China is stepping in to prop up its stock market, quietly opening the door to more outbound investment, and easing off the credit gas – all at once.
Coincidence? We don’t think so.
On this week’s Trivium China Podcast, Andrew Polk sits down with Dinny McMahon (Head of Markets Research) and Joe Peissel (Lead Macro Analyst) to unpack:
Why the “national team” bought A-shares after last month’s selloff, and why this intervention was smaller than last year’s
What SAFE’s move to regularize QDII quotas signals about RMB internationalization
The quiet PBOC move to curb bankers’ acceptances, and what it tells us about Beijing’s deleveraging playbook
What the latest GDP and trade data say about China’s widening “K-shaped” economy
Tune in for the full breakdown.
And while you’re at it, make sure to check out Dinny’s latest note on the pivot to deleveraging here. You won’t regret it!
Transcript
Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I am joined today by two guests. First, our head of markets research, Dinny McMahon, and Trivium’s Lead Macro Econ Analyst, Joe Peissel.
Joe, how are you doing today, man?
Joe Peissel: Hey, Andrew. I’m good. Thanks, mate. And pleased to be here as always.
Andrew: Yeah, great to have you on, as always. Dinny, how about yourself, man? How are you doing over there?
Dinny McMahon: I’m doing good, mate. Doing good.
Andrew: Sorry, we’re laughing because Dinny was having some technical difficulties and getting quite frustrated. But we’re here now.
Dinny: Frustrating to me. I mean, it seemed to have made your day.
Andrew: Yeah, I was delighted by all of it. But we’re here now. We’re here now. And what we are going to talk about are some of the biggest developments in terms of the macro picture, as usual with these two guys. This is our monthly pod where we talk about the macro data, but we’re also going to throw in a couple of other things, which is why I also wanted to have Dinny on, also kind of have kind of a three-way conversation, a little bit more conversational than just me purely interviewing Joe.
But we’ll get to the macro data at the end with Joe really taking the lead there. We are going to start, though, with the deployment of the “national team” by Beijing to prop up A shares after last month’s tech-led share sell-off. Then we’ll get into the moves by SAFE, which is the foreign exchange regulator in China, to regularize the QDII quota, which is the outbound quota for foreign investment by Chinese institutional investors. And so, we’ll talk about what that means for outbound investment.
And then we will talk about the latest reports that the central bank, the PBOC, has told banks to raise the minimum discount rate on bankers’ acceptances. That’s a wonky thing, but basically, it’s a quiet but meaningful move on the deleveraging front, which we talked about in my last pot with Tiffany, so we thought it’d be a good thing to bring up. And then, of course, like I said, we’ll get into the macro data, talking about the K-shaped divergence running through China’s economy, which Joe has highlighted in some of our recent writing that our subscribers will have seen.
But of course, before we do that, we got to start with the customary vibe check. I’m already smiling, Dinny. How’s your vibe over there?
Dinny: Oh, mate, it was great. So, about 15 minutes ago, when I started to set up my camera and microphone and all that sort of stuff. Yeah, it was a beautiful morning. The birds, the sun is shining, the birds are singing. And then, you know, I had a workshop last night with Claude, exactly how I was going to set up my [inaudible 00:02:44] set up. And I don’t know, one of us clearly got it wrong, so I’m a little bit more on the irritated side of frustrated this week.
Andrew: Well, we’re glad to have you. Even an irritated Dinny is a good Dinny to have, and so hopefully we can push past it. Glad that you finally got everything set up. I can attest that technology issues, especially when it comes to sound, first happen way more than you would expect as a regular podcaster. It seems like the setup’s always changing. There’s always some sound bug. And secondly, they are incredibly frustrating when they do happen. So, you have my sympathies. Although I’m still going to laugh. Joe, how was your vibe, man?
Joe: My vibes are good. Thanks, Andrew. Although I’m, to be frank, I’m still smarting from the World Cup, from the Football World Cup from last week.
Andrew: Oh, right.
Joe: England’s depressing performance against Argentina.
Andrew: Yeah, we haven’t had a chance to discuss that.
Dinny: Yeah, France too.
Joe: Yeah, well…
Andrew: Well, it was bittersweet that was also a weird game. We won’t get into it; this isn’t a World Cup podcast, but that third-place game was a funny one. But yeah, sorry, sorry to all our British listeners out there. I watched that game. Sorry, yeah.
Joe: Well, English in particular. I think Scottish and Welsch listeners will probably be thrilled at the result, yeah.
Andrew: Yeah, fair enough. Fair enough. Yeah, good point. Well, my vibe, it’s 9.30 in the morning on Wednesday, July 22nd. I’m in a great mood. And watching Dinny’s foibles has sort of given me a little bit of a pickup further. So, I’m going to be carrying the good vibes into this podcast today. But we should probably get into it because that was kind of an extended vibe check. Although we also do have to do the quick housekeeping.
Just quickly, a reminder, we are not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China around a range of issues, whether that be tech, markets, etc. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please do reach out to us at hq@triviumchina.com. We would love to have a conversation about how we can support your business or your fund.
Otherwise, if you want more Trivium content, check out our website, again, www.triviumchina.com, where you can find the China policy intel option that you’ll need. We, again, have markets, tech, anything that you might need is there on the site as well. So, check that out. And while you’re at it, please leave us a rating or comment on the podcast and tell your friends and colleagues about Trivium. We always really appreciate the word-of-mouth recommendations. They really help us to grow our business. So with that out of the way, let’s get into it. Dinny, Joe, you guys ready?
Joe: For sure. Yep, let’s do it.
Dinny: Yep, let’s do it.
Andrew: All right. So we’re going to start with the stock market, the latest intervention on the stock market on July 19th. So that was just, I guess, on Sunday, a couple of days ago, basically. Two central government-owned investment firms, China Reform Holdings and China Chengtong, announced they’d increase their holdings of Chinese equities. These big state-owned investment firms coming in is what we refer to as the “national team.”
