China deleveraging damage tops $500B
HOW MUCH pain can China’s leaders stomach? It’s becoming a key question for investors as the government’s stepped up campaign to rein in financial leverage ripples through markets.
The clampdown has erased at least $453 billion from the value of Chinese stocks and bonds since mid-April, spurred $21 billion of canceled debt sales and compelled the People’s Bank of China to inject $48 billion into jittery money markets. Sales of assetmanagement products by lenders and trust companies have plunged by more than 30%, while domestic real estate transactions have slowed and metals prices have buckled.
The upheaval hasn’t reached crisis levels yet. But as the nation’s equity crash in 2015 showed, market declines in China have a habit of snowballing. As authorities juggle the conflicting goals of curbing leverage and maintaining economic growth before a Communist Party leadership reshuffle later this year, some money managers are bracing for more turbulence.
“It would take a lot for the country to move into easing mode,” said Howard Wang, the Hong Kong-based head of greater China at JPMorgan Asset Management, which oversees about $1.8 trillion worldwide. “They will adjust their policies if markets go down another 10% or the currency cracks under pressure. Only these very drastic swings will make them move the other way.”
China’s banking, insurance and securities regulators have all played a part in the clampdown, focusing much of their attention on the nation’s shadow banking system. The investment products produced by that system have funneled huge sums of cash into local asset markets, but critics say they employ too much leverage, create dangerous asset-liability mismatches and reduce transparency. Shadow banking assets in China increased by 21% in 2016 to the equivalent of $9.3 trillion, or 87% of gross domestic product, Moody’s Investors Service said in a report on Monday.
The tightening campaign adds to a nine-month-long effort by China’s central bank to curtail excessive borrowing by gradually raising interest rates. The nation’s key seven-day repo rate has climbed to about 3% from 2.3% in August, and would likely be higher if not for cash injections by the PBOC via daily open-market operations over the past month. The rate topped 12 % during a brief shakeout in the shadow banking system in 2013.
Overseas money managers including Franklin Templeton Investments and Fidelity International have applauded the latest clampdown as necessary to curb a $28 trillion debt pile that threatens China’s long-term economic stability. Yet the reception by local investors has been anything but sanguine. —