A senior researcher from China’s central bank has issued a warning against policymakers forcing through an excessively rapid deleveraging of the economy that could lead to debt deflation.
While financial regulators have stressed the need to deleverage the Chinese economy this year as part of efforts to reduce risk and prevent asset bubbles, one of the People’s Bank of China’s leading researchers has cautioned against pursuing this process with a surfeit of haste.
Xu Zhong, head of PBOC’s research department, said at the recently convened Northern Finance Institute that while policy makers must prevent a rapid increase in leverage from creating liquidity risk or asset bubbles, it must also implement deleveraging at a “rational pace.”
According to Xu policymakers must avoid an excessively rapid squeeze on credit and investment that could impede economic growth, as well as prevent deleveraging and shrinking balance sheets from causing debt deflation.
China’s regulators have implemented strong measures to deleverage the economy following an explosion in credit growth since the Great Financial Crisis.
PBOC has taken the lead in this regard, pursuing a “stable and neutral” monetary policy, with three hikes in open market rates since last year and significant reductions in reverse repo operations.
In addition to monetary restraint on the part of the Chinese central bank, the China Securities Regulatory Commission, the China Banking Regulatory Commission and the China Insurance Regulatory Commission have all issued a slew of directives since the start of the year as part of efforts to curb key risk points in interbank, wealth management and asset management operations.
One banking industry figure said to Beijing Business Today that the reduced inflation caused by a tightening of monetary policy would cause a small short-term ripple in the economy, that could potentially lead to a debt-deflation trap given the high debt levels borne by companies.
This could in turn lead to a malignant cycle in which manufacturers tighten prices, actual interest rates rise, debt levels worsen, and the the economy further contracts.