And that investment announcement came after a pretty rough month for A shares, the kind of benchmark CSI 300. Stock index is down more than 9% since its June 22nd peak. And the STAR market or the STAR50 dropped 17% just last week. So those two firms stepped in. And then even more recently, we had China’s biggest state-backed insurers, including China Life, Ping An Insurance, and China Pacific, all issuing statements pledging confidence in A-shares and committing to more equity investment as alongside 40 listed companies announcing buyback plans, stock buyback plans to support share prices.
So, Dinny, let me toss this to you first. What’s your read on the scale of this intervention, especially compared to previous interventions that we’ve seen. I think the most recent one was back in April 2025. So, talk us through kind of the scale of this thing and what to think about it.
Dinny: Yeah well so far it’s been pretty small. So when the Liberation Day tariffs hit, those two same state-owned firms deployed, well, they said they deployed 180 billion renminbi to buying ETFs and buying stocks. Whereas this time the numbers they’ve given us are only 70 billion. So, the scale of the intervention is much smaller. But I think the more sort of telling thing is that in the past, when Beijing is sort of really being worried about the stock market having fallen and it’s trying to get things back up again, its sort of modus operandi was to throw a whole lot of administrative measures at things.
So, typically, their go-to playbook would be they’d impose more a moratorium on all new IPOs so that you weren’t diluting liquidity among more stocks. Or you’d change margin trading rules so that it was easier to borrow to invest in stocks, or that you tighten up, make it harder for people to short sell off, stuff like that. But I think it’s quite telling that the two things that they’ve done this time in response to a pretty precipitous sell-off in certain stocks is one they’ve deployed the national team on a relatively modest scale.
And secondly, they’ve deployed the state-owned insurers not to buy stocks, at least not immediately, but to kind of jawbone the market up that kind of as a team they got together and said, “Look we’re all in this we’re buying more shares than we used to. We see value in the A-share market over the long term. We’re committed to this market as long patient capital.” And so, Beijing’s approach to this has fundamentally changed. It’s no longer about sort of trying to engineer a short-term bump to the market, but, as we’ve been arguing for a long time, kind of lay the foundations to a sort of a cultural change that can translate into what Beijing refers to as a slow bull market.
And so, I think that’s what we’re seeing here. To the extent that the national team is deploying capital this time around, it’s about putting a cushion under the market. It’s not about trying to reflate prices. It’s just trying to soften the fall, limit the degree to which stocks fall, and then try and rebuild confidence, genuine confidence, as opposed to just trying to engineer a rebound with various tricks and measures.
Andrew: Joe, let me bring you in here. What are your thoughts on this intervention? Do you think, well, first of all, I was going to say, do you think it’s going to work? But then I guess the question is sort of what defines success here in Beijing’s mind. Dinny just made the argument, they’re not really trying to throw everything at the stock market simply to pump up prices, but want to achieve this more of a slow bull market. So, will it be successful and what defines success in your view of Beijing’s view?
Joe: Yeah, so I think success is really about trying to attain this slow bull market. So, that there hasn’t been this aggressive knee-jerk reaction from Beijing like there has been in the past, I think it’s actually a positive thing. And they’re not really putting a floor on prices, right? It’s almost like they’re trying to put a floor in a panic. So, if stock prices drop too much, there’s these kind of these modest incremental measures, but nothing really aggressive, nothing really knee-jerk.
That’s consistent with trying to achieve this slow bull run of the market. What I think is quite interesting is that markets have stabilized. They’ve actually picked up very slightly. I mean, really modest. But I think the key takeaway here is markets have stabilized. The fall has stopped despite using two and a half times less fiscal firepower than they did this time last year, which, to me, suggests, or potentially suggests that maybe Beijing is building up credibility in its ability to put a backstop onto a market slide.
Andrew: Yeah, that’s a good point. Dinny, what do you think about that? I mean, I look at these interventions, and it just feels like we get one every 12 to 18 months now. So, what is your take on Beijing’s credibility here with the market that Joe pointed out?
Dinny: Yeah, I think the market’s starting to give it a better sense of what to expect from Beijing. I think it now knows that when Beijing intervenes, it’s not trying to reflate the market, but it’s trying to put a net under it. And I think that’s a very different set of expectations that for the state to intervene and try and engineer a bull market, which it has done in the past, the public has kind of lost faith in Beijing’s ability to do that.
But if it’s just the state intervening to go, we’re just going to limit the degree to which it falls, maybe even stop it falling. I mean, that’s a very different benchmark. It’s certainly something that the state is far more equipped to handle and so is conceivably something that the public is more willing to accept as something that the state can feasibly do and so sort of moderate their expectations.
Andrew: With that kind of context in mind, Joe, first to you, then over to Deneen, we’ll wrap this part of it up, should we expect more moves out of regulators and out of state-linked market participants on this front? I mean, it seems like in the past, there’s sort of been, I don’t know, usually like three, four weeks of kind of incremental moves that kind of add up to a package. But if they’re not really trying to pump prices, they’re just trying to create a net under them, maybe they don’t need a spate of moves. I don’t know. What do you think, Joe?
Joe: I expect regulators will respond to equity prices. So, markets have stabilized for now. I think if that stabilization prolongs for a period of time, then there won’t be any further moves. If the market fully resumes, then I expect there would be more intervention. Again, I don’t really think regulators are trying to put a floor under prices per se, but they do want to stop any sort of irrational market panic. Dinny, do you think that’s right? Do you agree?
Dinny: Yeah, absolutely. We absolutely watch the market there. I don’t think regulators are going in with a preconceived set of or a checklist of measures they’re going to roll out. They’re going to see how the market responds, and then they’ll adapt accordingly.
Andrew: Yeah. Well, we will obviously see in the coming days kind of how the market continues to react. This podcast is not investment advice. We have to say that, but it does strike me that there’s not an obvious signal. This is not the kind of situation where especially foreign entities would jump in and try to ride what looks to be an upward surge or a wave of price increases in A-share markets because that is not what they’re trying to do, according to you guys, which I agree with. But we will continue to monitor this and see how effective these moves are and if Beijing is becoming more effective.
