TheChek News Flow

Gapping up
In reaction to earnings/guidance:

Select Index ETFs showing strength:

Other news:

DAX:

MDAX:

SDAX:

Stimulus helps drive China's industrial profits as trade risks loom large

Summary

BEIJING, May 27 (Reuters) - China's industrial profits picked up pace in April, official data showed on Tuesday, giving policymakers cause for optimism that recent stimulus efforts are helping to keep the economy afloat despite trade tensions with the United States.

U.S. President Donald Trump's decision to single China out in his global trade war has stirred significant worries about an economy that has been reliant on an export-led recovery to drive momentum in the face of weak domestic demand and deflationary pressures.

Industrial profits rose 1.4% year-on-year in the January-April period, according to data released by the National Bureau of Statistics (NBS). This compared with 0.8% growth over the first quarter.

In April alone, profits rose 3.0%, versus a 2.6% rise a month prior.

"China's industrial policy priorities look to be working well," said Dan Wang, Eurasia Group's China director. "Commodities involved in new energy and new materials supply chains are doing well, as are those in high-end manufacturing."

Policymakers have since September been drip-feeding stimulus measures in a bid to boost domestic demand and investor confidence, with the latest round in early May including interest rate cuts and a major liquidity injection.

Moody's on Monday maintained its negative outlook on China, citing unease over tensions with major trade partners could have a lasting impact on its credit profile, but acknowledged that government policy had addressed the credit ratings agency's previous concerns about the health of state-owned firms and local government debt, which prompted a downgrade in late 2023.

Profits at state-owned enterprises fell 4.4% over the first four months, the NBS data showed, while private sector companies and foreign firms enjoyed growth of 4.3% and 2.5%, respectively.

Industrial profit numbers cover firms with annual revenue of at least 20 million yuan from their main operations.

"The foundation for stable profit growth still needs to be strengthened," Yu Weining, an NBS statistician, said in a note accompanying the data.

"Challenges remain: global uncertainties, insufficient demand and falling prices continue to weigh on the recovery."

Separate data released over the course of April - as the U.S. and China ramped up tit-for-tat tariffs - painted a mixed picture for the economy, with better-than-expected exports offset by slowing growth in factory output and retail sales and a slump in bank lending.

While the world's top two economies reached a truce during talks in Geneva earlier this month - with the U.S. and China unwinding most of the tariffs imposed on each other's goods since early April - analysts warn the arrangement may not hold and could still derail the Chinese economy.

Some 16 million Chinese jobs could be lost if exports to the U.S. fall by 50%, Nomura analysts have warned.

"It's encouraging to see that manufacturing enterprises saw 8.6% (profit) growth year-on-year despite the more challenging environment," said Lynn Song, chief economist for Greater China at ING. "But some other industries faced larger challenges, including autos, which have faced severe price competition."

And stablecoin issuers are banks

Stablecoins: it doesn’t take a Genius 

A stablecoin issuer is a bank and a stablecoin is a bank deposit. This is not complicated. If you hand me money and I invest it, and in return I give you something that is a liability for me and an asset for you, and that is redeemable by you on demand and at par, I am a bank and the thing I have handed you is a deposit. It doesn’t matter if that thing also works as an intermediary in a crypto market, a token in a cross-border payment app or gets you a gumball out of a gumball machine. I’m a bank, you’re a depositor, and we’re in this together. 

Keep these facts in mind and several developments of the past week or two become clearer. One was reported by The Wall Street Journal:

The nation’s biggest banks are exploring whether to team up to issue a joint stablecoin, a step intended to fend off escalating competition from the cryptocurrency industry . . . Banks have been bracing for the possibility that stablecoins could become widely adopted under President Trump and siphon away the deposits and transactions they handle . . . Banks see an opportunity for stablecoins to speed up more routine transactions, such as cross-border payments that can take days in the traditional payments system 

No surprises here. A new wave of start-up banks has developed a pitch that consumers like. Normally in such a situation, legacy banks would be screaming for the start-ups to be crushed by the mountains of regulation they themselves labour under (or, if you prefer, are protected by). But the start-ups look to be in favour politically. So if you can’t beat ’em, join ’em.

The second bit of news is that the Genius (Guiding and Establishing National Innovation for US Stablecoins) act has made it through an important procedural vote in the Senate. Knowing that stablecoins are bank deposits, it is easy to see the act for what it is: a framework for light-touch regulation of a new kind of bank. Not a “narrow bank”, exactly (you can look up what that is) but a sort of “banking lite”.

The central feature of the act as currently written is the requirement the deposits/stablecoins be backed 1:1 by one of the following reserve assets: US dollars, US central bank reserves, “demand deposits . . . at an insured depository institution”, “Treasury bills, notes, or bonds with a remaining maturity of 93 days or less”, Treasury bill repo or reverse repo agreements, or shares in money market funds that invest only in the other permitted assets.

There is also the requirement of monthly disclosure of reserves and annual audits for issuers of more than $50bn in coins. The act also holds that stablecoin regulators should issue regulations covering capital requirements, reserve asset diversification and risk management (for non-banks, the regulator will be the Comptroller of the Currency, at least at the federal level). But it doesn’t say what those regulations should be. 

It is striking that the act specifies that a stablecoin “is not a deposit . . . including a deposit recorded using distributed ledger technology”, but it’s important not to get caught up in terminology. If it quacks like a duck, and so on. It is also striking that the act insists that a stablecoin “does not offer a payment of yield or interest”. There are two ways to look at this latter point. You might say it’s a handout to the crypto industry; who wouldn’t want to run the sort of bank that is legally forbidden to pay depositors interest? On the other hand, you might see it as a safeguard; if issuers are not allowed to invest in longer-term, higher-yielding assets, it is better for the solvency of the industry that they don’t compete on yield. 

With this sketch in mind, there are two big questions: Are these new sorts of banks, called stablecoin issuers, risky? And do they solve a problem that needs solving?

Steven Kelly of the Yale Program on Financial Stability reminded me that one source of risk was issuers’ deposits in what the act calls “insured depository institutions”. The problem is the FDIC insurance doesn’t apply to institutions at all; it applies only to deposits, up to $250,000. We saw how this can go wrong in 2023, when it turned out that Circle, issuer of the USDC stablecoin, had $3.3bn of its reserves deposited at Silicon Valley Bank when it failed. USDC holders ended up being bailed out by the US government, along with SVB’s other depositors. If a bank is runnable, and stablecoins reserves can be bank deposits, stablecoins are runnable — and the stablecoin could be the cause of the run, if enough coin holders want to redeem their deposits for cash.

The act could be amended to limit coin reserves to Treasury bills alone. But, Kelly points out, this would:

make [stablecoins] look like government money market funds — but that could get messy 1) if they’re truly to be used for payments, which will require some bank reserves to settle withdrawals from the cryptosphere, 2) if the Treasury doesn’t alter its issuance strategy to help meet that demand for bills, 3) if bills sell off or are illiquid, such as around debt ceiling dates.  

So much for the risks. What about the benefits? It is true that the current payment system is too slow, not just for cross-border payments but (as Aaron Klein of Brookings has highlighted) for domestic ones, too. The question is whether privately issued stablecoins are the right technology to solve this problem. 

This brings us back to where we started, with the banks. Suppose they (along with the Fed) tokenised deposits using a publicly agreed blockchain technology. This could capture the benefits of stablecoins for both speed and transparency, without the problem of having to move in and out of an intermediary currency. Stablecoins could then return to their original purpose: serving as chips in the cryptocurrency casino, a very minor form of banking we already know how to live with.