SinoInsight 1
The Beijing Securities Regulatory Bureau recently suspended Dagong Global Credit Rating Co., a Chinese credit rating agency, from bond market business for a year for a range of irregularities.
Before Dagong was suspended, the company submitted an emergency report to People’s Bank of China governor Yi Gang claiming that “improperly punishing Dagang will lead to systemic risks” and trigger an “avalanche” that would cause a “domino effect” where trillions worth of bonds are affected.
Companies rated by Dagang have issued bonds totaling 10 trillion yuan, or one-fifth the size of China’s bond market.
OUR TAKE
1. The Chinese Communist Party (CCP) has long touted Dagang as a credible rating agency. Now, the CCP has essentially exposed the semi-official Dagang as unreliable, a move that casts doubt on the trustworthiness of Chinese bonds.
Dagang could have passed off junk bonds as being creditworthy. For investors, buying Chinese bonds is a huge risk.
2. The steady outflow of business investments from the mainland in the first half of 2018 suggests that the markets are losing confidence in China’s economic prospects. Also, the Chinese regime’s credibility has been weakening significantly in light of the slowing economy, the Sino-U.S. trade conflict, and the outbreak of many social scandals.
The CCP could be thinking of reorganizing Dagang to redeem itself at home and abroad.
SinoInsight 2
On Aug. 16, a prominent Chinese blogger tweeted out part of an internal document by Huawei founder Ren Zhengfei: “The reality we are now facing is that (China’s) relationship with the United States may be in a relatively tense stage, and we must be fully prepared. Surrender is not the way out, and the slaves of defeated countries have always been trampled upon. We will never willingly become slaves of defeated countries. Therefore, we must shrink some marginal investments across the board while increasing investments in key areas to prevent our lifelines from being sealed off…”
OUR TAKE
The CCP has misread the Trump administration and appears to have only recently realized that they are in trouble (see article below). While Beijing is trying to find ways to fulfill U.S. demands on trade without losing face, the CCP knows that ceding to American requests will imperil its rule over time and is no real solution.
Ren Zhengfei’s view reflects the CCP’s thinking. The CCP doesn’t dare to back down in confronting the U.S. and is looking to stall for time until it finds a better solution to its predicament. We believe that the CCP might be willing to pursue all options (such as influencing U.S. tech companies) to weaken the Trump administration before the U.S. midterm elections in November, and hope that a favorable elections result would give it leverage in future Sino-U.S. negotiations.
