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Caixin: S&P Lowered China’s Sovereign Credit Rating

Well-known Chinese financial news media group Caixin recently reported that Standard and Poor’s (S&P) just announced the decision to downgrade China’s sovereign credit rating from AA- to A+. This is the first time in 18 years that S&P has downgraded China. In May, another world-class ratings organization, Moody’s, also downgraded the rating of China’s currency. S&P explained that concern over China’s debt level was the primary cause of the downgrade. S&P expects sustained growth of loans made outside the standard banking system over the next two to three years, while China’s total debt growth rate will remain higher than its GDP growth. The financial risks in the Chinese economy are still increasing. S&P did acknowledge the success of the recent efforts the Chinese government put in place to control the growth of debt. However, it will take time for the new policies to have a tangible impact. S&P also mentioned that it may increase China’s ratings if the rate of debt growth slows down significantly. All of the international ratings organizations have been monitoring China’s debt level and its financing platforms carefully. They have repeatedly asked the Chinese government to improve the information transparency of local government debts.

Source: Caixin, September 21, 2017

CBN: China Closing Down All Bitcoin Exchange Platforms

China Business Network (CBN) recently reported that the Chinese Internet regulatory authorities have decided to close down all bitcoin exchange platforms operating in China and put them out of the market. According to a government-issued risk advisory, all these Internet-based virtual currencies (“coins”) and their exchange platforms were established without having a Chinese legal basis. They are rapidly growing into channels for money laundering, drug-dealing and smuggling. China has been investigating the virtual currencies since the beginning of the year, starting in Beijing and Shanghai. The government also met with the owners of all the Chinese virtual currency platforms. The investigation showed all these platforms failed to meet financial regulatory requirements and caused major market fluctuations. According to recent statistics, the vast majority of the global Bitcoin trading transactions occurred in China. As of the beginning of this year, the three major Chinese Bitcoin trading platforms carried 98 percent of the global volume. The trading volume saw a sharp decline after the Chinese authorities intervened. On September 4, the Chinese central bank announced that Initial Coin Offering (ICO) activities are illegal. Very recently, the Chinese government decided to ban all virtual currencies in China.

Source: China Business Network, September 14, 2017

The Economic Observer: Moody’s Downgraded China’s Bank of Communications

Well-known Chinese national weekly newspaper The Economic Observer recently reported that Moody’s has just downgraded the baseline credit assessments of China’s Bank of Communications (BOCOM) from Baa3 to Ba1, which is often known as the “garbage level.” BOCOM was founded in 1908 (Qing Dynasty) and is currently the fifth largest bank in China, with 3,285 domestic outlets and 20 international branches. BOCOM’s total asset value (2016) was around US$1,296.5 billion. Moody’s cited BOCOM’s poor financing capabilities and higher-than-average financing costs, as well as a declining number of savings accounts, as the reason for the downgrade. A few other performance indicators also showed that the bank is facing much higher market risks. BOCOM responded immediately by suggesting that Moody’s focused too much on very few indicators and the downgraded rating was biased. It is worth noting that BOCOM’s rating for its long-term outlook remains at A3.

Source: The Economic Observer, September 8, 2017

Three Percent of College Graduates Had to Start Their Own Business Due to Poor Job Market

According to a report that Radio Free Asia (RFA) published, new statistics from the Ministry of Education showed that, after graduation, three percent of college graduates in China start their own businesses. The rate is twice what it is in developed countries. The most likely conclusion is that these college graduates were forced to start their own businesses because of the lack of job opportunities. One economics professor in Beijing told RFA that the struggles that private companies have directly impact the job market for college graduates. Most of these college graduates have been forced to start their own businesses because they can’t find jobs. The Chinese economy has slowed down in recent years. Many private businesses face the challenge of high tax rates and the difficulty of getting a loan from state owned banks. Some of them have chosen to borrow money at a high interest rate and have ended up in a capital chain rupture.  The Ministry of Human Resources and Social Security found that over half of the businesses that college graduates started failed within three years.

Source: Radio Free Asia, September 8, 2017

CCP Wants Final Say in Foreign Company’s Operations in China

According to a dispatch from Beijing that the Taipei-based Central News Agency (CNA) published on August 24, executives from over a dozen major European companies in China met in Beijing last month to discuss the growing role the Chinese Communist Party (CCP) plays in foreign companies.

CNA cited reports from Reuters, among other news agencies, that people familiar with the discussion were concerned about President Xi Jinping’s emphasis on the CCP’s role in Chinese society, which has impacted the China operations of foreign companies.

China Daily, China’s official English-language newspaper, reported last month that it is a fact that CCP organizations have been established within companies in China. According to China Daily, out of 1.86 million privately owned companies, over 70 percent have a CCP branch unit in them.

Until recently, many foreign executives have regarded such an arrangement as symbolic. However, one executive who participated in last month’s discussion revealed that (the party) has exerted political pressure on some companies to give CCP representatives in the joint ventures the final say over business operations.

The executive said the company’s Chinese partner was pushing to change the terms of the joint venture to bring CCP personnel into management, to include the CCP organization’s overhead expenses in the company budget, and for the CCP secretary be named chairman of the board.

Central News Agency, August 24, 2017

A Hunan Local Government Invalidated All Its Government Loan Guarantees Overnight

Well-known Chinese news site Sina recently reported that the government of Ningxiang County of Hunan Province just officially announced that it invalidated all government guarantees to loans that the county government had issued since 2015. The county announcement referred to several policy orders that the central government recently released on prohibiting local governments from providing guarantees for companies seeking loans via financing platforms. For many years, central government policies did not allow local governments to borrow money from the financial market. However, many local governments worked around these policies by providing government guarantees to loans that the companies that work for the local governments had taken out. More and more local governments are taking similar steps like Ningxiang County of Hunan. However, analysts expressed the belief that the sudden invalidation of government guarantees is directly against the spirit of the contracts since the guarantees were part of these legally binding contracts. Many banks and other financing companies are asking for an early pay back of the loans.

Source: Sina, August 23, 2017

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