Brief #17—Economic Policy

Summary
Recent reports indicate that China has temporally ceased its work on the structural reforms on national economic systems and is shifting its focus to policies that are more geared to supporting general economic growth.

The People’s Bank of China is the nation’s central bank. Recently, it has prompted prominent lending institutions to trade over $1 trillion yuan’s worth of corporate debt in return for equity. In U.S. dollars, that amount is equal to roughly $152.9 billion. July 5th marked an important event for the Chinese economy, as the People’s Bank of China slashed the reserve ratio that many banks are required to have on hand by 0.5%, thereby liquidating roughly 700 billion yuan. These newly liquidated funds are available to be lent out or used for further purposes intended to spur growth.

In addition, the central bank is putting pressure on smaller banks, typically those in the  small to midsize range, to increase their loans distributed to small businesses and enterprises. To further encourage this, capital for these banks will be raised by up to 200 billion yuan. At the larger banks, meanwhile, the reserve requirements will decrease to 15.5%. The funds that will be liquidated from his endeavor are intended to be used to finance the debt-for-equity trades mentioned earlier while the bank’s outstanding liabilities are exchanged for stock options.

The original guidance for these debt-equity swaps was originally issued by the State Council of the Chinese Government in 2016. Currently, there is over 1 trillion yuan in anticipated swaps intended for enterprises owned by the state. Many such enterprises are steel and coal manufacturers who have been negatively affected by overcrowding within their industries.

So far, we have seen only roughly a tenth of the proposed swaps carried out. As of now, there seems to be no prospect of the shares of these indebted companies being resold.

Analysis
It is clear that these actions on behalf of the Chinese regulators and central bank are to help shield the nation’s economy from the effects of the trade war with the swiftly approaching trade war with the United States.

The recent actions on behalf of the People’s Bank of China indicated that they may be trying to move away from downsizing state-owned enterprises that have been deemed inefficient.

Banks all across the nation have been asked to do more to help the enterprises that continue to struggle, further indicating the prioritization of quick economic growth and general stability. This is further indicated by the recent policies pushed by the central bank that are intended to free up and stabilize liquidity in order to make such an endeavor more doable.

Historically, the practice of banks being pushed to create loans for those in the lower income brackets has not always worked in nations such as the U.S. but China remains hopeful as it moves forward with the policies centered around this endeavor.

The impending trade war with the U.S. has been marked by the tariffs on imported goods such as steel and aluminum proposed by President Donald Trump in March 2018. The manufacturer of half the world’s steel, China has been responsible for flooding the marketplace and lowering steel’s global prices. As previously mentioned, China has seen a strong overcapacity throughout its primary manufacturing industries. A trade war will affect the entire globe and as the world’s second-largest economy, it would certainly serve China to be ready.

Resistance Resources:

• National Retail Federation – The world’s largest retail trade association, responsible for organizing a collation of diverse industry groups that are banding together to stand against the Trump administration’s proposed tariffs.
• Information Technology Industry Council – A Washington D.C. based trade association, credited with helping the NFA compose a letter to the White House Ways and Means Committee warning of the impending negative impacts of the proposed tariffs.
• United States Chamber of Commerce – An American lobbyist group centered-around business that recently launched a campaign against the Trump administration’s trade tariff policies.

This Brief was prepared by USRESIST NEWS Analyst S O’ Brient, sam@usresistnews.org