MNI Analysis: China Fin Dlvg Campaign Only Half Way Through

New Rules Will Determine The Future Direction

     BEIJING (MNI) - China's financial deleveraging campaign has only halfway

complete and the new asset management product regulation rules will reveal the

direction with which the second half will take.

     Financial deleveraging is a blurry concept, as no official statement has

made clear to the market which indicator the government is watching most

closely. From the micro level to macro level, there are different measures to

gauge financial leverage, including leverage ratio in the bond market, the

banking sector, and so on.

     TACKLING CHANNEL BUSINESS ACTIVITIES 

     However, regulators have made clear the government's main aims of its

financial deleveraging campaign is to tackle the idle cycling of money in the

financial system and prevent financial risks. In this sense, curtailing the

rampantly growing "channel business" - which is used by mainly banks to get

around regulatory restrictions - will be the main focus point of regulators.

     So far, the financial deleveraging campaign has successfully curbed the

growth of this channel business.

     The growth rate of "equity and other investments" of banks, an indicator of

channel business, has fallen from 45.9% y/y in the beginning of 2017 to 0.5% y/y

in February this year. Banks' lending to non-bank financial institutions also

saw its growth rate plunge to 3.2% in February from 31.4% in the beginning of

2017.

     M2 growth also fell to 8.8% y/y in February, compared with 10.4% (after

revision) in the same period last year. M2 growth contributed by non-standard

asset also declined sharply to 0.3 percentage points in February, compared with

5.3 percentage points in January 2017.

     The next step of the deleveraging campaign is to tackle with the potential

risks generated by the asset side of the banks, mainly the way that banks issue

credit, and the risks on banks' outstanding liabilities, like guaranteeing

principle payments of wealth management products.

     INCOMING RULES TO CAUSE LARGE ADJUSTMENT

     The new asset management product regulation rules, which are expected to

come out soon, if they remain the same as the draft announced last November,

will likely cause a large scale adjustments of banks' balance sheets. Preventing

banks from fully paying back defaulted products or products suffering from

losses might cause a capital draw-back from wealth management products, causing

a mismatch on asset side and liabilities side, and result in high selling

pressure if asset side cannot adjust quickly enough.

     The delay of the publishing of the rules - from January to present - also

suggests the regulators have been very cautious on this matter, and they seek to

find a balance between financial deleveraging and preventing systemic financial

risks, which will be a big test for regulators' abilities as well as the risks

pent up in the system.

     The primary market rates of negotiable certificates of deposit also

remained at a high level, though falling recently. The net issuances of NCDs

picked up since the start of the year, showing that banks' liability pressures

remain quite high.

     Therefore, it is too early to say the financial deleveraging campaign has

approached its end, and the difficult stage might have just started. However, it

will depend on how the central government and regulators gauge the current

condition.

     SHORT-TERM PAIN VS LONG-TERM PAIN

     A stricter deleveraging would cause short-term pain on both the financial

sector and economic growth, especially considering that global financial market

and political uncertainties have risen. While a more relaxed deleveraging

campaign would minimize short-term risks but increase longer-term risks, perhaps

to an uncontrollable level.

     How the central government will choose will be signaled in the regulation

rules on asset management products, which will provide a clearer signal to the

market.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

--MNI London Bureau; +44-203-865-3820; email: Ian.Stannard@marketnews.com

[TOPICS: M$A$$$,M$Q$$$]