January 23, 2022
  • January 23, 2022

China quietly steps up market interventions

By on June 19, 2021 0

China is resorting to increasingly aggressive measures to contain risks to the financial system, measures that threaten to undermine President Xi Jinping’s commitment to give more freedom to markets.

In recent weeks, authorities have ordered state-owned enterprises to reduce their exposure to commodities abroad, forced domestic banks to hold more foreign currency, considered a cap on thermal coal prices, censored research by crypto-exchanges and effectively prohibits brokers from posting bullish stock index targets. A new rule will prohibit cash management products from holding riskier securities and limit their use of leverage. On Thursday, an official said that China plans to sell metals from state reserves.

If the measures are far from direct intervention, they risk reinforcing the notion of moral hazard. If traders know that the authorities are likely to intervene to limit gains or losses in an asset class, they can bet on that outcome with some certainty. The government’s implicit safety net may encourage one-way betting – a challenge for policymakers seeking to make markets more efficient while supporting an unbalanced economic recovery.

“The problem for China is that there is more debt and more risk to the financial system, which makes it more difficult to give up control of domestic markets,” said Michael Pettis, professor of finance at the Peking University and author of Avoiding the Fall: China’s Economic Restructuring. “The more China stabilizes the markets, the more fundamentally unstable they become due to moral hazard.”

Easy monetary conditions abroad are putting pressure on Beijing. Much of the liquidity released by governments and central banks over the past 15 months has gone directly to China – a huge market offering higher yields, a strong currency, and increasingly better access for nationals. foreigners. Unilateral capital controls mean prices can be distorted by too much money entering the continent.

Officials have warned of asset bubbles on several occasions since January. Even before the commodity boom began to fuel inflation risks, authorities had already encouraged a correction in equities and cornered traders in leveraged bonds.

Rhetoric escalated last week at a key forum in Shanghai, with the country’s main banking and insurance regulator calling for “unremitting” efforts to tackle financial risks. Firms speculating on the currency are “doomed to lose,” said the head of the Chinese Foreign Exchange Observatory. Investors should be wary of the risks of the yuan depreciating as the dollar strengthens, the Chinese Foreign Exchange Committee said in an article published on Wednesday.

“Policymakers are watching financial stability risks closely,” Morgan Stanley economists, including Jenny Zheng, wrote in a June 10 memo. “China’s stimulus response to Covid has been significant and effective in driving a recovery in the real economy, unlike a ‘flood-like stimulus’ approach in some developed markets which has partly contributed to record asset prices . “

This does not mean that the Communist Party is giving up its efforts to reduce the influence of the state. Beijing’s silence on the future of China Huarong Asset Management Co. – a bad debt manager deeply linked to the country’s banking system – has shocked investors and called into question long-held assumptions that the government will always bail out companies. systemically important to maintain stability.

The notion of “too big to fail” may no longer apply to Chinese borrowers, according to analysts at Goldman Sachs Group Inc ..

The government is fighting against extraordinary forces. A commodity price tracking gauge hit a 10-year high this month, with gains in fuels, metals and food proving to be more persistent than previously thought. This is fueling faster inflation in emerging markets as well as in developed economies such as the United States and the Eurozone.

Guo Shuqing, chairman of China’s Banking and Insurance Regulatory Commission, warned last week that global inflation may not be as transient as some experts predict, while central bank governor Yi Gang said that China must not lower its guard against inflation and deflation. pressures “from all sides”.

The fragility of the Chinese economic recovery complicates the picture. Data on Wednesday showed retail sales and industrial production increased more slowly than expected in May. This may reinforce the government’s preference for intervention over more blunt tools. The People’s Bank of China has said it will not tighten monetary policy significantly. Unlike its counterparts in other emerging economies like Russia, Brazil or Angola, the PBOC is not expected to raise interest rates anytime soon.

This means that targeting risk at the micro level is likely to continue, although it reinforces the belief that the state will always intervene when the threat to stability is perceived to be too great, thus making truly free markets a more distant prospect.

For now, the Communist Party can see this as a cost to bear, especially as it seeks calm as its centenary approaches on July 1.

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