MNI: China To Tighten Grip On Finance Despite Deleverage Shift

China’s top financial meeting has signalled authorities will take stronger control of the levers of lending in order to channel credit to the real economy in line with national strategy while limiting risks, calling for much tighter regulation of banks and local government borrowing despite dropping a previous call for deleveraging, policy advisors and economists told MNI.

The policy announcements by the twice-a-decade Central Financial Work Conference held between Oct 30-31 in Beijing indicate the People's Bank of China could introduce additional targeted tools, while financial institutions, heavily-indebted local governments and property developers can expect tighter oversight. The conference, which brings together state leaders and top bankers, will set the tone for financial markets over the next five years.

An advisor familiar with financial regulation said the removal of the call for deleveraging was a significant departure from 2017’s meeting and could lead to monetary expansion and further central government borrowing. Overall debt reduction was not appropriate while the economy continued to struggle, with challenges likely to persist for several years, he added.

Liu Lei, senior fellow at the National Institution for Finance and Development at the Chinese Academy of Social Sciences, predicted the overall debt/GDP ratio would rise by 10 percentage points in both 2024 and 2025 from the current 291%, as the central government expands its balance sheet to support the economy and local governments focus on swapping and curbing hidden debt. The central government will likely continue to add leverage next year after this year’s issuance of CNY1 trillion in additional treasury bonds, he said. (See MNI: China Stimulus To Keep 2024 Growth Over 5%, Advisors Say)

FINANCIAL RISKS

The advisor noted regulators will enhance oversight of any fresh attempts by local governments to hide debt off-balance sheet and incentivise their funding vehicles to become market-oriented companies, following the conference’s emphasis on lowering and preventing financial risks across a variety of sectors. (See MNI: China To Launch Debt Swaps To Address Implicit Liabilities)

Wang Jun, director at the China Chief Economist Forum and chief economist at Huatai Asset Management, told MNI that regulators will also crack down on unlimited expansion by property developers. The sector has soaked up financial resources that could more productively have gone elsewhere, while adding significant risk to the financial sector, Wang added.

Last week’s conference also referred to the exchange rate – a rare occurrence at a high-level meeting – stressing that the yuan should remain stable at a “reasonable and balanced level.”

Tan Yaling, head of the China Foreign Exchange Investment Research Institute, said the currency’s recent weakness had aroused concern. Authorities will tighten control on cross-border capital flows, particularly arbitrage trades, which they consider a key factor in the yuan’s depreciation, she said, pointing to recent curbs imposed by the State Administration of Foreign Exchange. However, Tan estimated the yuan would continue to weaken beyond 7.3 against the dollar despite the PBOC’s attempt to stabilise the currency through stronger-than-expected daily fixes.

END OF AN ERA

The advisor said the PBOC will introduce more structural tools such as relending facilities or credit linked to special-purpose vehicles to implement the meeting’s call for greater support of key and weak sectors, such as technological innovation, advanced manufacturing, green growth and small businesses.

The central bank will hold interest rates low for some time, the advisor said, adding that the meeting’s main theme meant the financial sector will face significantly closer scrutiny.