China begins another industrial downleg

Advertisement

From HSBC:

The strong rebound in growth in 1Q17 has provided Beijing with a welcome opportunity to tackle the issue of financial deleveraging. This had led to a rise in onshore rates – up c35bp in April alone – even though US rates have been edging down. Like Chinese corporates, the country’s financial institutions have rapidly expanded their balance sheets over the last few years; their assets now total RMB232trn vs their US counterparts’ RMB110trn. At the same time, more transactions are taking place within the financial system rather than in the real economy, significantly reducing credit efficiency while increasing financial market risks. In response, regulators are enforcing the strongest financing deleveraging measures since the cash crunch that rattled the market in 2013, causing a decline in the stock and bond markets.

The deleveraging efforts rely on the economy’s improved ability to endure higher borrowing costs. As the rebound loses steam, we think credit stress and defaults will begin to rise. The fall in the stock and bond markets is also complicating companies’ refinancing efforts. While the regulators want to press on while they have the chance, if they tap the brakes too hard they will come under pressure to ease off in order to protect economic growth. The key question for the regulators and the market is no longer whether China has a credit problem. Rather, it is how China can fix the problem and what price is it prepared to pay?

The full text of this article is available to MacroBusiness subscribers

$1 for your first month, then:
Cancel at any time through our billing provider, Stripe
About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.