The Threat Of A Chinese Financial Crisis Is Growing
The Threat Of A Chinese Financial Crisis Is Growing –
At the beginning of 2016, markets around the world started to slide on speculation that China was rapidly heading towards a financial crisis. Twelve months on, and no such crisis has yet emerged.
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The Threat Of A Chinese Financial Crisis Is Growing
Analysts at Morgan Stanley believe that China is living on borrowed time. The significant sell-off in China’s bond market post-Fed rate hike has led to market concerns of a liquidity crunch within the country. The People’s Bank of China injected Rmb 205 billion into the country’s credit markets between December 13 and December 15 in an attempt to loosen credit conditions after a broad-based sell-off in China’s bond market which saw yields spike. In particular, the 10Y government bond yield jumped 22bp to 3.45%, the highest level since August 2015.
The Federal Reserve’s decision to hike interest rate isn’t the only factor sending jitters through China’s bond market. As well as higher US interest rates, the People’s Bank of China has also been attempting to curb leverage in the bond market by tightening wholesale funding rates. At the same time, Chinese banks/insurance companies have been conducting their year-end asset rotation, which this year entails the shift away from bonds due to the expectation of further tightening from the country’s central bank. Further, China’s bond investors have become increasingly cautious since the Rmb 500 million bond default by Hualong Securities on December 13, as well as market concerns of a possible bond default by Guohai Securities.
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So, is this the beginning of the great Chinese financial crisis, or is the market just over reacting as usual?
Analysts at Morgan Stanley believe that these recent developments in China’s credit markets are nothing to be overly concerned about. Even though monetary policy is turning less accommodative around the world, the bank’s analysts believe a Chinese liquidity crunch or financial shock is unlikely in the near term:
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“The Fed rate hike and recently higher interbank interest rates have led to market debate on whether there could be a liquidity crunch in China. We have seen a less-dovish monetary policy stance due to concerns over asset bubble risks,as reflected by PBoC’s tightening bias over the wholesale funding rates to curb bond market leverage. We also think that if inflation continues to surprise on the upside (our base-case estimate is a fast reflation in PPI YoY in the coming two to three months, reaching 6% by Jan/Feb 2017), PBoC will likely turn more hawkish, leading to slower money supply growth and posing risk to our call of a 25bp rate cut in 3Q17.”
“But a liquidity crunch or financial shock is unlikely: We think the scope of monetary tightening will be modest, and an aggressive tightening (such as a policy rate hike) is unlikely, as the reflation will likely be short-lived and soften from 2Q17 onward. Meanwhile, we expect that while policy makers have been tightening in the interbank market to curb bond market leverage, it will inject more liquidity via OMOs and lending facilities in the near term to stabilize the expectation and avoid a liquidity panic. That said, we think the bond market correction may have not ended yet in the medium term due to the asset rotation from institutional money and expectations of higher rates.”
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Source: valuewalk
