SinoInsight 1
On June 5, Chinese premier Li Keqiang convened a State Council meeting on business startups and innovation.
Key points of the meeting include:
- The authorities would move to bolster business start-ups and innovation nationwide;
- Micro and small firms would be allowed to have a higher ratio of nonperforming loans of 3 percent, higher than the current 2 percent;
- Ensure steady agricultural production and guarantee effective agricultural supply;
- Comprehensively carry out drought and flood control work;
- The meeting passed the revised draft of a law on waste disposal and environmental protection.
On June 6, the People’s Bank of China renewed 500 billion yuan ($72.32 billion) worth of medium-term lending facility loans, offsetting 463 billion yuan worth of MLF loans which expired that day. The scale of the MLF operation was the second highest on record in the same period over the past years; the highest MLF loan issued was in July 2018 (502 billion yuan).
OUR TAKE
1. The agenda of the State Council meeting indicates that China’s unemployment woes, food crisis, and natural disaster problems have worsened as a result of the escalating Sino-U.S. trade conflict. However, the fact that the central authorities have been constantly harping on the same issues suggests that it has no effective solutions to the issues and can only pay lip service.
2. We noted in our China 2019 outlook that:
- Corporate closures will become more frequent and severe, resulting in a sharply shrinking manufacturing sector and sluggish retail sales.
- The wave of unemployment will become more serious.
- Food shortages may worsen, and the price of staple food may rise sharply.
All three predictions have been verified by the State Department’s meeting on business start-ups and innovation, as well as the central bank’s recent liquidity support measures.
We believe that the Chinese authorities would continue to pay lip service on resolving China’s growing problems as it struggles to find effective solutions. Meanwhile, the PBoC will likely roll out more stimulus and “encourage” local governments and financial institutions to fix China’s unemployment and financial problems.
The fact that the central bank and central authorities need to keep exhorting the local governments to get moving on policies suggests that Xi Jinping, like his predecessor Hu Jintao, continues to face the same problem of having his orders fail to leave the gates of the leadership compound at Zhongnanhai despite having centralized power to a high degree.
SinoInsight 2
On June 4, China’s finance ministry announced that it would begin auditing major pharmaceutical companies between June and July. The 77 companies chosen include multinational firms like Sanofi, Eli Lilly & Co. and Bristol-Myers Squibb Co., as well as local firms like Jiangsu Hengrui Medicine Co. and Shanghai Fosun Pharmaceutical Group Co.
The announcement led to a 1.53 percent drop in the healthcare index of companies traded on Chinese stock markets that day. The markets also lost 50 billion yuan in value.
OUR TAKE
1. The MoF’s audit announcement follows the recent exposure of financial fraud by pharmaceutical companies in China. For instance, Kangmei Pharmaceutical Co. was found to have overstated its cash holdings by over 30 billion yuan. Many Kangmei investors suffered huge losses as the company’s shares reached junk status overnight. Thus, the authorities are likely stepping up auditing to minimize further investor losses.
2. MoF documents indicate that the current round of audits would be focused on verifying sales fees, a move which is likely aimed at tackling high drug costs and kickbacks.
According to data from Wind, 27 of the 77 companies involved in auditing had sales totaling 66.241 billion yuan in 2018. One of the companies, Shanghai Pharma, made 11.085 billion yuan alone, and is only listed pharmaceutical company with sales of over 10 billion yuan.
Meanwhile, 19 of the 27 companies have sales expenses to revenue ratio of over 10 percent. Leading the pack was Aosaikang Pharmaceutical (61.78 percent), followed by Shandong Buchang Pharma (58.81 percent) and China Resources Sanjiu (48.17 percent).
3. The audits into pharmaceutical companies indicate that the problem of fraud in the Chinese markets has become so severe that the central authorities have to step in to appease the masses. More financial problems would likely bubble to the surface shortly with the intensification of Sino-U.S. tension and the rapid worsening of the Chinese economy.