So, I’m sure there will be plenty of opportunities to talk more about it in the coming weeks. I want to pivot now, though, to the second topic, which is about currency and capital flows. So last week, July 17th, SAFE, again, the FX regulator said it would start issuing QDII quotas, Qualified Domestic Institutional Investor quotas is I believe what QDII stands for. They will start issuing them on a regular basis going forward rather than ad hoc basis, which we’ve seen in the past, sometimes years apart, where the batches of quotas will just kind of be dormant for an extended period.
Walk us through why this matters, Dinny, what’s happening. Our super in the weeds listeners will know kind of what all this is, but just lay the groundwork for those who might not be experts in the space.
Dinny: So we were expecting something like this to happen, that Beijing would liberalize or open up the channels through which people could invest, the Chinese people in the mainland could invest in overseas capital markets. We thought this was happening, partly because there’s been a real push towards renminbi internationalization over the past year. Beijing kind of sees what’s happening globally with the role of the U.S. in the global economy, sort of shifting sentiments about the role of the U.S. dollar in the global economy.
And they kind of think, look, this might be a unique opportunity, a unique moment in time to promote sort of the internationalization of the Chinese renminbi. But on top of that, we thought something like this was sort of on the cards because a few months ago, Beijing cracked down on three Hong Kong-based brokerages, Futu, Tiger, and Longbridge. And what it was cracking down on is these three securities companies were kind of operating in a bit of a legal grey area. China’s people are allowed to move overseas $50,000 worth of cash, capital, however you like to put it, each year.
And they can do that year in, year out. And so, what these securities companies were doing is they were signing up people in mainland China, signing them up to brokerage accounts, having them move their money over to Hong Kong or somewhere, and then from there, putting the money into overseas brokerage accounts and allowing them to invest overseas. And Beijing doesn’t like that because it likes being able to control the channels through which money moves from the mainland into overseas equity markets, called capital markets. And so, you’ve got these formalized, I guess, these formalized channels through which capital flows.
You’ve got things like the Stock Connect, you’ve got Bond Connect, you’ve got various other programs, including things like the QDII program, which differs with what the Hong Kong brokerages were doing in the sense that people would put their money into a sort of a fund management company in mainland China. That fund management company was then able to convert funds into dollars, take the money overseas and invest in overseas capital markets. And that gives Beijing a degree control over where money is going relative to people doing it off their own bat. Now, of course, Beijing hasn’t completely crackdown on people being able to invest overseas based on their own discretion.
I mean, if you turn up in Hong Kong and bring your money over with you, you can set up an account in Hong Kong and invest overseas like that. You can invest in overseas insurance products in Hong Kong like that as well, and Beijing allows that door to remain open. But it didn’t like what Futu and Tiger and Longbridge were doing, and so they shut it down and there was a lot of bad questions at the time was, well, is this kind of like what Beijing did a few years ago with the tech sector, what it did with the education sector?
It kind of cracked down on a handful of firms, and it signaled a broader crackdown. So the question was by going after this small handful of firms, did it signal a broader crackdown on outward capital flows? And we did not think that was the case. We thought, given all the signals we’ve been given about renminbi internationalization, literally the opposite was true. That Beijing was cleaning up a gray area, a loophole that it didn’t like and had sort of put up with for too long.
But in doing so, it would then have the confidence to further broaden out and embrace, sort of broaden out those channels which it itself had sort of set up and which it had more confidence in. And that’s exactly what we’re seeing now. The State Administration of Foreign Exchange is saying that it will now regularize the issuance of new QDII quotas. Now, we don’t know how much each additional quota will be. We don’t know how regular or regularized actually is.
But the signal here is that we’re going to get these new quotas for outward investment on a more regular basis, which is one of the reasons why we think they were cleaning up the sort of grey channel conduits earlier in the year.
Andrew: Thanks for that, Dinny. Great explanation. Joe, let me bring you in. So now seems like a pretty good time for a move like this because there is pretty significant capital inflow, right? They try to avoid liberalizing in any way of the capital account when there is depreciation pressure, capital outflow pressure from China. So, we saw in the first half of the year net non-bank inflows, so inflows from basically corporates and households, hit USD $247 billion. That nearly matched all of the 2025 inflow of $300 billion.
You think that kind of inflow strength gives safe sort of room here to do a little bit more capital account opening? Or do they need to be careful if kind of the dynamics go into reverse? I mean, I think, yeah, China’s export juggernaut and relatively weak dollar driving appreciation pressure that the PBOC is kind of fighting against. So, I think it creates a moment, but I don’t know, give us some context on how you think about this.
Joe: Yeah, for sure. I mean, I agree. I think it gives regulators, it gives Beijing confidence that they can pursue these policies now. Dinny touched on this a minute ago. We’ve been tracking really closely all of these policy measures aimed at RMB internationalization. And a prerequisite for that is to liberalize your capital accounts to an extent. And so, this is what we’re seeing. This is what the regularization of QDII quotas does. I think there’s kind of two important signals from this. So, the first is, and I’m really just kind of repeating what Dinny said, I think the timing makes perfect sense, right?
They crack down on some of this illegal or grey market capital outflow channels. And at the same time, they enlarge or liberate these legal controllable channels. So, the timing is really important. It signals that no, Beijing isn’t trying to crack down on capital outflow per se. I think it wants to crack down on those channels that it can’t control. The second thing is, is it normalizes capital outflow as a policy, which is really important. It’s something we haven’t really seen before because previously QDI quotas have always been issued on an ad hoc basis.
So, moving to this routine schedule, even though we don’t know the dollar amount at the moment, I actually just think the regularization per se is more important than the dollar figure here because as I say, it’s going to create routine and regularity in terms of capital outflow policy.
Andrew: Yeah, we actually had a client for years asking us to track the QDII changes, kind of trying to stay on top of this and see what it meant for capital account liberalization. And they were so irregular, we had to check it every day. But like I said at the top of this section, they often wouldn’t change for eight, 12 months or longer. So, I think people poo-poo the whole notion of renminbi internationalization.
