CHINESE BANKING REFORMS: SHORT OF DETAILS; LONG OF RISKS

Takeaway: Chinese policymakers appear committed to ignoring the risks embedded throughout the country’s financial system.

CONCLUSIONS:

  • We don’t like that Chinese policymakers appear committed to ignoring the risks embedded throughout the country’s financial system and its 3,800 banks.
  • Forging ahead with interest rate reform – as recently affirmed by the PBoC – in the absence of meaningful and accelerated banking system reform that is accompanied by broader economic reform (see: publically-perpetuated fixed asset investment bubble) is a HUGE risk, in our analytical opinion.
  • If it seems as if we’re no longer comfortable with NOT being bearish on China, then we’d say that is an accurate depiction of our fundamental bias at the current juncture.

How trite of me to send you a note in the late afternoon thrashing the 3rd Plenary Session of the 18th CPC Central Committee. Surely by now you’ve been pelted with sell-side notes and media headlines berating it for its lack of specificity on the reform front.

As such, we’ll spare you the details and a long-winded summary of our likes and dislikes; we really couldn’t put one out if we tried – the actual policies are to be designed by a hand-picked reform task force in the weeks and/or months ahead. For now, all we have are more questions than answers.

A short-winded summary of our likes and dislikes:

  • We like that Chinese policymakers appear committed to reforming municipal government financing. Per World Bank estimates, municipal level governments spend ~80% of total public expenditures in China, but take home only ~40% of total public revenues. This cash flow mismatch is financed largely by off-balance sheet debt issuance of questionable credit quality (~28% of outstanding bank loans per the latest CASS estimates), so anything to remedy the aforementioned disparity would be positive, at the margins, for reducing the risk of an NPL crisis predicated by LGFV liquidity issues.
  • We like that Chinese policymakers appear committed to restructuring property rights. While harvesting the low-hanging fruit will likely fall short of broad-based Hukou reform, we do think any progress on this front will help to alleviate the political pressure boiling up across rural China which has decidedly undermined CPC legitimacy in recent years.
  • We don’t like that Chinese policymakers appear committed to ignoring the risks embedded throughout the country’s financial system and its 3,800 banks. Forging ahead with interest rate reform – as recently affirmed by the PBoC – in the absence of meaningful and accelerated banking system reform that is accompanied by broader economic reform (see: publically-perpetuated fixed asset investment bubble) is a HUGE risk, in our analytical opinion.

If you’re not yet familiar with our seminal concerns surrounding the structural headwinds to Chinese (and global) economic growth embedded throughout the Chinese banking sector, we think it is important that you review the summary piece we published last Friday, “PREVIEWING CHINA’S THIRD PLENARY SESSION: CREDITHOLICS ANONYMOUS?” (11/8), as well as our 61-page slide deck titled, “ARE YOU SHORT CHINA [AND OTHER EMERGING MARKETS] YET?” (6/12).

CHINESE BANKING REFORMS: SHORT OF DETAILS; LONG OF RISKS - 1

If it seems as if we’re no longer comfortable with NOT being bearish on China, then we’d say that is an accurate depiction of our fundamental bias at the current juncture.

Please feel free to email us if you have follow-up questions that you’d like us to address.

Have a great evening,

DD

Darius Dale

Associate: Macro Team