exports in the first five months of the year reached Rmb1.87tr, a 14.6% year-on-year drop, according to Gao Feng, a spokesperson at the Ministry of Commerce. He was talking at a press conference on Thursday. Export volumes dropped by 2.3% year-on-year to Rmb759.3bn. Imports fell 21.5% to Rmb1.12tr.

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Luckin Coffee failed to secure a two-thirds majority vote from its board on Thursday to remove co-founder Lu Zhengyao as a director of the company and chairman of the board, according to a US Securities and Exchange filing. Lu will continue to serve as director and chairman, despite the majority of Luckin’s directors backing his ouster in the first place.

The company has been under fire since revealing at the start of April that an internal investigation had found evidence of fabricated sales. Luckin said on Wednesday that the fabrication of sales began in April 2019 and that its net revenue last year was inflated by Rmb2.12bn, while costs and expenses were inflated Rmb1.34bn.

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Car Inc, founded by Luckin’s Lu, said SAIC Motor Corp has agreed to buy up to 28.9% of its shares from two shareholders for HK$1.9bn.

The news, announced on Thursday evening, has given a boost to the price of Car’s Hong Kong listed shares, which opened at HK$2.92 on Friday morning compared to the previous close of HK$2.53. The stock price plunged by 54.4% — from HK$4.3 to HK$1.96 — on April 2, the day Luckin first admitted to faking sales.

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The Communist Party committees of Citic Securities and China Securities Co (CSC) have approved a proposal for the merger of the two brokerages, Bloomberg reported on Thursday, citing anonymous sources. The plan is for Citic’s parent, Citic Group, to buy CSC’s stake from Central Huijin Investment, according to the wire.

Both Citic and CSC said in stock exchange filings on Friday morning that they are not aware of the alleged merger, nor do they have any information that should be disclosed.

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Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, urged financial institutions to improve their corporate governance. He proposed measures including improved regulation of senior management of the banks and insurers, a periodic review and improvement of banks’ strategic plans and the establishment of better risk management mechanisms.

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The National Association of Financial Market Institutional Investors, one of the regulators of China’s interbank bond market, scrapped the limit on the maximum number of underwriters an issuer can hire for a private placement note (PPN). Previously, PPN issuers could hire only two lead underwriters on a deal.

Under the new rules, PPNs issued by privately owned enterprises and foreign corporations can be managed by multiple lead underwriters. All other issuers can appoint no more than three leads. 


By Addison Gong, Rebecca Feng
03 Jul 2020