MNI INTERVIEW 2: PBOC Shouldn’t Normalise Too Quickly: Advisor

The People's Bank of China should not normalise policy too quickly and should closely monitor the risk of corporate debt defaults, a senior fellow at a Chinese government-sponsored think tank told MNI.

Economic weakness persists amid China's recovery, while price indices, including CPI, core CPI and PPI, have shown signs of deflation, Zhang Ming, deputy director of the Institute of Finance and Banking under the Chinese Academy of Social Sciences, noted in an interview.

Regulators may enhance scrutiny of financial markets next year, including of wealth management and equity products, and of the property market, Zhang said, warning that combining this with policy normalisation could slow borrowing needed for growth and make it harder for indebted companies to meet repayments and roll over debt. Tighter policy could also increase government borrowing costs at a time of rising public debt issuance, he pointed out.

The central bank began normalising policy in May after its pandemic easing. The 7-day repo rate rose to 2.3% at the end of November from 1.91% in May, while the negotiable certificates of deposit rate jumped to 3.38% from 1.59%. Growth in the M2 measure of broad money fell to 10.5% in October from 11.1% in May, while total social finance dropped to CNY1.42 trillion in October from CNY3.5 trillion in September, according to PBOC data.

GOVERNMENT BORROWING

The PBOC might even be forced to ease marginally should economic data come in weaker than expected, Zhang said.

Pointing to bond market nerves following recent missed debt payments by several AAA-rated state-owned enterprises, Zhang said authorities should not allow large defaults, but rather improve debt-restructuring rules for troubled firms in order to better protect investors. Otherwise doubts might spread about indebted companies which investors had previously assumed enjoyed implicit government guarantees, raising the risk of bond-market selloffs.

One possibility would be for the central government to increase borrowing to bail out local administrations, Zhang said. The government is already planning more issuance of CGBs, in both amounts and variety of maturities, to fill out a risk-free yield curve.

To support this increased issuance, the PBOC should consider reducing banks' reserve requirement ratios, particularly in the case of big banks, Zhang said. Healthy demand for CGBs from lenders means there is no need for the PBOC to expand its balance sheet quickly.

China's first negative-yielding government bond came on Nov. 18, after a EUR4 billion bond sale which Zhang called a good test of international demand for the country's debt. But, despite the low yields on offer, the government will remain cautious towards foreign debt issuance, both at a public and corporate level, given exchange rate risks, Zhang said.