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China policy round-up: Beijing cracks down on regional financial institutions, Hainan FTP access rules ease up, Guangzhou reveals ambitious GBA development plan

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By Addison Gong
09 Apr 2021

In this round-up, the State Council flags up risks at regional financial institutions in China, measures have been announced to relax market access in the Hainan Free Trade Port, and the Guangzhou government details a plan to develop the financial industry and support cross-border businesses in the Guangdong-Hong Kong-Macao Greater Bay Area.

The International Monetary Fund raised its 2021 GDP growth forecast for China to 8.4% on Tuesday, from an 8.1% projection in January. It expects the global economy to expand 6% this year, and 4.4% in 2022.

“China has recovered more rapidly than other countries, but at the cost of a further buildup in vulnerabilities, particularly risky corporate debt,” the IMF said in the latest global financial stability report.

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China’s official manufacturing Purchasing Managers’ Index (PMI) reached 51.9 in March, up from 50.6 the previous month. Non-manufacturing PMI came at 56.3 versus 51.4 in February.

The Caixin China manufacturing PMI, which focuses more on smaller, private firms, fell to 50.6 from February’s 50.9, hitting the lowest level since May 2020. The Caixin services PMI jumped to a three-month high of 54.3 in March.

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The March consumer price index (CPI) improved 0.4% from a year ago, while the producer price index (PPI) jumped 4.4% the biggest annual increase since July 2018, the National Bureau of Statistics said on Friday morning.

The rise in PPI beat the 3.5% forecast by economists at Barclays, who said on Friday that PPI inflation would extend its upward trend in the second quarter. PPI could rise 7% year-on-year in May before easing gradually to 4% in December, they added in a note, expecting a “moderate rise” in CPI inflation.

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China’s outstanding government debt totalled Rmb46.55tr ($7.1tr) by the end of 2020, with a debt-to-GDP ratio of 45.8%, according to the Ministry of Finance (MoF).

Ou Wenhan, assistant to the Chinese finance minister, said at a Wednesday press conference that the MoF “strictly forbids” local governments from taking on hidden debt through corporate debt. It also plans to better regulate local government financing platforms and deemphasise their role in funding on behalf of the local governments.

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On a monthly basis, China’s foreign exchange reserves dropped by $34.96bn in March to $3.17tr, according to the State Administration of Foreign Exchange.

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China will work with the Group of Twenty nations to promote sustainable finance, the People’s Bank of China (PBoC) governor, Yi Gang, said at the G20 Finance Ministers and Central Bank Governors meeting on Wednesday evening.

According to a PBoC statement, the G20 group also proposed a new general allocation of Special Drawing Rights worth $650bn by the IMF, and approved a final extension of the Debt Service Suspension Initiative by six months to the end of 2021.

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The State Council’s Financial Stability and Development Committee, chaired by Chinese premier Liu He, held a meeting on Thursday. The meeting focused on the sustainable development of regional financial institutions.

Beijing plans to increase regulatory oversight of regional financial institutions as risks have started to emerge, according to the meeting minutes. These institutions must shift their focus back to serving local businesses and residents, and strengthen corporate governance. “Good” regional financial institutions are being encouraged to acquire the risky ones.

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The PBoC published a working paper this week, suggesting the establishment of an onshore futures market for the renminbi “when appropriate”.

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The National Development and Reform Commission and the Ministry of Commerce released 22 measures to relax market access in the Hainan Free Trade Port. The measures will benefit a variety of industries, including agriculture, pharmaceuticals, culture and education, commercial and civil aviation, tourism, sports, and new energy vehicles.

In financial services, Beijing said it supports the development of securities, insurance and fund management industries in Hainan, and for financial institutions to be set up in the province. It will also encourage the development of the commercial health insurance and pension industries in Hainan.

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The Guangzhou municipal government published guidelines and a three-year action plan to further develop the financial industry in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).

Guangzhou plans to attract more financial institutions from Hong Kong and Macau to establish regional centres or subsidiaries in the city, and for them to invest in domestic financial institutions. It will encourage qualified institutions to set up financial holding companies in the city, and for Guangzhou-based financial institutions to actively attract foreign capital including from Hong Kong and Macau.

The local government will also work towards aligning the financial regulations in Guangdong province, Hong Kong and Macau, boost the connectivity of financial infrastructures, and improve the green finance co-operation mechanism for the GBA.

Guangzhou-based companies are being encouraged to issue green bonds, and use the platforms in Hong Kong and Macau to fund and certify their green projects. Financial institutions are being encouraged to work with their Hong Kong and Macau counterparts in green finance, and to issue green financial bonds while using the proceeds in projects in Guangzhou. Institutions from Hong Kong, Macau and globally are also being encouraged to come to Guangzhou and start credit rating businesses for green bonds.

In addition, the government is encouraging companies in Guangzhou to issue offshore renminbi bonds and repatriate the proceeds, and for technology firms to list in domestic and overseas stock exchanges. Banks will be supported to start cross-border loan businesses, and non-bank financial institutions to begin cross-border businesses in Hong Kong and Macau. 

By Addison Gong
09 Apr 2021