Financial turbulence but no crisis in markets: Expert
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 warned on Monday. 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.
“Last month’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.