Dinny: Who are these people?
Andrew: Yeah. Well, basically anyone in Washington, DC, right? No one will ever displace the dollar. China is never going to internationalize. And I mean, I kind of get it, right? People have been saying that China is going to open its capital account or liberalize capital flows since probably like the early 2000s, right? Definitely since I’ve been watching China starting in the mid-2010s or I guess late aughts. I don’t know. Last point here, Dinny, that they do seem to think this is a true moment of opportunity, right?
With kind of a lot of countries, especially that are not geopolitically aligned with the U.S., kind of looking for alternatives over time. Not that China’s trying to displace the dollar as a reserve currency anytime soon, but just to like create a somewhat more viable option at this sort of moment where people are looking at the dollar a little bit more askance. I mean, is that what’s happening?
Dinny: Yeah, absolutely. I think there’s a number of ways to look at the renminbi internationalization thing. I mean, even if you think that China will never be able to rival the dollar, or even rival the euro in terms of usage rates, the point is Beijing at the moment thinks it is something that it can push forward. It sees some value in it and it thinks it is in a unique moment in time where it can push that agenda. And so, the significance of that is we are seeing a lot of micro reform. And those micro reforms have knock-on effects which have unexpected consequences.
And so, I think it’s really worth watching what Beijing is doing, given Beijing thinks at least something is feasible. And so, it’s moving in that direction. And so, keeping an eye on what it’s actually doing is really quite important. And I think the other thing to keep in mind is with renminbi internationalization, I don’t think Beijing’s goal is to just displace the dollar. It looks at the United States and it says, “Look, if to have a global reserve currency is to lose control of our money supply,” because half of the dollars created in the world are created in the eurodollar market outside of the control of the Federal Reserve.
Given that the way that the U.S. ensures that there’s a sufficient supply of dollars globally is by running a massive trade deficit, Beijing looks at those conditions and goes, “We’re not particularly interested in that.” It sees that it can push renminbi internationalization, push the supply of renminbi globally through running a financial surplus, which is kind of a bit of an experiment they’re pursuing at the moment. But the goal here isn’t to displace the dollar or even to replicate what the U.S. has created to the extent that they want to internationalize the renminbi, they’re trying to come up with a way of doing it that suits their own domestic economic concerns and considerations.
Whether they pull it off or not, it’s a different question, but it’s certainly watching them do it and seeing the measures they pursue is going to have unintended consequences.
Andrew: Yeah, all those are great points. I think I 100% agree that China is not trying to replicate what the U.S. has done. And I just also, as you were saying that, just thought about the irony of people who, again, poo-poo RMB internationalization. “Oh, it’s never going to happen. They can never do it.” Their kind of implicit argument is because they’ll never run a trade deficit like we do. Meanwhile, they turn around and are like, “I hate your trade surplus, which I understand.” But I don’t know, it seems a little bit inconsistent logically. But anyway, we’ll leave that. There will be plenty more on that.
This is an issue where we do follow it very, very closely because we think that there is some action here. And so, these little micro moves add up over time. And we think, like Beijing, that kind of now is a moment where this is getting a little bit more traction than it has any time in the recent past. So, we’ll stay on top of that as well. And then the last thing I want to talk about before we dig into the macro data is particularly wonky.
But this went over to Dinny because it plays right into the deleveraging thesis, as I said, that you laid out in the pot a couple of weeks ago. So, Caixin, the Chinese financial media outlet, is reporting that in June, the PBOC told banks to raise their minimum discount rates on bankers’ acceptances to somewhere between 0.35% and 0.5%, depending on the bank. So, for listeners who may not know what those are, bankers’ acceptances are sort of IOUs that firms can use to pay suppliers. And then when those firms get the IOUs, they’re usually for a certain period of time.
But if you need cash, you can cash one in early at the bank. And that gets recorded on the bank’s books as basically a loan. But banks have been reportedly cutting the discount rates towards zero to juice their loan counts because credit demand has been so weak. And the PBOC is saying, “Stop doing that.” Dinny, before you get into the specifics of exactly what’s happening, why don’t you just take a minute and give a little bit more context around bankers’ acceptances, discount rates, give it to us in layman’s terms.
Dinny: Okay. Well, firstly, the reason we’re talking about this is because of what you said about deleveraging. When I was last on the podcast, I was talking about deleveraging in terms of the slowdown in credit growth, the government sort of peering back, it’s spending on certain stuff and pursuing policies that are resulting in less borrowing. And then I saw this was happening with the PBOC and I felt particularly vindicated because what’s happening with bankers’ acceptances is a way for the PBOC to reduce credit growth in a way that doesn’t necessarily impact the economy.
And I think that’s very important because it’s kind of almost like an administrative change that tweaks the numbers without having any real consequences. And this is kind of what we saw with the deep leveraging campaign back in 2016. Beijing was able to wring a lot of credit out of the financial system without it having much of an impact on economic growth because credit was being used in various sort of creative ways. Layers and layers of credit were being used to disguise what a central loan was being used for. But those layers of credit didn’t actually add any economic activity. They were just a kind of a wrapper or a disguise that allowed shadow banking to sort of exist beyond regulatory control.
And this in some ways is the same. Now, what bankers’ acceptances are, as you said, they’re IOUs. They’re a type of trade finance, almost like a trade receivable, an account receivable. So, let’s say I sell you something, and rather than you paying me in front of cash, you say, “Okay I’m going to pay you in six month’s time.” And I’m like, “Mate, I don’t trust you to pay me in six month’s time.” So, you say, “Look, I will pay you with a banker’s acceptance. So you don’t have to trust me. You can trust my bank.” So, you go to your bank, and you tell the bank, “Look, I’m going to pay this guy, Dinny, $100 in six month’s time. So I’ll need you to write the IOU and you give that to Dinny. And so, in six month’s time, he will be able to present that IOU to you or any bank, frankly, and you will give him the $100 that I owe him because I will pay you, the bank.” So, everything’s fine.
