SinoInsight 1
In Q1 2019, China imported $166.025 billion worth of goods, or 4.8 percent less from the same period last year, according to China’s customs administration.
Imports of electronic components, and fabricating equipment saw steep declines:
Metal work machine tools (quantity of goods: -48.7 percent; value of goods: -25.1 percent)
Machines and devices for manufacturing semiconductors or integrated circuits (quantity: -56.8 percent; value: -32.9 percent)
LCD panels (quantity: -13.1 percent; value: -8.6 percent)
Printed circuits (quantity: -16.8 percent; value: -13.5 percent)
Diodes and similar semiconductor components (quantity: -16.4 percent; value: -8.6 percent)
Integrated circuits (quantity: -10.7 percent; value: -7.7 percent)
OUR TAKE
1. The steep decline of electronics components and fabricating equipment in the first quarter will likely translate into a sharp reduction in Chinese exports in the second quarter.
2. China derives the bulk of its export surplus from Europe and America. In 2018, China’s export surplus with Europe and the U.S. accounted for 38.4 percent and 91.9 percent respectively of the total national surplus. And electronic audio and video equipment (smartphones, laptops, etc.) account for nearly half (46.4 percent) of China’s total exports to the United States.
China typically imports electronic components from abroad and assembles the final product over a couple of months before exporting the finished goods to the European and American markets. The sharp drop in electronic imports to China in Q1 2019 suggests that there might be fewer orders for electronic products.
3. On the whole, China’s first quarter import data corresponds with the trend of foreign companies withdrawing from the mainland, factory closures, and rising unemployment. The data also reinforces our pessimistic view of China’s economic prospects.
SinoInsight 2
On April 25, the Supreme People’s Procuratorate (SPP) held a press conference on the procuratorial organ’s efforts to crack down on intellectual property infringement. The SPP also highlighted 14 typical cases of IP-related crimes.
According to SPP data, procuratorial organs approved arrests for 3,306 cases (5,627 people) of IP-related crimes in 2018, or up 31.7 percent from a year ago. Procuratorial organs brought charges in 4,458 cases (8,325 persons), an increase of 21.3 percent (or 22.3 percent more persons).
OUR TAKE
1. In announcing actions taken to combat IP theft close to World Intellectual Property Day (April 26), the CCP is signaling to the world that it has stepped up efforts to curb an activity which it has been accused of being a main culprit in. The CCP’s signaling on IP theft is also likely aimed at addressing a sticking point in trade negotiations between China and the United States.
2. The CCP’s IP “performance” is in line with our previous analysis. To recap, we believe that Beijing is prepared to make concessions to get a trade agreement, but will do anything it can to delay the signing to buy the regime more time to “recover” from the impact of the U.S. tariffs. The ball is now in America’s court.
SinoInsight 3
On April 24, the Hong Kong Monetary Authority and the Securities and Futures Commission issued a notice warning banks over complex lending transactions.
The notice cited a recent case involving the subsidiary of a Chinese bank obtaining a credit facility from the bank and making a large investment in a private fund. The fund’s only purpose was to provide a loan to a special purpose vehicle owned by a substantial shareholder of a listed company.
Hong Kong regulators said that firms that may have adopted similar complex lending transactions should “review them urgently and take all necessary steps to address all untoward risks.”
On April 25, the Shanghai index fell 2.43 percent to below the 3,200 mark, while the Shenzhen index fell 3.41 percent. Meanwhile, the Shanghai-Shenzhen-Hong Kong Connect saw 10.1 billion yuan in northward outflows between April 23 to April 25.
According to news reports, China Minsheng Banking Corp. is the China bank that the Hong Kong regulators are referring to in their April 24 notice.
OUR TAKE
1. The involvement of Hong Kong’s top regulatory bodies suggests that the issue of complex lending transactions is a major incident. We believe that more than one mainland bank is involved in such complex lending transactions, and could even involve money laundering through the securities market.
2. We believe that the complex lending transactions incident is related to mainland financial institutions carrying out margin trading in Hong Kong markets to gain increased funding due to highly leveraged positions. This phenomenon has become more obvious since the start of the year as mainland financial institutions look to avoid the scrutiny of Chinese regulators while speculating in the mainland markets. The massive inflow of mainland funds into Hong Kong puts pressure on the city’s currency and forces the Hong Kong authorities to prop up the exchange rate.
In our March 12 analysis, we noted that the “precise” capital outflows from the mainland markets partly led to the irregular Chinese stock market plunge on March 8.
3. China’s economy is steadily worsening, and major shareholders of public companies have been dumping their stocks or “cashing out” via dividends. We do not rule out more cases of complex lending transactions being uncovered in Hong Kong as the CCP continues to tighten its foreign exchange controls.
