La bajada de rating de Moody´s es otra señal de los retos a los que se enfrenta China, que está haciendo malabares con los problemas crecientes de apalancamiento, disminución del crecimiento económico y reformas estructurales. Sin embargo, y pese a estas presiones crecientes, estamos convencidos de que el Banco Central Chino y sus reguladores tienen un control total de la situación. Particularmente, el reciente endurecimiento regulatorio de China debería ayudar a deflacionar los mercados de crédito del país y llevar a una estabilización a largo plazo del mercado.

An apparent shift in policy from China’s Central Bank has increased concerns of an imminent credit crisis. We think that is unlikely and the recent tightening measures are actually a step in the right direction for the stability of the country’s credit markets.

Regulatory tightening, not monetary tightening

Following years of monetary loosening and fiscal stimulus, in February 2017, China seemed to reverse course. Since then, the People’s Bank of China (PBoC) has raised interest rates on multiple monetary policy tools – including open market operations and medium-term lending facilities – which is a de facto tightening of liquidity. Market rates such as the overnight SHIBOR have reacted.

Chart 1: Overnight SHIBOR rising in rate corridor

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SHIBOR overnight

SLF overnight

Interest on excess reserves

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Note: SLF = Standing lending facility Source: DataStream, FIL, 16 May 2017

It is this move that has led some international investors to start fretting about an imminent crisis; after all, the potential consequences of it include an imminent liquidity crisis for small lenders and/or slowdown in China’s medium-term growth.

While we do see scope for the consolidation of lenders, we think the PBoC is in control. The measures taken to manage liquidity should be viewed as regulatory tightening - a joint effort with the regulator to bring non-bank credit creation under control. While the short-term reaction is for yields to rise, the intent is not to starve corporates but to slowly deflate what is widely regarded as an inflated credit market.

Should rates rise to an extent where corporate ability to thrive is compromised and growth slows significantly, the PBoC would still have the ability to either inject more liquidity into the system or push large banks to increase their lending activity.

Stabilizing the credit market

The PBoC’s tightening measures are taking place alongside a series of regulatory measures aimed at tightening interbank liquidity and reining in non-bank lending (shadow banking).

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Historically, and in contrast to developed markets, interbank rates in China have had little impact on the real economy as the Chinese financial system has been dominated by the state. In this system, the regulator uses quotas and other guidance to influence state-owned banks. It is these measures that ultimately determine the cost of money, irrespective of interbank rates.

However, the rise of non-bank lending has seen the link between money market rates and the real economy grow stronger, as non-bank lenders are using money markets to finance loans. The PBoCs recent moves to target the money market, tighten liquidity and effectively raise short-term rates, has made it more expensive for non-bank lenders to borrow money, reducing the proliferation of credit funding.

We would expect the stabilization to be led by a slowdown in credit growth and overall leverage. In turn, constrained credit expansion should tame inflationary pressures. Taming inflation is critical, as savers’ bank deposits are the bedrock of China’s bank liquidity. A recent surge in inflation has reduced the purchasing power of these savers, enticing them to reduce deposits and withdraw liquidity from banks.

What really matters

The most common precursor of a debt crisis is a liquidity crisis, but we have good reason to believe that China is well-shielded from a liquidity squeeze.

First, a high savings rate combined with a tendency to leave cash in banks means that liquidity is readily available. Second, and in stark contrast to Western economies, virtually all Chinese debt is domestically financed and provided by local banks. Third, capital controls are still in place and, as shown over the past months, can be rapidly tightened if needed.

Finally, the Chinese economy is still dominated by large state-owned companies. This state control protects these companies from the market and allows the government to gradually restructure them.

What to watch for

While we do not see the risk of an immediate crisis unfolding, we do closely monitor what we consider to be leading indicators.

Top of our list is the risk of a policy mistake. Policy intervention has been the key driver for growth and stability since the financial crisis. A misstep could send tremors across markets. A policy mistake could take many forms, from growth overshooting to the regulator’s inability to contain shadow banking.

Next is the risk of increased capital outflows. An ongoing drainage of liquidity could force local banks to increase their exposure to international markets. As international standards would be applied to assess Chinese bank stability, funding costs would probably rise, putting further pressure on the economy.

Finally, the risk of a loss of confidence by savers should not be underestimated. A run on the banks would considerably weaken their position.