Fi­nan­cial tur­bu­lence but no cri­sis in mar­kets: Ex­pert

China Daily (Canada) - - BUSINESS - By LI JIABAO

China’s fi­nan­cial mar­kets are likely to see fre­quent de­faults this year de­spite the re­cent avoid­ance of such a mea­sure by a trust prod­uct, a se­nior econ­o­mist with The Econ­o­mist Group in China has warned. Xu Sitao, chief rep­re­sen­ta­tive of The Econ­o­mist Group in China, said that the liq­uid­ity squeezes of June and De­cem­ber 2013 will be­come a “com­mon sce­nario” this year and the de­fault of trust or wealth man­age­ment prod­ucts will con­tinue to emerge.

“At present, shadow bank­ing is worth pay­ing the great­est at­ten­tion to in China. China must step up re­forms in fi­nan­cial sec­tors, other­wise, the prob­lem will be very wor­ri­some,” Xu said.

Al­though tur­bu­lence will be seen in the fi­nan­cial mar­ket, an all-out “Lehman Broth­ers” cri­sis is im­pos­si­ble de­spite the con­cerns of some over­seas in­vestors, he added.

Ear­lier last month a 3 bil­lion yuan ($490 mil­lion) in­vest­ment prod­uct, known as Credit Equals Gold No 1, avoided a de­fault on Jan 31, when it was due to ma­ture. The prod­uct was is­sued three years ago by China Credit Trust, a leading Chi­nese trust com­pany. The money was raised for a coal miner, Shanxi Zhenfu En­ergy Group, with ad­ver­tised an­nual re­turns of about 10 per­cent. It was dis­trib­uted to wealthy in­vestors by In­dus­trial and Commercial Bank of China Ltd, China’s big­gest bank. The case caused wide­spread fears within the fi­nan­cial sec­tor.

The drop in the man­u­fac­tur­ing Pur­chas­ing Man­agers’ In­dex in Jan­uary re­vealed a per­sis­tent down­turn pres­sure on China’s econ­omy. It’s too early to get op­ti­mistic about the ex­ports data last month. The fi­nan­cial sys­tem is likely to suf­fer tur­bu­lence in some ar­eas.” XU SITAO CHIEF REP­RE­SEN­TA­TIVE, THE ECON­O­MIST GROUP, CHINA

But an un­known third party stepped for­ward to buy an eq­uity stake in the coal miner, which won a valu­able min­ing li­cense just in time to set­tle the deal and caused a mod­est loss for the orig­i­nal in­vestors rather than big­ger dam­age. Nei­ther ICBC nor China Credit Trust iden­ti­fied the third party or ac­knowl­edged where the funds came from to re­pay in­vestors.

“Jan­uary’s bailout re­flected the govern­ment’s wor­ries about any trig­ger­ing of a large-scale de­fault,” Xu said.

Hong Kong- head­quar­tered Credit Ly­on­nais Se­cu­ri­ties, one of the re­gion’s largest and most highly rated in­de­pen­dent eq­uity bro­kers and fi­nan­cial-ser­vices groups, which fo­cuses on pro­vid­ing broking, in­vest­ment bank­ing and as­set man­age­ment ser­vices to cor­po­rate and in­sti­tu­tional clients around the world, is pay­ing close at­ten­tion to the sit­u­a­tion. Its chief eq­uity strate­gist Christo­pher Wood said if there is a to­tal bailout — or per­haps even worse a bailout through the back­door as some spec­u­late — it will be a sig­nal that the govern­ment’s talk of pur­su­ing re­form is per­haps not gen­uine. This will in­crease macro risks, at a time when China’s trust as­sets now to­tal more than 10 tril­lion yuan.

Ac­cord­ing to mar­ket es­ti­mates, around 5 tril­lion yuan of trust prod­ucts ma­ture this year with a peak of around 1 tril­lion yuan in May.

The In­tel­li­gence Unit of The Econ­o­mist down­graded China’s gross do­mes­tic prod­uct growth fore­cast to 7.2 per­cent this year from a pre­vi­ously re­ported 7.3 per­cent be­cause the need to curb credit growth poses risks to the growth out­look. China’s GDP ex­panded 7.7 per­cent in 2013, the same pace as in 2012, which was the slow­est since 1999.

“The drop in the man­u­fac­tur­ing Pur­chas­ing Man­agers’ In­dex in Jan­uary re­vealed a per­sis­tent down­ward pres­sure on China’s econ­omy. It’s too early to get op­ti­mistic about the ex­port data last month. The fi­nan­cial sys­tem is likely to suf­fer tur­bu­lence in some ar­eas,” Xu said.

He added the 7.2-per­cent GDP growth fore­cast for the world’s sec­ond­largest econ­omy is nei­ther a bad thing nor a sig­nal of a hard eco­nomic land­ing, but a nec­es­sary route for eco­nomic re­bal­anc­ing and ad­vanc­ing re­forms.

“China should learn to get re­laxed about slow­ing eco­nomic growth and step up re­forms in fi­nan­cial sec­tors,” Xu said. “Per­son­ally I hope the lo­cal cur­rency will slightly de­value to de­velop some op­por­tu­ni­ties for ex­porters and cre­ate a bet­ter ex­ter­nal en­vi­ron­ment for re­forms at home.”

He added the ta­per­ing of quan­ti­ta­tive eas­ing (print­ing more dol­lars) in the United States hit China’s ex­ter­nal en­vi­ron­ment for ad­vanc­ing do­mes­tic re­forms, while US eco­nomic im­prove­ment, which fea­tures “job­less re­cov­ery”, would not boost con­sump­tion or in­crease de­mand for Chi­nese ex­ports.

Zhu Haibin, J.P. Mor­gan China Chief Econ­o­mist, said the growth mo­men­tum has soft­ened from the lat­est peak of the third quar­ter of 2013 and the slow­down is mainly driven by the shift of pol­icy pri­or­ity to­ward struc­tural re­form (from sta­bi­liz­ing growth), the tighter rules on lo­cal govern­ment ex­pen­di­ture (re­lated to anti-cor­rup­tion) and the con­tin­u­a­tion of “credit ta­per­ing”.

“New sources of growth may emerge as struc­tural re­forms move for­ward (for ex­am­ple lib­er­al­iz­ing pri­vate in­vest­ment, sup­port­ing the ser­vice sec­tor and eas­ing the one-child pol­icy), but the pos­i­tive im­pact may come with a de­lay. There­fore, in the near term, the bal­ance be­tween struc­tural re­forms and downside risks (both on the eco­nomic and fi­nan­cial sides) re­mains the big­gest the chal­lenge for pol­i­cy­mak­ers,” Zhu said. Con­tact the writer at li­ji­abao@ chi­


A woman leaves the head­quar­ters of the People’s Bank of China, China’s cen­tral bank, in Bei­jing, on Nov 20, 2013.

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