So that’s basically how it works. But if I, Dinny, am holding your IOU and I’m like, I need cash before the six months is up. I’ve got people to pay. I’ve got suppliers to pay. I can’t wait six months. So, I take your IOU and I take it to a bank and I present it. I say, “Look, I want my cash now.” And the bank says, “Yeah, we’ll give it to you, but we’re not going to give you the full face value. We’ll give it to you at a discount.” And that discount rate might be 4% annualized, might be 3%. But depending on what credit demand is, how hot the economy is running, that discount rate could really be anything.
But the point is, I present it, I need cash, and you don’t give me the full amount. You take a cut. And that’s the discount rate. Now, what’s been happening recently is that the discount rate has been next to zero. So effectively, I could turn up before the IOU matures, the bankers’ acceptance matures. I present it to the bank after a month, after two months, and the bank gives me the full amount or close to the full amount. So, the bank is really making no money on this whatsoever. And so, it begs the question, why are the banks doing it? And the banks are doing it because these bankers’ acceptance are recorded as corporate loans.
And so, when you look at their loan book at the end of the month, unless you’re looking at the details, all you see is a higher credit figure. And that’s kind of how the banks have worked for years and years, that there’s always been this prioritization of volume, that they’re all striving to generate robust credit growth every month. And the PBOC is sick of it. It’s been saying this for over a year at this point. It’s like, you know, size doesn’t matter anymore. We don’t want you to be pursuing credit growth just for its own sake. We want quality. And yet it hasn’t really been able to stop the practice.
And this year, it’s been particularly acute. I mean, over the last few months, there’s been months where credit growth would have contracted year-on-year, were it not for a surge in this discount in the bankers’ acceptances.
Andrew: Sorry, just quickly on that one, just a point to clarify. Correct me if I’m wrong, but the banker’s acceptances only show up as a loan at the bank after they are discounted, right?
Dinny: That’s right.
Andrew: Right. So, that’s why the banks would want to increase or lower the discount rate, increase the overall number of discounted acceptances, because when they’re not discounted, they’re just kind of off the balance sheet. And once they are discounted, then a bank can show it as a loan.
Dinny: That’s exactly right. That is exactly what’s happening here. And so when credit growth has been so weak with all other parts of the economy, companies aren’t borrowing as much, households aren’t borrowing as much. And so, banks are still in this mindset of like, well, we need to show credit growth. They are turning to discounting bankers’ acceptances, even though they’re making next to no money off these things. And so, the Caixin story was quite telling because it’s the PBOC now saying, look, you can’t cut this discount rate to zero. You’ve got to keep it at least 0.35 or 4% or 0.5%. And that’s kind of saying, firstly, you’ve got to make money off these things.
And secondly, there needs to be real economic incentive or reason for doing these sorts of transactions. And when we saw the story in Caixin, that kind of started ringing alarm bells for us because it started to make sense of comments that Pan Gongsheng had made at his Lujiazui speech in June. And Pan has really made a big deal of his speeches at Lujiazui. I mean, I think this is the third he’s given. Last year, it was all about women being internationalization. It really kicked off this sort of changing approach that Beijing has sort of been taking towards it.
The year before that, he kicked off a wave of interest rate reform with his speech. This year, there didn’t really seem to be a strong theme to kind of draw on. But now we’re starting to think maybe there was, and it just wasn’t immediately obvious. And it’s this idea of cleaning up credit, of improving the quality of the loans being made the system of not doing wasteful credit generation like meaningless discounted bankers’ acceptances.
He didn’t talk about bankers’ acceptances explicitly in his speech, but he was talking about raising the quality of credit growth and not pursuing credit growth for its own sake. All of the issues that sort of touch on what’s sort of going on here. So, we’re feeling a little bit validated because reducing the amount of bankers’ acceptances being discounted would be a way to reduce credit growth and kind of achieve that deleveraging goal that we were talking about without an overly detrimental impact on the economy.
Andrew: Yeah, let me bring in Joe here. That’s all great. Joe, you were going to jump in.
Joe: I want to jump in with a question for Dinny, if I may. So Dinny, my initial thoughts on this are, and I accept that bankers’ acceptances are inflated and the PBOC wants to crack down on that. Is there an argument to be made that they’re going to inadvertently crack down to the extent where banks actually pull back, offering bankers’ acceptances in cases where they’re actually useful, not just in the gimmicky cases, and in doing so squeeze working capital for smaller suppliers who rely on them? Is there a risk there, do you think?
Dinny: No. I think, if anything, smaller suppliers are already feeling screwed by this preponderance of trade finance that has been imposed upon them in ever-increasing volumes over the last few years. So, at the moment, it’s not just bankers’ acceptances. It’s commercial acceptances where large corporations are effectively issuing their own IOUs without the backing of a bank, which have really increased in huge volumes in recent years. I think at the beginning of this year or end of last year, BYD in particular was forced by the government to massively scale back the volume of corporate acceptance drafts.
Its own IOUs that it was issuing to its suppliers because its suppliers were barely seeing any cash. They were just seeing the scripts being issued by BYD. And then on top of that, you’ve seen sort of an expansion of accounts receivable, just normal trade receivables. And on top of that, you kind of have the pressures of local governments not paying their trade receivables or even their banker’s acceptances on time. So, I think there is a whole problem attached to the issue of suppliers and contractors being forced to accept some form of alternative payment other than cash because it’s just proliferated over recent years.
And it’s a way of firms, large firms, local government financing vehicles of large SOEs to push their own financial stress onto the supply chain because these sorts of dealings are effectively zero-interest-rate loans.
So, I think there’s a problem really with the proliferation of this sort of stuff. So, if the banks themselves stop discounting them in such large volumes, maybe you’ll find some firms are frustrated by the fact that they can’t cash in their IOUs, their acceptances earlier at lower discount rates. I’m sure some firms will find that frustrating. But it sort of belies a much bigger problem here where these sorts of arrangements have become just so ubiquitous in recent years to the detriment of smaller firms.
