In the News: QFII Investment Quotas Scrapped; China-US Trade War 'Goodwill'; Insurance Affiliate Transactions Scrutinized; and Surging Pork Prices Spark Alarm

China's $13 trillion bond and $6.9 trillion equity markets have traditionally been closed to overseas investors but a spate of measures in recent years have gradually opened them up. Chinese stocks and bonds have increasingly been included in international indexes such as MSCI and FTSE Russell, with their weights steadily increased. In early September, JP Morgan said it would add Chinese government bonds to its indexes following a similar move by Bloomberg LP in April. However some analysts say this latest removal of investment quotas is "largely cosmetic" as only around a third of the investment quota under the QFII program was being used prior to its removal. The QFII and RQFII programs have diminished in importance since the launch of the Stock Connect system in 2014 which is preferred by most foreign investors as it allows them to buy and sell equities in the Shanghai and Shenzhen stock exchanges through Hong Kong without a license. On Sept. 10, China's securities regulator listed 12 priorities for deepening reform of the nation's capital markets. These include attracting longer term capital through measures such as allowing individuals to invest private pension funds into mutual funds.  

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U.S. delays tariffs after China exempts products from retaliatory measures

The U.S. postponed an increase in tariffs on Chinese imports until mid-October after China rolled back tariffs on several U.S. products. U.S. President Donald Trump confirmed that an increase in tariffs from 25% to 30% on $250 billion of Chinese goods originally scheduled to take effect on Oct. 1 will be delayed until Oct. 15, a day after Beijing announced a list of U.S. goods to be exempted from the first round of China's additional retaliatory tariffs. 5,000 types of U.S. imports are still subject to China's additional tariffs.

In a series of tweets, President Trump said that the tariff delay was "a gesture of good will" made at the request of China's Vice Premier Liu He and because of China's National Day on Oct. 1 which will also be the 70th anniversary of the founding of the People's Republic of China. China had earlier announced exemptions for 16 types of U.S. imports including some anti-cancer drugs and animal feed ingredients according to a Ministry of Finance statement. A few days later, Xinhua reported that China will waive tariffs on U.S. soybeans and pork too and allow Chinese businesses to purchase those products without specifying the amount. Both U.S. soybean and pork imports have been subject to heavy Chinese duties during the trade war, the purchase of U.S. agricultural goods by China a central point of contention. This latest concession by China can be partially explained by surging pork prices (see below).

China and the U.S. are set to hold fresh trade negotiations in October. Although a date has not been confirmed, it is widely expected to be before Oct. 15 which means that a further delay or even a cancelling of some U.S. tariffs could be discussed at the meeting. The Wall Street Journal reports that China is looking to narrow the scope of the next round of talks to only trade matters and put more contentious national security issues on a separate track in an attempt to make a breakthrough in the trade talks. Reuters reports that private Chinese firms bought more than 600,000 tonnes in soybeans from the U.S. on Sept. 12, the largest purchase by Chinese private importers in over a year. China suspended all U.S. farm product purchases in August following threats by President Trump to impose new tariffs on Chinese imports. Data released by China's customs administration on Sep. 8 reveal that Chinese exports to the U.S. in August declined by 16% from a year earlier. The U.S. ranked third among China's largest trading partners in the first eight months of 2019 behind the EU and the 10 countries making up the Association of Southeast Asian Nations (ASEAN), the latter seeing their trade with China jump 11.7% year-on-year.   

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China caps investment in shareholders by "ATM" insurers

China is tightening regulation on affiliate transactions in the insurance sector in order to curb risks and improve corporate governance in the sector. The China Banking and Insurance Regulatory Commission (CBIRC), the nation's insurance regulator, announced that outstanding investments in shareholders or their related parties must not exceed 30% of an insurance company's total or net assets in the previous year.

The CBIRC said that investments by insurers in any single shareholder cannot be more than 15% of the company's total assets. An insurance company's board must also set up a committee responsible for managing the risks of affiliate transactions under the new rules which took effect on Sep. 9. "Several insurance companies transit vested interests to shareholders and related parties through non-financial units and well-packaged financial products," the regulator said in a statement. Insurers have been used as "ATM machines" which has led to "severe risks and social impact", it added.

China is the world's second-biggest insurance market. The CBIRC handed out more than $10.8 million in fines to insurance companies in the first eight months of 2019 due to violations including data fabrication and false advertising. The regulator said that existing regulation has failed to meet the demands of risk prevention in the sector. In related news, a proposed "insurance connect" scheme between Hong Kong and mainland China which will facilitate cross-border sales of insurance products is on hold because of the ongoing protests in Hong Kong and trade war uncertainties, Hong Kong's Insurance Authority chairman said on Sept. 9. 

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China's pork prices surge in August, prompts comprehensive government response

China's pork prices have increased at their fastest pace in almost a decade, prompting the central government to direct local governments to boost pork supply. According to inflation data released by the National Bureau of Statistics, China's consumer price index (CPI) rose 2.8% year-on-year in August, unchanged from July's 17-month high, with the average pork price increasing almost 50% year-on-year – its biggest increase since July 2011.

On the same day, the State Council released a circular outlining plans to stabilize hog production through measures such as tapping into pork reserves, accelerating the production of alternatives to pork, and providing subsidies to farmers to slaughter pigs afflicted by African swine fever – the disease which has devastated China's pork industry since its first reported case in August 2018. A third of China's pig herd has been culled because of the disease, official reports say. The State Council will extend subsidized loans for pig farms to the end of 2020, according to the circular, which also urged provincial-level governments to promote preferential policies in farming land and grassroots epidemic-prevention teams to further ease burdens on farmers.

Pork is hugely significant in China, the world's top pork consumer. It is the most popular meat for consumption and its prices seen as a proxy for the affordability of daily life for the Chinese public. Xinhua reports that the government has introduced 17 measures since the end of August through multiple agencies to support pork production, including toll charge exemptions for vehicles transporting frozen pork. China has also looked abroad to help meet its 10m-tonne pork shortage, with pork imports from Brazil and Europe surging in recent months according to the Financial Times. The State Council circular said that 95% of pork should be supplied domestically, but imports could account for 10% of China's pork supply over the next few years, a consultant from China-America Commodity Data Analytics told the Financial Times. In Dalian, which hosts one of four futures exchanges on the Chinese mainland, there are plans to launch live pig futures which could help stabilize pork prices by allowing farmers to hedge against price declines.    

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