From interbank tightening to SOE deleveraging:HSBC China Monetary Conditions Indicator (Aug 17)

It’s been nearly six months since the ‘financial deleveraging’ policy first came toprominence. The combined effect of higher interbank rates, tighter liquidity andmultiple prodding efforts from regulators led to sharp moves in the market, beforethese quieted down. How should we assess these policies and what are the nextsteps? Data suggest that policymakers have achieved some success, as banks pulledback from interbank borrowing (down by over RMB2trn from December 2016 levels)and reduced the issuance of interbank certificates of deposit. The stock of wealthmanagement products has also declined, including the off-balance sheet portion.

    After claiming some ‘low-hanging fruit’, further regulatory reforms are likely.

    Policymakers, however, have again assured the market recently that they will moveflexibly and cautiously, and be mindful of the negative impact on growth. Meanwhile,the overall policy agenda on risk prevention has shifted to state-owned enterprises(SOEs). SOEs account for over 70% of corporate debt in China, and 50% of systemwidedebt but produce less than a third of economic output. The economic rationaleis overwhelmingly in favour of faster debt restructuring. With cuts to overcapacity aswell as recent anti-pollution measures, progress is already picking up in heavyindustries. The continued recovery in the manufacturing sector should provideopportunities for progress to accelerate after the 19th Party Congress.