Cash-Strapped Chinese Banks Are Offering Pork To Lure New Depositors

In the peak days of the European financial crisis, when Spanish banks were on the verge of collapse and were desperate for depositor funding as the ECB scrambled to come up with a viable rescue scheme, one bank - the soon to be insolvent Bankia - had a "clever" idea: offer a Spiderman Beach Towel in exchange for a €300 deposit.

Fast forward 7 years when the cash-strapped banks of another country have come up with a similar trick to entice depositors: a growing number of small local banks across China have conceived of a "brilliant" scheme to lure new depositors: handing out servings of expensive pork as a reward for opening an account, the SCMP reports.

As we discussed in recent months, China's smaller banks were hit by a perfect storm of falling rates and declining state support, which culminated in bank runs and the nationalization of several small and medium banks. And since there is little hope that the status quo will change any time soon, Chinese banks - which on top of everything are facing a $400 billion liquidity shortfall in January  - are forced to go to greater lengths to attract new deposits, since they generally earn less money from lending and have fewer funding options than their larger peers.

Unlike Spain, Chinese banks are offering a product which is in great demand for the nation that is reeling as a result of "pig ebola": pork. Indeed, as SCMP adds, the fact that pork could be seen as a desirable reward for opening a bank account also speaks to the country's massive shortage of its favorite staple meat.

Who knew the intersection of the supply and demand curves would be marked by a pound of pork.

On Monday, clients who deposited 10,000 yuan (US$1,430) or more in a three-month time deposit at the Linhai Rural Commercial Bank in Duqiao in Zhejiang province were then eligible to enter a lottery to win a portion of pork ranging from 500 grams (18 ounces) to several kilograms.

"The money is still my own, and the interest is good. I'm happy to receive a piece of pork in addition," one female client, who deposited around 20,000 yuan (US$2,900), was quoted as saying by the Metropolitan Express. Unfortunately for said client, she failed to grasp that any bank that is resorting to such ham-headed measures to boost depositor interest will likely not be around for long, and her entire deposit will likely vaporize in the coming weeks.

In any case, the gimmick is working: according to the Express, the bank distributed 1,097 deposit rewards on Monday after scores of mostly elderly clients queued up in front of the bank from early that morning.

"It was quite a good idea and very popular among locals, especially the elderly," said a bank staff member, who did not offer his name. He also refused to comment on how much money the bank had received in new deposits due to the promotion.

In retrospect, it is a brilliant solution: instead of offering higher rates which only accelerate the banks insolvency as these require higher payouts on deposits, the bank is instead making a one-time payment, and the novelty of the "handout" is enough to get substantial new deposits.

Other rural commercial banks in northern China's Hebei province and western China's Guizhou province have also launched similar pork rewards programs. Dushan Rural Commercial Bank, located in the remote mountainous county in Guizhou, offered a coupon for 10 yuan (US$1.4) worth of pork for every 10,000 yuan of new deposits.

The reason behind China's infatuation with pork is familiar: the outbreak of African swine fever, which is reported to have killed over 100 million pigs in China, has sent the price of pork skyrocketing, with November's consumer price index rising 4.5 per cent from a year earlier, up from a 3.8 per cent gain in October, in large part due to a 110.2 per cent increase in the price of pork.

There were some signs of improvement: China's pig population actually expanded in November for the first time in a year, while the price of pork price has fallen in recent weeks. The pig population in 400 counties monitored by China's Ministry of Agriculture and Rural Affairs grew 2% in November from October, the first monthly rise since November 2018, while the number of breeding sows rose 4% from a month earlier. Wholesale pork prices last week fell back 0.8 per cent from the previous week, the fourth straight weekly decline, according to the latest data released by the Ministry of Commerce on Wednesday.

Wholesale pork prices last week fell back 0.8 per cent from the previous week, the fourth straight weekly decline

China's pig population, though, is around 40% smaller than it was a year ago, according to data from China's agriculture ministry.

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Still, despite recent signs of improvement, experts said the crisis may worsen further next year before it improves.

"It depends on what you mean on whether the worst is over because it's already killed most of [China's pigs]. There aren't as many pigs to kill as there were before," said E. Wayne Johnson, a veterinarian consultant at Enable AgTech Consulting in Beijing.

"We expect that there will be outbreaks in the wintertime because it's very difficult to clean the trucks, particularly in the north of China, and the virus is preserved by cold weather. Plus, you have the fact that the infected pigs are continuing to go into the slaughterhouses, and everybody sends their trucks to the slaughterhouse. So the disease is being spread on the highways just as it was a year ago. There's no reason to think that it's over with."

With peak seasons for pork consumption just around the corner – with celebrations for the winter solstice this week, the new year holiday on January 1 and the week-long Lunar New Year holiday starting on January 25 – the pressure on the price of pork is set to increase due to limited supplies. To alleviate the coming demand surge, on Tuesday, the government announced that it would release an additional 40,000 tonnes of frozen pork reserves on Thursday, on top of the previous round of 40,000 tonnes released a week ago.

China also announced earlier this month that it would waive import tariffs on some pork shipments from the United States. In total, China will purchase over 3 million tonnes of pork this year, more than twice as much as last year, confirmed Commerce Ministry spokesman Gao Feng at the end of last month.

Beijing has also called for a relaxation of restrictions on pig farming on land normally reserved for forests, with the land only returning to forestry production after the pork supply crisis
has been resolved, according to a document from the National Forestry and Grassland Administration dated Monday and seen by the South China Morning Post.

