Caixin Insight: Economic Recovery Continues Despite Floods

Data digest: China industrial profits rose in June

China’s industrial firms saw a 11.5% YoY profit increase in June, rising 5.5 percentage points from May, according to data released by the National Bureau of Statistics on Monday, illustrating China’s continued recovery from the impact of Covid-19.

Zhu Hong, senior analyst at the Bureau of Statistics, attributes the profit growth to the slower decrease in the price of industrial products, and a reduction in costs of 0.22 yuan per 100 yuan of operating income, the first such decline this year.

Key industries such as steel, oil and gas, and nonferrous metals were among the best performers, with steel and nonferrous industry profits rising 35.3% and 24.1% respectively after falling 50.5% and 49.3% in May.

Zhu pointed out, however, that demand remains weak and as the pandemic continues, companies face many uncertainties in international trade and struggle to maintain continuous growth in profits.

Regulators finally step into Sichuan Trust crisis

Last week, financial regulators stepped in to deal with the long-brewing crisis at Sichuan Trust after it failed to secure funding in an attempted private placement with major shareholders including Sichuan Hongda and Zhonghai Trust. The Sichuan branch of the China Banking and Insurance Regulatory Commission (CBIRC) ordered Sichuan Trust to suspend repayments of some trust products, citing violations of industry rules regarding connected-party transactions, risk management and internal controls.

This is the first time that regulators formally addressed Sichuan Trust’s credit crisis, which has been simmering since May and led to a series of protests by investors at the firm’s Chengdu headquarters.

Sichuan Trust’s financial hole, revealed after it failed to repay interest on Trust of Trust products, could be as large as $3.6 billion, affecting more than 8,000 creditors.

The sanction on Sichuan Trust is the latest warning from CBIRC to China’s free-wheeling $3.1 trillion trust industry. In June, major trust Anxin Trust began government-led restructuring after its founder Gao Tianguo was reported to have misappropriated funds to the benefit of his company’s biggest shareholders and their affiliates, leaving behind a $7 billion debt that the company was unable to repay. In May, regulators punished nearly one-third of China’s 68 trust companies for violations including conducting illicit off-balance-sheet lending and illegal real estate investments, levying $3.2 million in fines.

PBOC investigates banks about online lending

The People’s Bank of China is surveying commercial banks about their online consumer lending businesses, asking them to submit online consumer lending data as of December 2018, June 2019, December 2019, and the first six months of 2020. The central bank specifically asked them to disclose data on online lending giant Ant Group’s Jiebei and Huabei, major microlending platforms with more than 100 million users that contributed to interest in Ant’s upcoming dual listing.

The move was widely interpreted by analysts as an attempt to get a clear grasp of the $1 trillion online lending market. Compared to traditional offline lending, the online lending system is less transparent, as banks rely on fintech partners like Ant Group to assess borrowers’ creditworthiness. While fintech companies’ giant data pool can help improve banks’ efficiency and expand access to broader clients, it also stands to expose banks to imprudent risk management and inadequate monitoring of the use of funds.

Total delinquent consumer loan receivables could reach 2.8 trillion yuan this year, up 14% from the end of 2019 and more than double from five years ago, according to estimates from iResearch. Such a drastic increase in bad loans might have prompted the CBIRC to issue a preliminary framework on July 17 regulating commercial banks’ online lending. Further implementation details should be coming soon, sources close to the regulator told Caixin.

Assessing the macroeconomic impact of record floods

Just after emerging from Covid-19, South China has been hit by the worst floods in decades. Earlier this month, Xi Jinping admitted that the situation is “grim,” and floodwaters have swept away over 28,000 homes, ruined over 3.5 million hectares of crops and caused over 82 billion yuan ($11.7 billion) in damage, according to the Ministry of Emergency Management.

The National Bureau of Statistics reported that food prices rose 2.8% in June despite falling 12.5% in the previous month, and the floods will likely dampen the country’s economic rebound from Covid-19 in the short term; it’s worth remembering that the Yangtze River Delta is one of the country’s biggest economic engines.

The Suning Financial Research Institute (SFRI) points out (link in Chinese) three immediate effects:

- destruction of crops and livestock

- destruction of fixed assets like houses, roads, bridges, etc.

- disruption of manufacturing, logistics, communications, etc.

But while this is the largest flood since 1998, China has invested heavily in water conservation facilities since then, so the impact will be much more limited and short-term than in previous major floods.

More specifically, SFRI says we can expect the floods will:

- likely not significantly increase the CPI beyond a bump in July and August;

- exert a .05 basis point to 0.15 basis point drag on GDP growth, due primarily to direct losses in primary industries like agriculture;

- have a relatively muted impact on industrial production, as most manufacturing is done indoors in relatively well-protected cities;

- dampen fixed-asset investment for as long as they continue

- but a rebound in the second half is likely to bring full-year numbers back on track, buoyed by the post-epidemic stimulus to infrastructure and post-flood reconstruction work.