Across The Border | China’s tighter financial regulations seen having minimal impact on economy

Small and medium banks are most at risk under China’s regulatory tightening, but the broader impact will be modest as Beijing seeks to minimise disruption to the economy, say analysts.

“Lessons learned from the June 13 [2013] cash crunch, new policy tools and the policy priorities ahead of the 19th Party Congress all suggest to us that a 2015-like crisis will be averted,” Citi analysts led by Liu Ligang said in a research report issued on Wednesday.

Chinese financial regulators have moved towards tighter oversight since March. The People’s Bank of China (PBOC) has been squeezing interbank liquidity and has pushed for economic deleveraging. The China Banking Regulatory Commission (CBRC) has issued documents and guidance urging banks to implement self-inspection of their asset management businesses and rein in interbank borrowing and off-the-book business transactions.

The China Insurance Regulatory Commission (CIRC) and China Securities Regulatory Commission (CSRC) have respectively published documents and introduced measures stressing tighter supervision and risk control.

The latest regulatory moves, dubbed “competitive regulation” by investors, referring to the intensive and frequent actions taken by regulators in response to the leadership’s call to clear out financial risks, have unnerved China’s real economy as well as its financial markets.

As a consequence, April’s economic data was weaker, commodities have been sold off, money-market rates have surged, bond-market yields are inverted, and the A-share market has slumped.