4 Feb 2014
Flash: Chinese deleveraging poses external risks - ANZ
FXStreet (Barcelona) - Richard Yetsenga, Head of Global Markets Research at ANZ notes that the Chinese deleveraging process poses risks to other markets.
Key Quotes
"China’s deleveraging process is likely to be substantially different from the ‘garden variety’ deleveragings that most global investors have experienced. This deleveraging is policy driven, growth is still quite strong, the institutional setup is robust and financial liberalisation is occurring in concert."
"In addition, policymakers still exert substantial control over both sides of the national balance sheet. This point, in particular, suggests that an acute adjustment in leverage is unlikely. Collectively, these factors imply quite different market outcomes."
"One key issue relates to how China manages one of its key sources of systemic stability, namely opaqueness, with a desire to allocate credit via market forces. Certainly, how far interest rates move will depend substantially on how much credit risk is ultimately allowed to be priced. If credit risk remains opaque and subject to a perception of some sort of official backstop, then rates will likely need to overshoot to the topside."
"While an abrupt adjustment is unlikely domestically, developments in China do pose risks to other markets. In fact, with capital flows in China already dwarfing foreign interest in other Asian markets, and with China now offering yields that are higher than a number of its regional peers, financial developments in China are likely to pose a larger risk for third markets, than for China itself."
Key Quotes
"China’s deleveraging process is likely to be substantially different from the ‘garden variety’ deleveragings that most global investors have experienced. This deleveraging is policy driven, growth is still quite strong, the institutional setup is robust and financial liberalisation is occurring in concert."
"In addition, policymakers still exert substantial control over both sides of the national balance sheet. This point, in particular, suggests that an acute adjustment in leverage is unlikely. Collectively, these factors imply quite different market outcomes."
"One key issue relates to how China manages one of its key sources of systemic stability, namely opaqueness, with a desire to allocate credit via market forces. Certainly, how far interest rates move will depend substantially on how much credit risk is ultimately allowed to be priced. If credit risk remains opaque and subject to a perception of some sort of official backstop, then rates will likely need to overshoot to the topside."
"While an abrupt adjustment is unlikely domestically, developments in China do pose risks to other markets. In fact, with capital flows in China already dwarfing foreign interest in other Asian markets, and with China now offering yields that are higher than a number of its regional peers, financial developments in China are likely to pose a larger risk for third markets, than for China itself."