Andrew: Yeah, great question, Joe. Good answer. And I just wanted to follow up with you. I was actually thinking the exact same thing, right? Like, you know, isn’t this just hurting companies that need to get paid? But I guess there is a broader effort that obviously the three of us and others in Trivium have covered that to reduce the payment times for suppliers throughout the economy, reduce accounts receivable.
But more generally on the deleveraging piece, you come at this from a couple of different angles. One is you just edited Dinny’s client notes, going to go out here soon on this topic. And secondly, you are, of the three of us, probably the purest macro economist in terms of your thinking and analysis.
Joe: I’m anything but pure, Andrew.
Andrew: So, what do you make of Dinny’s overall kind of deleveraging argument here and how banker’s acceptances play into it?
Joe: Yeah, I feel like you’re tearing me up to make a shameless plug for Dinny’s piece. The client note is phenomenal. It’s phenomenal. I finished editing it this morning, and I’m serious, it’s so novel and insightful, this piece of work that Dinny’s worked on. And I know you talked about it in last week’s pod. But no, I think it makes sense. The policy signals that Dinny’s picked up on, it makes clear sense to me. I’m not convinced it’s going to work from Beijing’s perspective. I think a deleveraging sounds great in principle. It’s very hard to implement.
One of the main reasons is credit growth juices the economy in one way or another, even with decreasing efficiency over time. The minute you try and pare back credit growth, you’re actually going to impact GDP growth as well. So kind of unwittingly, your debt-to-GDP ratio can still end up rising. And there’s loads of case studies of this empirically. UK is a great example. So, I forgot your question, Andrew.
Andrew: Oh, just what do you make of the argument and how do bankers’ acceptances feed into it?
Joe: Okay, yeah. I got so excited talking about Dinny’s piece. Yeah, so again, yeah, I think the argument makes sense. I think it’s going to be really interesting to look at TSF versus nominal GDP growth in the coming year and see if the policymakers can effectively deleverage. Again, I suspect they’ll be unsuccessful, but there’s no doubt they’re trying to do it as Dinny has picked up on. And yes, banker’s acceptances are a small part of the puzzle.
I think how Dinny responded to my question actually makes a lot of sense that this is very much a low-hanging fruit. I asked just a minute ago, is there going to be pain for smaller suppliers? Is Beijing going to create a working capital problem for small suppliers? But I think Dinny convincingly argues no in most cases. And therefore, it’s a low-hanging fruit for policymakers. This seems like a very pain-free way to lower credit growth.
Of course, what comes later down the line necessitates more painful ways to lower credit growth. And I think that’s where we might start to see it filter into lower GDP numbers through things like lower infrastructure investment, less loans for consumer spending, things like this.
Dinny: If I could just jump in for a sec, because the whole idea of potentially hurting smaller firms, it’s quite interesting because at various times, particularly at the NPC, right? where delegates write documents making proposals for what they want to see policy-wise in the year ahead, a common theme of the NPC for the last few years is that somebody advocates for getting rid of bankers’ acceptances entirely because they hurt small firms so much.
So, regardless of what the discount rate is, they’re small firms hate bankers’ acceptances because they must prefer them than a straight-up trade receivable, right? it must be because trade receivable, nothing backs it except the goodwill of the company that you’ve sold something to. Bankers’ acceptances are better because they’re backed by a bank, you know you’re ultimately going to get paid. But no one really likes them because...
Andrew: You know what they like even more? Actual cash. Actually just getting paid.
Dinny: They see bankers’ acceptances as almost kind of like as an excuse to not get paid in cash, right? It’s like, well, if you’ve got an option, well, we could give you a trade receivable and pay you in six months, or we could not pay you in cash. Or we could give you a banker’s acceptance. It’s like, well, you know, okay, we’ll take the banker’s acceptance. So, no one actually likes these things. And you’re right, in an environment where the discount rate is zero, firms are probably a lot better off than they ever were in the past.
But it’s not necessarily translating sort of firms’ relationship or enthusiasm for getting paid with bankers’ acceptances.
Andrew: Yeah.
Joe: Andrew, can we add a link to Dinny’s client note in the podcast notes?
Andrew: Absolutely. We will do that for sure.
Joe: Again, I mean, segues into another shameless plug. A lot of listeners won’t be able to read it because it’s only available to paying subscribers. But I think it’s worth putting the link there for subscribers that listen to this podcast, then they can read Dinny’s report. Again, it is fascinating.
Andrew: Yeah, we’ll make sure to highlight that, and everybody should be on the lookout for that piece. I mean, I would love to actually just talk about this deleveraging piece more and more. I think there’s a lot here. We need to get onto the macro data, but I’ll just finish this up by saying, Joe, you partially sort of anticipated what would have been my next question, which we can now generally skip about whether or not there’s really a cost ultimately here to the economy of the deleveraging.
I will just say, again, we don’t want to get too much into it. The same argument was made in 2016, 2017, when Beijing started deleveraging the banking system. And the argument at the time was, “Well, we’re actually just unwinding some of the most speculative financial activity in the interbank market, where it’s really just been financialization, financial firms lending to each other, which has been running up credit growth, and it didn’t create any economic activity on the way up. And so, it’s not going to hurt economic activity on the way down.” And that actually what ended up being true for a period, right?
The low-calorie interbank loans that were really just about banks kind of betting on each other and kind of creating new financial instruments didn’t hurt economic growth when they were unwound. And I guess the thinking at the PBOC would be banker’s acceptances might be similar. Now, ultimately, that reduction in credit growth did have unintended consequences, which meant it was harder for private sector, especially small firms, to get actual credit that they needed. And they kind of got crowded out. And ultimately, a couple of years on, it really did impact private sector credit and overall economic growth.
So, I think your point stands, Joe, although also Beijing, I think could argue or regulators in Beijing could argue it was partially successful. The last time we tried something like this was at least partially successful in slowing credit growth without hurting economic activity. But we will see.
Joe: By the way, think about the property downturn that started in 2021. That was triggered by the three red lines, which was an attempt to deleverage the property sector.
