SinoInsight 1
On May 1, China Banking and Insurance Regulatory Commission director Guo Shuqing told reporters that the CBIRC is planning to introduce 12 new measures to open up China’s financial sector to bankers and insurers.
Key changes include:
1. Foreign financial institutions can wholly own local banks and will not need to meet total asset requirements. Also, foreign financial institutions can provide renminbi-denominated retail banking services to customers on the mainland without needing approval from the authorities.
2. Foreign financial institutions, including non-insurance institutions, can invest in foreign insurers in China.
3. Foreign insurance companies may establish insurance institutions in China without needing to meet the requirement of having over 30 years of operation experience and assets of more than $200 million.
4. Requirements are relaxed for both Chinese and foreign companies to set up or invest in consumer finance companies.
OUR TAKE
1. The Chinese regime is looking to address domestic and foreign issues with the opening up of China’s financial sector.
On the domestic front, opening up serves to attract foreign investment, curb the trend of capital outflows, and increase China’s shrinking foreign exchange reserves.
Meanwhile, the Chinese regime is looking to pave the way to sign a trade agreement with the United States. Opening up the financial markets is a sign of goodwill and could boost America’s trust in China’s commitment to the trade deal.
2. The Chinese authorities must have anticipated few downsides to opening up China’s financial sector at this time. For one, foreign financial institutions currently take up only a tiny portion of the market share, and the financial sector will not be impacted by increased foreign competition in the short-term. Moreover, the Chinese authorities can always find ways to erect “invisible barriers” designed to curb the development of foreign financial institutions on the mainland.
However, corrupt Chinese officials could abuse the retail banking services offered by foreign banks to deposit their ill-gotten wealth. Foreign banks from countries that are hardline on China (such as America) will have an “advantage” in “attracting” the aforementioned deposits as corrupt officials seek to escape scrutiny by the Chinese authorities. In the long-run, the growth and development of foreign financial institutions could have an important impact on China’s financial policy.
SinoInsight 2
On April 30, Chinese listed company Kangmei Pharmaceutical Co. issued an announcement about errors in its 2017 financial statement. According to the announcement, accounting errors led to the company overstating its funds by 29.924 billion yuan (about $4,443 billion) in 2017.
The announcement also noted that Kangmei’s 2017 revenue was revised down from 26.477 billion yuan to 17.579 billion yuan (a 34 percent decrease), while its 2017 net profits were 2.15 billion yuan as opposed to 4.1 billion yuan (a 48 percent decrease).
Kangmei’s stocks hit limit down after its announcement. At the close of trading on April 30, Kangmei saw its market value evaporate by 5.2 billion yuan while 2.105 million trades were frozen. On the same day, investors also dumped Kangmei’s “15 Kangmei Bond,” resulting in an 11.31 percent drop in bond value at the close.
OUR TAKE
1. Kangmei Pharmaceutical’s stocks are considered to be “white horses” (stocks that show good performance, high growth, and low risk) in the A-shares market. However, Kangmei’s financial data has always been considered questionable because the company’s financing costs are high despite supposedly having abundant liquidity. While Kangmei has admitted that there are problems with its funds, it is possible that the company may be engaging in stock fraud as well.
Public companies issuing fraudulent data is just the tip of the iceberg of the problematic nature of China’s economic and financial data.
2. Kangmei’s “data error” exposes just one part of China’s overall debt crisis. Over the past decade or so, China’s economic growth was largely built on growing debt. For instance, seemingly “large” companies like HNA Group and Anbang Group grew very rapidly over a short period by taking on debt. With the worsening of China’s economy, however, Chinese companies that rely on the debt model for growth started running into trouble.
3. We remain very pessimistic about China’s economic prospects. Businesses and investors that think that China’s economy is “rebounding” due to China’s first-quarter results must be alert to hidden risks from fraudulent data.