"These [recently announced] measures are very positive and effective moves," said Wang Zuli, a research fellow with the Chinese Academy of Agriculture Sciences. "But pork reserves have been unable to fully resolve the supply problem, so it is hard to say whether the measures are sufficient."

China Premier Warns Of Economic Turmoil In 2020, Continued Deceleration Means Global Rebound Unlikely

Chinese premier Li Keqiang was quoted on state television by Reuters on Thursday as saying the economy could face tremendous downward pressure in 2020.

Li said the downward pressures could be even greater than what was seen in 2019; he made no mention of the possible trade resolution with the US would correct economic growth. 

He said the government would implement monetary and fiscal policies to keep the economic expansion within a consistent range throughout 2020. This could be the latest confirmation that China's GDP could slip underneath 6%.

A similar warning was echoed by an advisor to the People's Bank of China (PBoC) last week, who said China's economy might not recover for the next five years.

Liu Shijin, a policy adviser to the PBoC, said the country's GDP will decelerate through 2025 and could print in a range of 5 to 6%. 

Shijin warned that excessive monetary policy is failing to stimulate the economy and could cause it to decelerate in the year ahead. 

Last month, we noted that China's credit growth plunged to the weakest pace since 2017 as a continued collapse in shadow banking, weak corporate demand for credit, and seasonal effects all signaled that China's economy, nevertheless, the global economy, will continue to slow in 2020. 

A further deceleration in China's economy could ruin the party for equity bulls, who have already priced in a massive 2016-style rebound in the global economy for 1Q20. A slowing China means the world could fail to rebound, though we don't discount the stabilization narrative.

With China's economy unlikely to sharply rebound early next year, global investors could find themselves repricing growth in the near term as global equities are at all-time highs thanks to massive money printing by central banks. 

To gain more color on China's extended slowdown, Fathom Consulting's China Momentum Indicator (CMI) provides a more in-depth view of China's economic activity than the official Chinese GDP statistics. 

CMI is based on ten alternative indicators for economic activity; some of those indicators include railway freight, electricity consumption, and the issuance of bank loans.

Fathom has stated that in CMI, the calculation of the index avoids measuring construction activity, and instead focuses on shadow measures of economic activity. The consulting group says this allows the index to be "less prone to manipulation than the headline GDP figures."

"In 2014, when China's traditional growth model was running out of steam and vulnerabilities were rising, authorities toyed with credit tightening and an enforced rebalancing. But at the end of 2015, when growth slowed too sharply, they quickly threw in the towel, resorting to the old growth model of credit-fuelled growth. With growth once again slowing, and past precedent suggesting credit has neared its limit, China finds itself at a crossroad," Fathom recently said.

China's failure to stimulate its economy suggests CMI will continue a downward trajectory that has been underway for the last decade.

We've recently outlined the bust of the global auto industry has weighed down the Chinese economy. With no signs of an upswing in the auto market, China's economy will remain depressed in the years ahead.

As China's economy slows, global commodity prices are stuck in a deflationary spiral. 

China's slowing economy warns that global equities have mispriced growth for early 1Q20. 

Looking for signs of life in the Chinese economy -- there aren't any at the moment.

Société Générale's latest report shows employment in China contracting across manufacturing and non-manufacturing, outlining how the slowdown is broad-based.

Bloomberg has compiled a list of long-time China watchers that are warning about an extended slowdown. 

George Magnus, a research associate at Oxford University's China Centre and author of "Red Flags: Why Xi's China is in Jeopardy:" 

In the spirit of self-criticism, I'd say my best call on the economy was an early spot of the huge demographic shift that kicked off in earnest in 2012, an abiding assertion that China's elevated growth rates could not be sustained, and anticipation of a financial crisis that turned up in 2015-16. Worst call was thinking that crisis might turn into a 'Minsky Moment' for China, as per 2007-08, and failing to integrate properly the tools the state has to prevent catastrophic failure.

I expect China to flirt with officially recorded growth of around 6%, but the reality is that the tempo of growth is ratcheting down to somewhere between 3% and 4%. In 2020, perhaps 5.8% to 6%, officially, not least because the economic news has to remain upbeat ahead of the CCP centenary in 2021. The consequences of over-indebtedness, demographic change, inadequate wealth transfer and income redistribution policies, and stagnant total factor productivity growth associated with institutional flaws are the main drags on growth. The 2020s will be a challenging time for China.

Jim O'Neill, the former Goldman Sachs Group chief economist who coined the term BRIC: 

The BRICs path assumed China would grow 5% a year in the decade 2020-29 and I have no reason for changing this. If it does, and so long as the renminbi doesn't decline a lot in value, then by the end of the decade, China will be very close to being as big in current dollar terms as the US.

As this decade nears its end, China has major problems positioning itself in the world. As evidenced by the Uighur situation, China's approach to life now gets much more global attention than when it was smaller. In the coming decade, China has to somehow develop a more subtle and sophisticated stance on many of these issues, and I am not sure Beijing fully realizes this yet.

Edward Yardeni, president and chief investment strategist at Yardeni Research: 

Demography is starting to really weigh on China's growth. China is rapidly evolving into the world's largest nursing home.

They are going to have to provide a social safety net for these folks who are going to get older and need health care. If they don't do that, they are going to depress their consumers. When you want to be a superpower, there are a lot of factors that matter, and demography is certainly one of them.

The biggest takeaway is China produced 60% of the world's debt over the last ten years and is the biggest driver in global economic growth. A slowing China means the global economy will likely remain stagnate in 2020.