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China policy and markets round-up: Q1 GDP growth breaks record, Beijing toughens stance on local government hidden debt, Luckin secures $250m investment deal

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By Addison Gong
16 Apr 2021

In this round-up, the Chinese economy rebounds at a fast pace from a year ago when the Covid-19 pandemic hit, regulators vow to manage hidden debt risks at local governments, and two existing shareholders agree to pump $250m into Luckin Coffee.

China’s GDP grew a record 18.3% year-on-year in the first quarter of 2021, according to the National Bureau of Statistics. The strong data came from a low base of comparison, as the country’s economy had contracted by 6.8% during the same period in 2020 due to the impact from the Covid-19 pandemic.

The strong GDP quarter is in line with consensus expectations, said David Chao, global market strategist, Asia Pacific ex-Japan, at Invesco. He added in a Friday note that China’s recovery is expected to normalise ahead of other economies but credit growth will continue softening.

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In March, total social financing (TSF) in China grew by Rmb3.34tr, data from the People’s Bank of China (PBoC) showed. The increase was Rmb1.71tr in February. Outstanding TSF stood at Rmb294.55tr by the end of last month, 12.3% higher than a year ago.

New renminbi loans rebounded to Rmb2.73tr in March from Rmb1.36tr the previous month. Outstanding renminbi loans grew to Rmb180.41tr, though the 12.6% year-on-year increase was 0.3 percentage point slower compared to what was seen in February. M2 money supply rose 9.4% on an annual basis, slower than the 10.1% seen in February.

“Despite the better than expected credit data outturn, growth rate in M2, new loans and TSF continue to slow, suggesting policy tightening is under way and could become tighter when the external growth outlook improves further in [the second quarter],” said a report by Citi’s research team.

Economists at Barclays wrote this week: “Rising inflation pressure and strong growth momentum suggest the PBoC will lean towards a tightening bias this year.”

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In dollar terms, China recorded a trade surplus of $13.8bn in March, according to the Ministry of Commerce (Mofcom). Exports surged 30.6% from a year ago, while imports grew at a quicker-than-expected pace of 38.1%. The annual growth was 154.9% and 17.3% in February for exports and imports, respectively.

Trade surplus reached Rmb759.3bn for the first quarter, up 690.6% from the same period in 2020. Exports to the US jumped 62.7% year-on-year between January and March, and US imports 57.9%.

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Foreign direct investment in China climbed 39.9% year-on-year during the first quarter to Rmb302.47bn, Mofcom data showed. FDI in the services sector soared 51.5% on an annual basis.

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China needs to make annual investments of Rmb2.2tr before 2030, and Rmb3.9tr between 2030 and 2060, to achieve its goals of reducing carbon emissions. That is according to central bank governor Yi Gang, who was speaking on Thursday at the opening of a green finance and climate policy seminar held by the PBoC and the International Monetary Fund.

The Chinese government alone cannot fulfil those investment needs, which must be supported by capital in the market, Yi said. The PBoC will help mobilise that capital through various means, such as revising the green bond standards and coming up with monetary tools to lower the cost of carbon emission reduction-related funding. A national exchange to trade carbon emission rights is likely to be launched at the end of June, Yi added.

He also said that China should raise carbon awareness in the society, maximise the pricing power of the carbon market, strengthen climate-related information disclosure to cover listed companies and financial institutions, while shifting from voluntary information disclosure to compulsory disclosure. He added that it is necessary to pay attention to the associated risks of transitioning away from fossil fuel, given the country’s dependence on coal.

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The State Council issued a notice to further reform the budget management system. It said the risk of hidden debt at local governments must be prevented and resolved.

Local governments are “strictly banned” from taking on hidden debt through corporate debt, or raise unauthorised debt through financial institutions, the Ministry of Finance said on Tuesday in a Q&A about the new notice. Local government financing platforms should be better regulated, and their role in funding on behalf of the local governments will be deemphasised, the MoF said, adding that platforms that have become insolvent should berestructured or even liquidated.

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The China Banking and Insurance Regulatory Commission wants the ‘big five’ state-owned lenders — Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank and Industrial and Commercial Bank of China — to “try to ensure” an annual growth of at least 30% in inclusive loans provided to small and micro-sized businesses.

