Sorry, Zuck: China Coin is On The Way
The PBOC made an exciting announcement on Monday. The central bank said that it is “close” to releasing its own, centralized cryptocurrency.1 This update comes as the Federal Reserve recently announced that it is developing an alternative payments system. China is the latest in a slew of central banks to announce plans for innovation in payment systems following Facebook’s announcement of the Libra coin project. Central banks consider the private company’s “world currency” as a threat to their authority. However, as recent statements would suggest, the PBOC may be closer to rolling out an alternative system than other central banks. The PBOC’s blockchain-based alternative is meant to give Beijing increased control over its financial system and use blockchain-based ledgers to provide a stable unit of exchange, rather than a speculative vehicle prone to volatility, such as Bitcoin. Depending on how close the PBOC actually is to rolling out such a system, China could become the first country to introduce a centralized cryptocurrency.
FX and Bond Update
The effectiveness of deleveraging efforts have largely flown under the radar, adding to the attractiveness of valuations in China’s bond market. The PBOC released its Second Quarter 2019 Monetary Policy Report over the weekend. The growth of M2 (credit) in China’s economy rose by 8.1% in July, compared to 8.5% in June and the projected rate of 8.4%. New RMB loan issuance also declined, with loan growth falling by 12.6%. The central bank also announced its intent to focus on supply-side financial reform and will be using open market operations, reserve requirement cuts for large banks, and targeted small-bank deleveraging through the end of 2019 to accomplish its goals. The central bank emphasized “growth within a reasonable range.” 2
Total social financing, another measure of credit in the economy, declined by more than 50% to 1.02 trillion RMB in July alone from 2.26 trillion in June. Official data suggest that this represents a significant pullback in “shadow banking,” unregulated lending that has proven hazardous for China’s overall credit risk in the past.3 Nonetheless, yields remain far higher in China than in the Eurozone’s most troubled economies, the PIGS (Portugal, Italy, Greece, and Spain),5 suggesting that the market is not pricing in China’s improved credit profile.
China’s debt markets remain characterized by solid fundamentals, relatively tight monetary policy, and an overestimation of risk. These factors continue to lend to the attractiveness of valuations in China’s bond market. RMB shows stability once again, ending the day at 7.058 RMB/USD on Monday. It is also worth noting that, despite all the talk of easing, the PBOC has yet to commit to a policy rate cut. However, USD-denominated bond issuance is rising, allowing China bond investors to mitigate RMB depreciation.4
Hong Kong stocks ended the day lower overall following Wall Street’s lows on Friday. That being said, PRC brokers in Hong Kong outperformed following the China Securities Regulatory Commission’s (CSRC) announcement that it would increase the number of securities available for margin trading by 650. NVC Lighting (HK: 2222) rose briefly upon news that the company would sell a 70% percent in its China lighting business to US private equity and asset management giant KKR. Auto importer and retailer Zhongsheng Group (HK: 881) rose by 9.3% on Monday following a revenue report that beat analysts’ estimates. Exceptional revenue growth may be mostly attributable to an increase in after-sales service margins.2 Tencent H-Shares were also up by 0.47%.5
The A-share market gained on Monday, diverging from US equity performance. The market was also influenced by the CSRC’s relaxing of margin trading restrictions. Chinese liquor giant Kweichow Moutai (CH: 600519) was up by 5.9% on Monday following its announcement of plans to cut out intermediaries in its sales pipeline by dropping underperforming distributors.2 Yihua Healthcare, a medical technology company, lead gains in the Shenzhen Composite, rising by 10.1% on Monday.5
What we are watching
Earnings reports for major A-share and China internet names are due later this week. Tencent, Alibaba, and Baidu all release earnings this week and next on Wednesday, Thursday, and next Monday, respectively. While still far off, the 70th Anniversary of The Founding of The People’s Republic of China in October and the sentiment leading up to it will probably influence markets.
Last Night’s Stats
- Shanghai Composite: -1.45%
- Hang Seng: -0.44%
- Caixin PMI: 49.9 for July
- China Development Bank 10-Year Yield: 3.43%
- MSCI China All Shares: -0.91
- MSCI China Financials: -0.65%
- MSCI China HealthCare: -0.75%
- RMB/USD Spot Rate: 7.058 RMB/USD
- HKD/USD Spot Rate: 7.846 HKD/USD
- “China’s PBOC Says Its Own Cryptocurrency Is ‘Close’ to Release,” Bloomberg News. August 11, 2019.
- Nguyen, Tom. “Good Morning CHINA from CICC,” CICC Sales & Trading. August 12, 2019.
- Zhu, Grace. “Chinese Financial Institutions’ Lending Dives,” The Wall Street Journal. August 12, 2019.
- Tsui, Vincent. “Asian Currencies Remain a Shock Absorber,” Gavekal Research. August 12, 2019.
- Data from Bloomberg as of August 12, 2019.