China signals strong hand at NFWC

The event – held in 2017 as part of a five-year cycle - deserves serious attention as five members of the Politburo attended, including President Xi Jinping who has suggested previously financial security was as important as national security.

"China still needs to establish an effective interest-rate transmission mechanism so borrowing and lending rates can be priced properly.” - Raymond Yeung

Despite the emphasis on economic deleveraging, ANZ does not think this event will trigger immediate monetary tightening. Since the communique reiterates both the need to lower the cost of corporate financing and that the financial system is to serve the interest of the real economy, the State Council is clearly keen to maintain financial stability and refrain from introducing an interest-rate shock.

In fact, ANZ expects the People’s Bank of China will keep policy rates in the money markets at the current level for the rest of 2017 in order to sterilise the negative impact of further tightening.

As the central government becomes extremely serious in curbing debt growth more corporate defaults are expected as local officials shy away from refinancing activities. Banks will likely tighten credit policy in the near term, risking the cash flows of some borrowers. Credit risks will increase.

However, for China to upgrade its monetary and financial systems, there are some gaps the NFWC has left out.

In ANZ’s view China still needs to establish an effective interest-rate transmission mechanism so borrowing and lending rates can be priced properly and efficiently.

In addition, more efforts are needed to strengthen SOE reforms, improve local governments’ fiscal positions and crack implicit government guarantees. These issues are crucial to reduce local governments’ indebtedness.

Raymond Yeung is Chief Economist, Greater China, ANZ