The key to Chinese reform

Macquarie has a nice warp on China today:

China’s top leaders just finished the National Financial Work Conference, which is held every five years. The focus of this year’s meeting was on reducing financial risks. A committee will be established to oversee the financial sector, but it’s far from the “super-regulator” which had been speculated by the market for more than a year. The short-term impact of the Conference is limited and we maintain our view on liquidity and interest rates for the remainder of this year. However, the Conference shows that top leaders have some new understandings about the limitation of financial reform after four boom-and-bust financial cycles following the previous Conference held in 2012.

The short-term impact of the Conference is fairly modest, as it simply reiterated what the market has already known for more than ten months. China’s financial policy stance took a sharp U-turn in August 2016, after the Politburo finished its quarterly meeting on economic issues. Since then, containing financial risks by deleveraging the financial system has become the focus of policy makers. The change has two bigger backdrops. First, 2016-17 is the critical period of power transition and thereby the last thing policy makers want to see is another credit crunch or stock market rout. Second, China’s economy rebounded in early 2016 thanks to the 3Rs (Reflation, Restocking and Real estate). Therefore, during the Politburo meeting last summer, policy makers viewed the next 12 months as the window for focusing on financial stability instead of economic growth.