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The PBoC said it plans to conduct stress tests on all 4,024 Chinese banks this year. It has conducted annual stress tests on domestic lenders since 2012. The scope of the tests have been broadened from just the major commercial banks, to cover 1,171 lenders in 2019 and 1,550 last year.

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At a Wednesday meeting, the central bank said it will work more on preventing monopoly in the onshore payments market, finalise rules governing non-bank payment institutions, and establish a cross-border payment system. The central bank released draft regulations for payment firms earlier this year.

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The PBoC injected Rmb150bn into the banking system through one year medium-term lending facility (MLF) loans on Thursday at 2.95%, unchanged from its previous operation. The one year MLF rate has remained the same for 13 consecutive months.

This week, the central bank also conducted Rmb50bn worth of seven-day reverse repos at the same rate of 2.2%. There were Rmb40bn of repos due between Tuesday and Friday.

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China’s holding of US Treasury bonds hit the highest level since July 2019, after a $9bn increase to $1.1tr in February.

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Luckin Coffee has reached a $250m investment deal with two of its existing shareholders, Centurium Capital and Joy Capital, according to a statement on Thursday. The Chinese private equity firms are expected to pump $240m and $10m, respectively, into the company through private placements of senior convertible preferred shares. The deal could be boosted on a pro rata basis by $150m. Houlihan Lokey (China) is the financial adviser.

The transaction hinges on Luckin’s successful restructuring of a $460m 0.75% 2025 convertible bond. The company, which was delisted from the Nasdaq, announced last month that investors holding some 59% of the CB had agreed to the planned restructuring, which is expected to lead to a recovery of 91%-96%.

In addition to help fund the restructuring, the proceeds from the placement will go towards a settlement with the US Securities and Exchange Commission, Luckin said in the statement. The transactions with Centurium and Joy will allow it to “focus its balance sheet on the continued execution of its business plan, focused on growing the core coffee business and achieving its long-term growth targets”, Luckin added.

Also on Thursday, the company said that it has hired Centurion ZD CPA & Co as its new auditor, replacing Marcum Bernstein & Pinchuk. Luckin added that it had “no disagreements on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure” with Marcum BP.

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The National Social Security Fund sold 77.6m H-shares of Bank of China at HK$2.95 per share on April 8, reducing its holding in the Chinese lender to 6.93%, Wednesday data from the Hong Kong Exchanges and Clearing showed.

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The China Securities Regulatory Commission said it has fined Leshi Internet Information and Technology Rmb240.6m for alleged violations such as falsifying its financial records between 2007 and 2016 as well as including false information in its IPO materials in 2010.

Jia Yueting, the billionaire founder and chairman of the company at the time, has been fined Rmb241.2m. Jia and Yang Lijie, who was the chief financial officer, are also banned from the securities market for life. Three other senior members of the management were given a market ban of eight or 10 years, and received cash penalties together with a number of other personnel .

Leshi, which was delisted from the Shenzhen Stock Exchange last July, disclosed the same information in a public filing. Jia left China in 2017 and filed for bankruptcy in the US in October 2019. He co-founded California-based new energy vehicle firm Faraday Future in 2014. Earlier this year, Faraday Future announced that it is looking to list on the Nasdaq through a merger with Property Solutions Acquisition Corp.

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A total of 34 internet platforms including Baidu, ByteDance, JD.com, Meituan and Pinduoduo have signed a letter promising to prevent market monopoly, ensure fair competition and protect consumers’ rights and data privacy, the State Administration for Market Regulation said this week.

Their names where released in batches by Samr over the course of three days. The list also includes Alibaba, Bilibili, Didi Chuxing, iQiyi, Kuaishou, Tencent and Trip.com.

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Having just relaxed market access for a variety of industries in the Hainan Free Trade Port and announcing measures to develop and open up its financial sector, China revealed more supportive measures for the development of the FTP this week.

Hainan will join the pilot programme for real estate investment trusts backed by infrastructure projects, officials said at a State Council press briefing on Monday. The negative list for cross-border trade in services and a framework for a trial Qualified Domestic Limited Partner programme have been finalised, according to the briefing.

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Nine Chinese banks — the ‘big five’ as well as China Development Bank, the Export-Import Bank of China, China Merchants Bank and Bank of Guangzhou — have agreed to provide Rmb720bn of funding to foreign companies based in Guangzhou over the next five years, the municipal government of Guangzhou said this week.

By Addison Gong
16 Apr 2021