Andrew: Exactly right. Yes. And there are definitely people who argue like the deleveraging then kind of tipped the first… it was a domino effect that got out of control and regulators couldn’t really control it. First, it went into the shadow banking sector that then reduced credit to the private sector, which then reduced basically credit to property developers, which then reduced credit and resources to local governments. And that none of this really was in the government’s control. So, that’s another way to argue it. So, that’s a good point, Joe. We will, again, definitely be debating this and following it, I think, for a while yet to come.
But it’s actually a great point to pivot to the current state of the economy, right? So, we’re talking about sort of the more contextual piece or the credit and financial environment within which this deleveraging effort is happening. And there’s no good time to deleverage. And Dinny has argued that actually part of the reason that they think they can do it now is because exports are so strong and inflation is up. But certainly, the rest of the domestic economy is not doing well. And you have, as we teased at the top, called this a K-shaped economy, and said that the Q2 data really puts that on display with GDP just growing 4.3% year over year, the slowest quarterly growth rate in three years.
Give us the lay of the land and the latest data in terms of what we’re looking at for China’s economy right now, Joe?
Joe: Yeah. So, I mean, it’s not… K-shaped, it’s not just me who’s calling it a K-shaped economy.
Andrew: Yeah, yeah.
Joe: It’s a pretty mainstream term. It’s quite satisfying to put the main economic indicators onto a graph because there really is a K there. And so, kind of the upward arm of the K is really China’s export sector. And this is driven by predominantly tech and clean energy exports. So, think of things like NEVs and batteries, solar. And that’s feeding into the manufacturing of tech and clean energy as well. And those parts of the economy are booming. They’re on fire. They’re doing really well.
But then the downward part of the K, the downward leg, is domestic demand. Both household consumption and general aggregate investment across the economy, whether that’s investment from government, from the private sector, from property developers, that’s all declining. And so, there’s this divergence. There’s one part of the economy that’s booming, quite a small subset of economic sectors really that are doing well. The rest of the economy not doing so well.
The consequence is, even when exports are at a record high, and China has this emerging clean tech and high tech, the emergence of this booming clean tech and high tech industries, GDP growth is still kind of stumbling along in the low fours, 4.3% in Q2. And that’s because despite parts of the economy doing really well, other parts of the economy are struggling big time.
Andrew: Well, talk to us about the parts of the economy that are struggling big time. I mean, I think we can pretty much guess them. But what’s the downward leg of that K look like?
Joe: Yeah, I think consumption is probably the most interesting thing to talk about because we got new data in the Q2 release. We got data from the Stats Bureau’s quarterly household survey, expenditure survey. So we can see what households are spending their money on. And they also report their income. So, we get estimates for income growth. So, throughout H1, so the first half of the year, income growth has hit a record low. It’s in the low fours, 4.something percent.
And outside of COVID, I should add, outside of COVID, that’s the lowest level on record. So, their income growth is slowing. They’re also spending less of their income. So, the propensity to consume, which is just the percentage of their income that they spend, that’s also hit a record low. Again, outside of COVID, kind of excluding those three COVID years where there’s lots of lockdowns. So, we’re talking about the lowest income growth on record and the lowest propensity to consume on record.
And as a consequence, consumption metrics are doing pretty badly. So, retail sales grew 1% year on year in June. That was following a 0.6% decline in May. So, it’s just a pretty dire picture on the consumption front.
Andrew: Is there anything that can turn consumption around at this point? I mean, they’ve been talking about it for years. We, and other analysts, have been highlighting the challenge for years. They just put out a five-year plan on consumption, which seemed to have no new ideas and didn’t seem to create much positivity among the analytical community. What can they do? What should they do? Is there anything to be done?
Joe: There’s no obvious near-term catalyst to boost consumption. And that’s because it’s a structural issue. It’s not just a cyclical downturn. And I think that it’s a structural issue. It’s caused by two things predominantly. There’s probably a bunch of other factors, but one is the overhang from the property sector downturn. So, household wealth is down, I don’t know, about 30% from this 2021 peak. Households just feel less wealthy. They have less money to spend.
And the second thing is a slow in income growth. As I say, income growth, lowest rate on record. That’s crazy. These are structural factors. This isn’t a cyclical downturn that is suddenly going to pick up in Q3. So no, in answer to your question, Andrew, there’s no obvious short-term policy fix, which is going to cause a sustainable increase in consumption. It’s structural issues, which means it’s going to take a long time to fix.
Andrew: And you’ve been highlighting this supply-demand mismatch for quite a while now. Others have as well, but you were definitely early on that. And now we’re seeing the structural divergence and kind of the AI versus the non-AI parts of the economy for a quick shorthand. But the PBOC, the China Central Bank, at its meeting earlier this month, actually named ‘structural divergence’ as a challenge for the first time as far as we have seen. Does the acknowledgement of that issue as a problem tell us anything about what the PBOC or any other policymakers might actually do here?
I mean, there’s admiring the problem, there’s fixing the problem. Where are we on that front?
Joe: Yeah, we’re very much with the former as opposed to the latter. Symbolically, it’s important. Symbolically, it’s notable. But in the past, senior policymakers have publicly acknowledged weak domestic demand as a challenge. It doesn’t mean they address it. So yeah, to recognize it symbolically, maybe that’s important. But a week after that meeting, the State Council released its five-year plan for boosting consumption. And there was very little in terms of demand-side support, very much still thinking about how they can allocate resources towards supply-side solutions.
So, this explicit acknowledgement of structural divergence appeared in a PBOC report. I mean, that’s pretty consistent with this long-standing preference of policymakers to acknowledge the problem. They know what the problem is, but still prefer to invest in these supply-side levers to try and deal with it.
Andrew: Yeah. Dinny, any thoughts on where we are in the current economic environment and how that might fit in? I mean, we’ve been talking about the deleveraging piece. It’s hard to deleverage when your economy is struggling. And then, if the deleveraging further depresses GDP growth, as Joe argued, could end up backfiring. What are your thoughts on how the growth picture fits into all this?
