Short-term pains will likely be traded for long-term eco­nomic health

China Daily (Hong Kong) - - BUSINESS -

China has been res­o­lute in con­tain­ing lever­age and fi­nan­cial risks, as it en­deav­ors to trade short-term delever­ag­ing pains for the long-term health of the econ­omy.

The Peo­ple’s Bank of China in­creased cash in­jec­tions early in June to shore up liq­uid­ity, fu­el­ing spec­u­la­tion that the au­thor­i­ties were flinch­ing from their on­go­ing delever­ag­ing cam­paign.

Yet the PBOC shifted its tac­tic dra­mat­i­cally in late June and starkly re­duced cash in­jec­tions.

On July 7, the PBOC re­frained once again from open mar­ket op­er­a­tions, on the grounds that liq­uid­ity within the bank­ing sys­tem re­mained am­ple.

That made it the 11th suc­ces­sive trad­ing day of open mar­ket sus­pen­sion, and the mat­u­ra­tion of 20 bil­lion yuan ($2.9 bil­lion) in re­verse re­pos has led to a net liq­uid­ity con­trac­tion of 630 bil­lion yuan in to­tal since June 22.

To fur­ther quash spec­u­la­tion, the PBOC re­it­er­ated this week that it would con­tinue with pru­dent and neu­tral mon­e­tary pol­icy, use a range of mon­e­tary pol­icy tools to main­tain sta­ble liq­uid­ity and place more im­por­tance on the preven­tion and con­trol of fi­nan­cial risk.

An­a­lysts said that given the Chi­nese lead­er­ship’s strong de­ter­mi­na­tion and steady growth of the econ­omy, the delever­ag­ing was un­likely to re­verse.

Call­ing the cam­paign a medium-term task, Citic Se­cu­ri­ties an­a­lyst Ming Ming said it would last a long while and re­main un­changed, but the pace and in­ten­sity of poli­cies would be fine-tuned to adapt to change.

Ming said China’s delever­ag­ing poli­cies so far had been ef­fec­tive, proac­tive and sci­en­tific, and yielded re­sults.

Growth of China’s broad mea­sure of money sup­ply, M2, hit a record low in May.

Banks’ out­stand­ing wealth man­age­ment prod­ucts or WMPs to­taled 28.4 tril­lion yuan at the end of May, down from 30 tril­lion yuan at the end of 2016.

The sec­tor’s fast ex­pan­sion had been con­sid­ered a ma­jor source of fi­nan­cial risk, as off-bal­ance-sheet WMPs chan­nel de­posits into risky in­vest­ments with­out ad­e­quate reg­u­la­tion.

How­ever, progress can­not be achieved with­out costs.

China’s GDP growth in the first quar­ter of this year, up from 6.8 per­cent in the pre­vi­ous quar­ter and above the gov­ern­ment’s full-year tar­get of 6.5 per­cent for 2017

An­a­lysts warned that China’s cor­po­rate sec­tor was feel­ing the stress and ex­pected a tougher time, as fund­ing costs were ris­ing and could rise fur­ther, while credit would be­come harder to ac­cess, es­pe­cially for small and medium-sized firms.

As the cam­paign con­tin­ues, an­a­lysts said liq­uid­ity con­di­tions would re­main tight for the rest of the year. The delever­ag­ing stress, cool­ing real es­tate mar­ket and mod­er­ate in­vest­ment growth will weigh on eco­nomic growth.

Chal­lenges for pol­i­cy­mak­ers lie i n coun­ter­ing debt, shadow bank­ing and long-term threats to the econ­omy, with­out desta­bi­liz­ing short-term growth.

While keep­ing liq­uid­ity rel­a­tively tight to un­der­pin delever­ag­ing, the Chi­nese au­thor­i­ties have been care­ful not to squeeze liq­uid­ity too much to avoid damp­en­ing de­mand.

PBOC data shows that to­tal so­cial fi­nanc­ing and new yuan-de­nom­i­nated loans both in­creased year-on-year in May, in­di­cat­ing ro­bust fi­nan­cial sup­port for the real econ­omy.

Li Pei­jia, a re­searcher with the In­sti­tute of In­ter­na­tional Fi­nance at Bank of Chi- na, said the cam­paign was still in a cru­cial stage, ex­pect­ing mon­e­tary pol­icy to re­main pru­dent but with a tight­en­ing bias in the sec­ond half of the year.

Pol­i­cy­mak­ers are un­likely to an­nounce new poli­cies to cut lever­age, but will fo­cus on bet­ter im­ple­men­ta­tion of cur­rent poli­cies while cre­at­ing a long-term mech­a­nism for a bal­ance between sta­ble growth and delever­ag­ing, Ming said.

Lian Ping, econ­o­mist with Bank of Com­mu­ni­ca­tions, said the gov­ern­ment should en­sure credit for small and medium-sized com­pa­nies and ease delever­ag­ing stress.

Be­sides act­ing on the mon­e­tary front, the gov­ern­ment should fur­ther im­prove its fis­cal pol­icy and un­veil sup­port­ive in­dus­trial mea­sures to en­sure sta­ble eco­nomic growth, said Zhang Jun, econ­o­mist with Morgan Stan­ley Huaxin Se­cu­ri­ties.

China’s econ­omy grew 6.9 per­cent in the first quar­ter of the year, up from 6.8 per­cent the pre­vi­ous quar­ter and above the gov­ern­ment’s full-year tar­get of around 6.5 per­cent for 2017.

ZHANG HAIYAN / FOR CHINA DAILY

A pedes­trian walks past the Peo­ple’s Bank of China’s head­quar­ters on West Chang’an Av­enue in Bei­jing.

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