Washington Insider-- Tuesday

New Chinese Banking Rules

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Still Waiting on Initial Look at Biden Budget

The first look at President Joe Biden's Fiscal Year (FY) 2022 discretionary budget request was not unveiled Friday, April 2, the Office of Management and Budget (OMB) confirmed.

OMB declined to provide more specifics on the timeline for release, which had been expected last week.

It seems there are funding disagreements among some departments, with most of the focus on the Pentagon.

It will be interesting to see how the new administration puts forth its initial spending plan, with ag interests watching to see if there are any proposed reductions in programs like crop insurance that have been proposed over the years. But those suggested cuts from any administration have rarely been followed by lawmakers that write the spending details.

Chinese Boycott On Certain Western Clothing Brands May Be Backfiring

After several brands such as Nike and Adidas said they would no longer buy cotton from Chinese suppliers in Xinjiang over reports that the growers rely on forced labor by ethnic minorities to produce their cotton, Beijing called for a boycott of several companies.

However, reports indicate sales of most of the boycotted brands are soaring as Chinese consumers rush to buy items before the government blocks sales entirely.

Clearly, this is not likely the impact Beijing intended.

Washington Insider: New Chinese Banking Rules

The New York Times reported last weekend that China has been putting “limits on foreign banks, and that foreign businesses are worried by the move.” The new rules are seen as efforts to tame big money flows and possibly for controlling the Chinese currency, “that could give domestic rivals a competitive edge and make international firms more dependent on local lenders,” the Times says.

The rules changes are seen as “sharply limiting the ability of foreign banks to do business in the country, making them less competitive against local rivals,” the Times said. One set of rules enacted in December and January restricts how much money foreign banks can transfer into China from overseas. Another, which took effect last Wednesday, required many foreign banks to make fewer loans and sell off bonds and other investments.

The changes are causing a stir among the global bank executives and foreign companies in China that depend on those lenders for money, the Times says. Among other concerns, borrowers worry that the rules could make foreign-owned businesses more dependent on China's state-run banking system for the money they need to grow — and could give Beijing another potential pressure point to use against Washington and others over trade, human rights, geopolitics and other sticky issues.

Banks and trade groups have been reluctant to speak publicly for fear of triggering further regulatory measures. But in a January letter to China's central bank that was reviewed by the Times, the EU Chamber of Commerce in China raised concerns about the money transfer limits.

“In some cases, the risk brought about by this major structural change may fundamentally overturn the strategic development direction of EU banks” in China, the letter said.

The new rules could complicate already thorny political issues, such as the U.S.-China trade war, a pending investment agreement between China and the European Union and long-simmering tensions over how Beijing controls the value of the Chinese currency. The new U.S. administration has shown little interest in letting up on the trade sanctions pressed by his predecessor and the two sides are also clashing over human rights, particularly Beijing's repression of mostly Muslim ethnic minorities in the northwestern Chinese region of Xinjiang and its crackdown on democracy activists in Hong Kong.

International companies have been caught in the middle. Over the past two weeks, Chinese state media and the country's online community have encouraged boycotts of foreign businesses like H&M, the Swedish retailer, and Nike, the American athletic brand, after they vowed not to use cotton made by forced labor in Xinjiang.

Still, the Times says that the reasons behind China's new banking rules aren't clear, though they appear to have little to do with the tense political environment. They seem to be aimed instead at stemming big, potentially disruptive flows of money into the country.

China, which keeps tight control over external money movements appear to be worried that a surge of funds could lead to nasty surprises like inflation. Money poured into the country in the second half of last year as the Chinese economy threw off its pandemic doldrums while activity in much of the rest of the world shrank.

Big money flows into a country can also make its currency rise in value — and China appears to be working hard to counter that. China's currency, the renminbi, rose sharply in value against the U.S. dollar in the second half of last year — a shift that was bad news for China's exporters. But since the Chinese government enacted its new banking rules, the currency has begun to weaken and now stands at about 6.6 renminbi to the dollar.

The new rules alone aren't likely significant enough to account for the sudden halt to the renminbi's rise. But they join other moves by the Chinese government in recent months that have made moving money into China slightly harder and moving it out slightly easier. Combined, they could put pressure on the renminbi to weaken.

Still, Chinese officials continue to stress that their country is open to foreign investment, particularly banking.

“The inflow of foreign capital is inevitable, but so far, the scale and speed are still within our control,” Guo Shuqing, the chairman of the China Banking and Insurance Regulatory Commission, which has worked closely with the central bank on the new policies, said during a news conference on March 2. “We continue to encourage foreign financial institutions to enter China for shared development.”

With near-zero interest rates elsewhere, international banks borrowed cheaply abroad. Until the new rules kicked in, they could send that money to China and lend or invest it there, reaping higher returns.

The first of the new rules, issued in a memo to banks in December, appeared to be aimed at that trend and it limited the ability of global banks to raise money overseas and move it into China. The rule is being phased in but was written in a way that has already had a big effect on financial contracts involving bets on currency trends.

Concerned about the rapid growth of credit in the Chinese economy, regulators ordered domestic and foreign banks to limit their balance sheets recently to show only slight growth from last year. Because China has recently loosened limits on foreign purchases of bonds, many foreign banks had been buying more bonds for sale to foreign customers, expanding their balance sheets.

The full impact of the new rules will depend on how long they stay in place. Eswar Prasad, a Cornell University economist, predicted that China would eventually resume opening up to foreign financial institutions. “They don't want to scare off foreign investors in the medium to long term,” he said.

So, we will see. The new administration is strongly stressing domestic job growth, and appears to be committed to continue that emphasis, high-stakes policies producers should watch closely as they emerge, Washington Insider believes.

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