An essay published by the official flagship publication of China’s central bank points to the possibility of a rate cut later this year.
The essay published in the People’s Bank of China’s Jinrong Shibao entitled “Steadily Advancing Deleveraging, Maintaining Stable Liquidity” (稳步推进去杠杆， 保持流动性稳定) notes that China’s leverage rates have been riding high for the past two years, as well as “shifted from the real to the empty,” which will have an adverse impact on the stable growth and upgrade of the real economy.
Author Zong Liang, Bank of China chief researcher and a member of Jinrong Shibao‘s specialist expert committee, notes that ever since the Politburo convened a meeting concerning national financial security on 25 April, Chinese regulators have adopted emphatic measures to deal with risk and properly control leverage levels.
At the recent National Financial Work Conference held in Beijing from 14 – 15 July, President Xi Jinping further reiterated the need for economic deleveraging, referring to it as a task of “the utmost importance” with respect to China’s state-owned enterprises, while also emphasising the need to maintain stable monetary policy and growth.
“Remarks made at the National Financial Work Conference in relation to corporate deleveraging in fact make clarify the relationship between corporate deleveraging and financial deleveraging, with corporate deleveraging being fundamental.”
The deleveraging drive did little to dent growth in the first half of 2017, which sustained the momentum from the second half of last year to reach 6.9% and surpass expectations.
Zong notes, however, that against the background of the deleveraging drive interest rate levels have risen, leading to certain adverse outcomes including a precipitous drop in corporate bond issuance.
Shibor for all maturities have risen to their highest levels in nearly two years. As of 21 June the Shibor overnight rate was 2.889%, 0.68 basis points higher than at the start of the year, while the 3 month rate had risen 1.4 basis points compared to the outset of 2017 to hit 4.688%.
This rise in interest rates has caused an increasing number of Chinese companies to either defer or outright cancel their bond issuance plans, with a year-on-year drop in corporate bond financing of nearly 1.79 trillion for the first five months of 2017.
In addition to raising corporate financing costs, rising interest rates are also having an adverse impact upon China’s efforts to upgrade its industry structures, and increasing risk by putting more pressure on comparatively indebted companies.
US rate hikes and a potential shrinking of the Fed’s balance sheet in the near future could also put further pressure on Chinese interest rates, leading Zong to conclude that macroeconomic policy must on striking a balance between corporate deleveraging and stable liquidity, in order to avoid “over-adjustments” resulting from policy reduplication.
For these reasons, Zong says PBOC will make appropriate adjustments to monetary policy in response to changing circumstances during the second half.
“In future the central bank will ‘cut the peaks and fill in the valleys,’ via the increased usage of monetary policy tools such as repo agreements and medium-term lending facilities, in order to iron out disruptions to liquidity caused by provisional and seasonal factors,” writes Zong.
“Based on circumstance [PBOC] should make appropriate and timely expansions to liquidity to ease market concerns about liquidity levels. It should focus on market liquidity conditions at key moments, and make appropriate micro-adjustments to liquidity increases when financial regulation lifts in severity or during key assessments, and continuously use open market operations that ‘lock short and release long’ to release long-term liquidity injections.”
Zong also explicitly points to the possibility of rate cut, in order to expedite reductions in corporate financing costs.
“In the first half of this year the central bank used methods such as increases in MLF rates and withdrawal of liquidity to force the financial sector to deleverage. The initial effects of deleveraging policy are becoming apparent, but new problems such as a rapid rise in money market rates and bond financing difficulties have appeared simultaneously.
“Since the start of the year the RMB-USD exchange rate has risen slightly amidst fluctuations, and it is expected to remain fundamentally stable in future. This is of benefit to easing the exchange rate constraints faced by Chinese monetary policy, and raising the proactive and flexible nature of adjustments to interest rates.
“Under such circumstances, the rates for MLF’s and other policy tools will remain unchanged or see slight declines, for appropriate reductions in financing costs.
“This will not put marked pressure on RMB exchange rates, and can also guide financial institutions in providing vigorous support to the real economy, creating an excellent financing environment, and nurture new drivers of economic growth.”