Dinny: You know, I think when foreigners in particular talk about maybe it’s China’s consumption problem, it’s all about they need to throw more money at it. You know, they need to fund welfare or they need stimulus or something like that. We’ve talked about why Beijing won’t fund welfare out of debt before, but I think in terms of the stimulus side of things, Beijing’s increasingly at a position where it’s not willing to throw good money up at bad anymore. And it’s being a lot more realistic in its assessment as to what constitutes bad money.
And I think that’s what we saw with the peering back of subsidies for the consumer trading program this year. I mean, we’ve talked about this before how the consumer trading program had 300 billion reminiscences worth of central government funding last year. And it was incredibly successful. I mean, it was for to support purchases of big-ticket consumer items like cars, furniture, white goods, and household personal electronics. Did wonderful things for purchases of those goods. But the very nature of the program meant that you were always bringing forward future demand, right?
It was you were bringing forward next year’s demand and the year after that’s demand and so on and so forth. And so, to keep going on that path, to maintain last year’s sales, you needed to increase this year’s subsidies. So, it’s not even a question about growing the program. Just to kind of keep it at last year’s levels, you needed higher levels of subsidies this year. And instead, Beijing made the decision to reduce the subsidies. So, this year, the subsidies are 250 billion renminbi. When they did that, they clearly went in with their eyes open. There was never going to be any doubt that sales would fall.
And that’s what we’ve seen. I mean, Joe, I’m not sure if you have the numbers on your fingertips, but what… auto sales are certainly down. White goods, what? Furniture down 7% so far this year?
Joe: Yeah, something like that, yeah. And I think home appliances, white goods are like close to double digits.
Dinny: And so this is despite having put aside 250 billion RMBs worth of subsidies. But the thing is, Beijing is weaning itself off this program because it realizes exactly what Joe was saying, that the problem with consumption is structural. These sorts of programs are fantastic if they’re a band-aid, if it’s cyclical. If you go, “Well, consumption’s weak this year and it’s probably going to be weak this year, but we can get through it with this sort of temporary subsidy program.”
But we’ve had the program now for, what? I think we’re already at two years and there’s no end in sight. And there’s a realization that to keep this program, contributing the economy in the same way it has, It has to keep getting bigger and bigger. And so they’re now like, we’re not willing to throw good money up the bad. And I think that the increasing of profit remittances, centrally owned SOEs to the government, is kind of indicative of that as well.
Joe did fantastic work kind of trying to estimate just the impact of these increased remittances would have on fixed asset investment this year. And what was it, Joe, that it reduced FAI by about 2.3 percentage points, give or take?
Joe: Yeah, 2.3% is points of FAI growth from this policy. Yeah.
Dinny: Which is wild. But for Beijing to make that decision at the end of last year, at a time where investment across manufacturing and infrastructure and the property sector were all weak, to make a decision like that to prioritize fiscal revenue over investment kind of showed how Beijing’s priorities were shifting as well. So, I think that’s kind of where we are at. Beijing is like, “Look, maintaining investment for its own sake, it’s not really worth it anymore. Maintaining consumer subsidy programs just to maintain an arbitrary high level of consumption, it’s just not worth it anymore.”
And I think that’s kind of where we are. It’s almost a recognition that, yes, these problems are structural and these short-term fixes we’re deploying, they’re not sustainable anymore. I think that’s where we are.
Andrew: Yeah, that’s pretty dire picture. Joe, why don’t you take us home here? I mean, we’ve got the July Politburo coming up probably in about eight, nine days at the end of this month. And it will focus on the economy as it always does and kind of lay out economic priorities for the second half of the year and kind of last best chance to sort of make an adjustment to policy on the fly.
What do you think going forward in terms of what economic policy looks like and the economic trajectory? Are we going to see any change or is this K-shape what we’re in for, for the next six to nine months?
Joe: I’m not expecting any change to be announced at the July meeting, the end of July. Dinny wrote about this in his client note. We are expecting a modest infrastructure stimulus, sort of late Q3, early Q4, but that’s not going to be a game changer in and of itself. It’s going to be about trying to ensure that government spending on infrastructure at least remains equal to the level of last year. So that’s really about trying to prop up the economy as opposed to turbo boost it. Now, things we can look out for that would signal there’s a step change and Beijing is more inclined to try and boost domestic demand.
With the caveat, I’m not expecting any of this, but these are the sort of signals we might expect to see would be an expansion in the consumer trade and subsidies or potentially expanding it to cover new products or services. Large increases in infrastructure investment, a large policy push on the property sector to try and put a floor under prices. Again, not expecting any of this stuff, not expecting any of these moves to happen, but that will give us an indication that perhaps there is a step change in Beijing’s approach. Most likely outcome is really more of the same with a modest infrastructure stimulus towards the end of the year.
Andrew: Well, we will have our answer soon enough when it comes to the Politburo meeting, and we’ll talk about it on the back side of that. Until then, our listeners will have plenty to mull over. I say this pretty much every podcast, but we truly covered a lot of ground today, guys. I really appreciate a lot of expertise here, a lot of different topics, all of which are important. So, really appreciate both of your time. Joe, great to have you on as always, man.
Joe: Yeah, thanks, Andrew. And just one more reminder, let’s put a link to Dinny’s piece in the podcast notes.
Andrew: Absolutely. Yeah, will definitely happen. Thanks for that.
Joe: Sweet. All right.
Andrew: And Dinny, glad to see you got through the technical troubles to drop some knowledge bombs on us today. Appreciate the time, man.
Dinny: No worries. How many listeners do you think we lost at banker’s acceptances?
Andrew: Oh, no, no, no, that’s where they jump back on. That’s where they start sharing the pod. “Grandma’s got to know about this one. My wife’s got to know about this one. My uncle’s got to know about this one.” So, yeah, I’m expecting listener numbers to skyrocket. I love it, guys. Really appreciate the time. Great conversation. And of course, thanks, everybody, for listening as always. We’ll see you next time.
Bye, everybody.
