March 20, 2018
U.S. Plans Heavy China Tariff Hit as Soon as This Week
The Trump administration plans to impose tariffs worth as much as $60 billion on Chinese products as early as this week to punish Beijing for what the U.S. perceives as intellectual property theft from American businesses, according to two people familiar with the matter. U.S. Trade Representative Robert Lighthizer is leading an investigation into China’s treatment of intellectual property, and policies that the U.S. believes force American companies to turn over their technological know-how as the price of doing business there. The administration is said to be considering wide-ranging tariffs on everything from consumer electronics to shoes and clothing made in China, as well as restrictions on Chinese investments in the U.S., according to people briefed on the matter. The exact size and makeup of the sanctions could still change, said two people who spoke on condition of anonymity because the discussions aren’t public. While Trump has repeatedly singled out China as a key trade violator, his toughest actions such as withdrawing from an Asia-Pacific trade pact — which excluded China — and slapping tariffs on steel have undermined relations with allies more than with the world’s second-biggest economy. The U.S. Trade Representative’s office didn’t immediately reply to a request for comment. The Washington Post reported earlier Monday that the administration planned to impose $60 billion worth of tariffs by Friday, after the president rejected a proposal by his officials to levy $30 billion in duties.
Europe Is Only Halfway To Healthier Banks
Last week, the European Commission and the European Central Bank announced new rules on how banks should treat dud loans. The good news is that the changes will help make European banks more resilient in the future. The bad news is that the euro zone banking system remains insufficiently equipped to deal with a new crisis. European banks are still struggling with the aftermath of the financial crisis and the ensuing recession. Unlike their U.S. rivals, many European lenders chose not to sufficiently write down their non-performing loans, since this would have required raising significant amounts of new capital. The U.S. banks took a different route: They tackled the problem head on, helped by the Troubled Asset Relief Program (TARP) whereby the government spent more than $400 billion to stabilize the financial system. The consequences of the European delay are still visible: Even now that the euro zone economy is recovering, this pile stands at around 760 billion euros ($935 billion) for the bloc’s significant banks, with Cyprus, Greece, Italy and Portugal most affected. Non-performing loans are a problem for both banks and the economy. They keep managers from seeking new and profitable lines of business and take up bank capital, which limits the ability of lenders to extend new credit to other firms. This has a negative effect on the European economy: Research by the Organization for Economic Cooperation and Development has found that the misallocation of credit is one of the main culprits for slow productivity growth in some euro zone countries such as Italy. The Commission’s new rules require lenders to set money aside over time in order to cover up to 100 percent of the value of a bad loan. Under this principle, called “calendar provisioning,” banks will have eight years to cover fully a secured loan, and two years for unsecured loans. The timing is generous: In most cases, this is enough to understand whether a creditor is good for what he owes. The rules will apply to all banks and only to new loans, allowing for a more than adequate phase-in period.
Drop in Riskiest Chinese Bank Bonds Signals Alert on Dollar Debt
China’s dollar-bond market has gone from strength to strength in recent years, but a sign is now emerging that the voracious domestic demand that spurred record issuance is starting to wane. The riskiest type of bank bonds, known as additional Tier 1 notes or AT1s and which were popular for their higher yields, are now sliding. AT1s sold by the Postal Savings Bank of China, China Zheshang Bank Co. and Bank of Zhengzhou Co. have fallen by at least 2 cents on the dollar since the start of the month. Behind the drop is a concerted effort by Chinese policy makers to rein in leverage, which has put in the cross-hairs the shadow banking units that borrowed to invest in securities including AT1s. With their longer duration, the securities are also more vulnerable to rising long-term rates, amid expectations for Treasury yields to keep climbing. “The Chinese AT1, in particular, were priced extremely tight and left little room for error,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd. “One would expect the asset class to underperform in times of uncertainty coupled with rising rates.” AT1s seek to protect taxpayers from bearing the cost of government bailouts, bringing with them relatively high yields. China’s securities were in such high demand that their rates traded below those of European contingent-convertible bank debt. That was thanks to “the artificial demand of onshore China from the leveraged structures and now that is being unwound,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd. More broadly, Gallimore sees the focus of Chinese investors in dollar bonds turning toward trading, rather than building up their stockpile of securities.