DEALING with the 26.7 trillion yuan shadow banking industry in China, which falls out of the balance sheets of banks, may require tougher measures but the fear is that it may trigger huge risks.
“True deleveraging will require some painful steps, such as denying businesses new funding, letting more companies fail and accepting the potential increases in unemployment that result.
“That won’t be fun for anyone, but it will signal – as nothing else has – that China is finally serious about these problems,’’ said Bloomberg.
The current gradual approach to tackle this massive “bubble” is viewed as a way to avoid overadjustment that can derail growth.
“The risk in shadow banking is much higher as it cannot be controlled via standard tools of monetary policy, and the government is unable to help if players get into trouble.
“These players have no direct access to the money market; they can grow very big and resort to unsound levels of leverage, as there are no minimum capital requirements.
“They are too big to fail, and yet outside the reach of the central bank. Essentially, they are constrained by the extent to which others are willing to let them have access to money,’’ said Pong Teng Siew, head of research, InterPacific Securities.
Wealth management products (WMPs), which offer much higher yields than traditional bank deposits, have seen their popularity crimped.
“The regulatory crackdown this year – mostly in the form of more stringent guidelines on use of financial products – has seen the amount of WMPs outstanding taper off from a peak in April.
“In July, the bank watchdog is said to have told some lenders to cut the rates they offered on the products,’’ noted Bloomberg.
Shadow financing, a factor behind China’s property-price surge, has also come under the hammer. Regulators this year banned private-equity lending to developers for land purchases and banks were told in March to submit reports on their entrusted investments – funds that Chinese lenders farm out to external asset managers.
In the area of repurchase agreements (repos), where participants can get cash for set periods, a key tool to rein in borrowing was to boost funding costs in the money market. The amount of repos outstanding has come off since reaching a peak at the end of June, said Bloomberg.
“The authorities are expected to adopt a measured approach to restrain shadow banking to avoid over-adjustment via dampening of consumption and investment,’’ said Lee Heng Guie, executive director, Socio Economic Research Centre.
Growth in money supply (M2) has paced to a record low of 9.6% in May, said Lee, adding that the authorities are expected to step up regulations to curb risks.
M2 is a measure of money supply that includes cash, checking deposits, savings deposits, money market securities, mutual funds and other time deposits.
“China has been addressing this issue quite seriously but tactfully. Any drastic move will trigger systemic risks as the size of the sector is huge,’’ said Danny Wong, CEO, Areca Capital.
“It will be a delicate balancing act for China, which is determined to address economic imbalances via measures to deleverage.
“But these steps have to be taken in such a way that they do not pose a significant threat to the growth trajectory. This reflects its deep concern over possible repercussions, should the economy start to get unhinged,’’ said Nor Zahidi Alias, chief economist, Malaysian Rating Corp.
Factors being considered are geopolitical issues on North Korea and the threat of inward-looking trade policies in the United States.
“China has more monetary and fiscal policy flexibility than what is generally assumed, and this will help cushion its economy in a down cycle,’’ added Zahidi.
President Donald Trump has declared that the US is “locked and loaded,” to retaliate, while Kim Jong Un’s regime says it can launch missiles toward US soil in the Pacific as soon as this week.
Markets took fright at all this “swashbuckling.” Although US markets are said to have stabilised after dropping for three days, there may be more pain ahead.
“I’m not sure if there has been any meaningful rebound, as the S&P 500 index is still below the 50-day moving average,’’ said Pong.
“Historically, stockmarkets have generally shrugged off geopolitical events, and recouped losses, if any, within days or weeks.
“But it is hard to predict the extent and duration that geopolitical tensions will escalate or be contained,’’ said Lee, adding that fundamentals of business and economic cycles would carry the day.
“The market has been performing very well this year, and naturally needs a break. With improving global growth and macro outlook, emerging markets have higher potential to perform.
“Any short-term weakness presents a buying opportunity. We always look to buy cheap stocks for our long-term portfolios, as time is on our side to reap future profits,’’ said Wong.
Columnist Yap Leng Kuen hopes market turmoil caused by geopolitics may be temporary.
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