Have Financial Regulators Brought an End to China’s Deleveraging Drive?


Leading figures from China’s banking sector have interpreted recent actions by the country’s top financial regulators as indicating that the deleveraging drive launched towards the end of 2016 may soon be moderated.

Huang Zhilong, chairman of Suning Financial’s macroeconomic research centre, said to China Securities Journal that the “emergency phase” of the financial sector crackdown may have already come to an end, and that regulators will soon switch to more moderate tactics.

The China Banking Regulatory Commission recently issued a survey to Chinese banks in order to ascertain the scope and nature of various assets on their balance sheets, including shadow banking instruments such as wealth management products and entrusted investments.

Given the strenuous regulatory measures already imposed on various forms of shadow banking such as WMP, entrusted investments and channel investments, Huang said the survey likely indicates that CBRC hopes to determine the effectiveness of established policies before it moderates regulation of the financial sector.

Analysts also view the Chinese central bank’s injection of a large volumes of liquidity into the system as flagging moderation of policy by the financial authorities.

The People’s Bank of China recently poured 498 billion yuan into the financial sector by means of medium-term lending facilities, which many observers viewed as a move to stabilise cross-seasonal liquidity levels during the transition towards the second half of 2017.

According to Li Qilin, chief macroeconomic researcher with Lianxun Securities, financial deleveraging has led to a “credit drought” that has hurt the real economy by raising financing costs.

Regulators hope to reduce the adverse impact of deleveraging on the real economy by moderating their policies.

“The thinking behind the central bank’s current injections embodies the adaptability of regulatory coordination,” said Li. “As we approach the middle of the year, there are continual expectations of tightening capital due to macro prudential assessments and regulatory pressure.

“Amidst stable, neutral monetary policy, the central bank must supplement liquidity when appropriate in order to stabilise capital, yet it must also avoid market expectations of loosening.”

Huang Zhilong said that China’s financial deleveraging should proceed in a moderate and gradual fashion, and should not be pushed through rapidly within a brief period, which can have the effect of triggering financial stability instead of preventing it.

“Over the past two months the regulatory tempest has caused an uproar on financial markets, and people suspect that vigorous deleveraging has been excessive,” said Huang.

“Additionally tightening of monetary policy in the first quarter led to a continuous rise in rates on the market for funds, and the entire financial system faced a sharp increase in pressure.

“Financial regulators will now advance using more moderate methods, but the direction of deleveraging won’t change.”