China’s state-run media has called for Beijing’s ongoing deleveraging campaign to be conducted in an “orderly” fashion, with a view to more effectively containing systemic financial risk.
The editorial entitled “Orderly Deleveraging Stabilises Financial Market Expectations” (有序去杠杆稳定金融市场预期) was published by the Xinhua News Agency’s Economic Information Daily on 12 February, and sings the praises of the central government’s current deleveraging campaign while warning of challenges ahead.
“Orderly deleveraging is the key to the effective prevention and control of risk,” states the editorial.
“For over a year now, economic malfeasance in China has been effectively contained, the scale of interbank assets and debts has contracted for the first time, financial institutions have strengthened their active willingness to ‘shrink balance sheets,’ and financial deleveraging has been implemented in an orderly way.
“Following the continued, longitudinal deepening of financial deleveraging, the difficulty and complexity of future deleveraging will increase, and attention needs to be given to the stabilisation of financial market expectations, and the creation of an appropriate public mood for orderly deleveraging.
“It should be understood that financial deleveraging is a process of continuous hazard, and the utmost caution is needed during operation…it’s frequently said that financial leveraging is easy and financial deleveraging is extremely difficult.
“The main reason for this is that financial leverage involves the creation of debt-credit relations, and financial deleveraging actively destroys certain debt-credit relations, making them extremely susceptible to debt risk disturbances, as well as highly liable to trigger chain reactions.
“During the process of financial deleveraging, interbank credit and debt maturities are quite short, and can be automatically cleared upon coming due. This normally will not trigger sizeable risk, and is one of the easier parts of financial deleveraging.
“However, following continuous longitudinal deepening of financial deleveraging, especially when it involves corporate deleveraging, the difficulty and complexity of deleveraging will sharply increase.
“Everyone knows that the operations of these enterprises suffer from innate fragility, and their cash flows are highly dependent upon external financing… [they have] already formed special ecosystems via complex networks of transactions in goods and services, as well as affiliate and guarantee chains.
“Destroying debt-creditor relations means remoulding these special business ecosystems, and the impact and shock they bring are contagious in character.
“There is an objective need to stabilise the financial market environment sufficiently to withstand the shock of deleveraging measures.”
“Following the widespread application of information technology in the financial realm, information flows have already become a key factor impacting financial markets…the process of financial crisis creates a drought of liquidity on financial markets, and even a genuine liquidity shortage on non-financial markets, with a lack of people willing to provide capital.
“During the process of financial leveraging, the dissemination of incorrect information spurs financial market investors to behave in an irrational and sheep-like manner.
“During the process of financial deleveraging, however, there is also the possibility of the spread of incorrect information causing a stampede amongst financial market investors, triggering intense fluctuations on capital markets, a surge in rates on money markets, and the spillover and spread of credit market risk.
“This causes massive disruption to the process of financial deleveraging, and greatly increases the cost of financial leveraging.
“It is thus evident that stabilisation of financial market expectations and the prevention of sharp fluctuations in sentiment is the necessary precondition for orderly deleveraging.”