China’s financial regulators appear determined to tighten rules further, boost oversight
Jittery investors urged not to overreact to ‘mild deleveraging’ of marketplace, amid effort to bolster and prioritise financial security
China’s financial regulators are signalling that they will continue to tighten rules and slash leverage, regardless of the short-term pain their moves bring, keeping with President Xi Jinping’s order to prioritise financial security.
The Financial News, a publication under the People’s Bank of China (PBOC), said in a commentary on Monday that market participants should refrain from exaggerating small-market volatility, lest their actions disrupt regulators’ determination to enhance supervision amid a “mild deleveraging” of the marketplace.
“There’s no need to worry about the current monetary policy and regulatory policies,” the commentary said. “Stability remains the key tone.”
Investors, however, heavily sold off their holdings in China’s stock, bond and commodities futures markets in recent weeks, on the increased regulatory efforts and their increasingly hawkish tone.
The PBOC did not renew 230 billion yuan medium-term lending facilities mature last week, fueling concern that the era of easy money already has come to an end amid China’s deleveraging strategy and efforts aimed at preventing systemic risks.
On top of the release of a number of banking supervision regulations in the past two months - the latest one is collateral management guidance launched on Monday - , the Ministry of Finance has reiterated a ban on local governments’ implicit financial guarantees and debt raising.
George Xu, an associate analyst of rating agency Moody’s, said that China’s shadow banking sector has more than doubled since 2012 and grew 21 per cent to 64.5 trillion yuan last year, a high level that triggered further government tightening.
“More marginal borrowers have turned to shadow financing after China started window guidance over credit extension to such sectors as property and tightened corporate bond issuance,” Xu said.
Shadow banking activities saw a surprising return in the first quarter, with a large increase in entrusted loans, trust loans and undisclosed banker’s acceptances.
Xu said he believes the recent market worries came from an expectation that the tightening trend would come but that actual policy implementation would be gradual. “The PBOC does not want to see a free fall of credit growth,” he said.
Credit and liquidity support are vital for an investment-driven economy such as China’s, especially when economic indicators signal that China’s once runaway growth is losing steam. The April Caixin composite purchasing managers’ index dropped to 51.2, the lowest level since September 2016.
Zhao Xijun, deputy dean of the school of finance at Renmin University of China, said the regulation-tightening aims to address a series of financial issues, including the 2015 stock market rout which triggered the need for a huge and costly public bailout fund, forex market volatility, high financial leverage and fraud.
The Chinese central bank has initiated what it calls a macro prudential assessment tool from the first quarter to eliminate systematic risks. A further tightening of regulatory requirements, a move to reduce the interbank financial connection and push banks back to balance-sheet lending, are now widely expected in the coming quarters.
“China’s monetary policy is goal oriented and it wishes for policy continuity and stability if goals – including economic growth and inflation target - can be met.”
Now that the country’s first quarter growth of 6.9 per cent stands above the annual target of 6.5 per cent growth and consumer inflation is well capped below the target of 3 per cent, Zhao said he believes more pressure for a monetary policy shift will come from overseas.
The US Federal Reserves has hiked interest rates three times since 2015, while the European Central Bank already has promised no more expansion of its balance sheet.
PBOC governor Zhou Xiaochuan said at the Boao Forum for Asia at the end of March that the easing cycle is close to an end worldwide. The central bank has increased interbank policy rates twice so far this year, and may continue to do so if the Fed hikes interest rates.
Larry Hu, chief China economist of Macquarie Securities, said he did not believe that tightening could lead to a credit crunch or cause a recession.
“The PBOC now has enough liquidity tools to prevent a credit crunch like June 2013’s,” he wrote in a research note.