The People’s Bank of China, the Chinese central bank, confirmed on Sunday (June 25) that it was cutting the amount of capital Chinese banks must hold by 50 basis points (bps), which is equivalent to releasing $108 billion in liquidity into the market. This is the third such reduction in the reserve requirement ratios (RRR) in one year but the latest cut, although expected, was much larger than anticipated. Further cuts are likely say economists.
The move sends two messages to the global market: one, that China is taking the trade war with the USA very seriously, which it expects to escalate; and two, that it will support and protect its economy from any fallout.
The general consensus is that the trade war is escalating. The latest news from the Trump administration today is enhancing its national security screening process to investigate Chinese investments, specifically to stop Beijing’s efforts to acquire US technologies.
Boeing has so far shrugged off concerns that renewed tariffs could impact Chinese aircraft orders – admittedly it has yet to progress that far but the threat is growing.
For Chinese banks, these latest cuts free up capital, which they are being pressed to use for debt-for-equity swaps for some of those companies impacted by the US pressure. However, Chinese banks balance sheets are much less constricted than their western counterparts and their market share for aviation finance has been steadily growing. The manufacturers estimate that almost one third of aircraft deliveries are being financed by Chinese money – be it from banks or from Chinese-backed leasing companies. This is set to continue if not accelerate as western commercial banks feel the pressure of Basel III and other constraints.
One source comments that the current environment feels like an opportunity for Chinese banks to strengthen their share of the aviation financing market but, despite their unconstrained balance sheets, Chinese banks should remain cautious and ensure they deal with stable and quality credits because pressures on airlines remain that will be revealed during the leaner winter months.
Fastjet, the African carrier backed by easyJet’s Sir Stelios Haji-Ioannou, may well be one of those causalities. Today, the low-cost African airline has warned that it was at risk of going under if discussions with shareholders concerning equity funding were unsuccessful (See Africa Airline news below).
And finally, yesterday (June 26), General Electric (GE) confirmed plans to spin off its healthcare division and its stake in oil services company Baker Hughes to focus on aviation, power and renewable energy, “creating a simpler, stronger, leading high-tech Industrial company” and reduce the company’s net debt by $25bn.
The decision, which was first reported by the Wall Street Journal, follows the agreement by GE to separate its train manufacturing business to raise cash and strengthen its balance sheet.
John Flannery, chief executive, said: “We are aggressively driving forward as an aviation, power and renewable energy company — three highly complementary businesses poised for future growth. We will continue to improve our operations and balance sheet as we make GE simpler and stronger.”