China keeps manageable pace of financial deleveraging

BEIJING - The market fears a cash crunch in late June as seasonally tight liquidity meets the mid-year macro-prudential assessment and tightening regulations in the banking sector.

However, volatile market adjustments, seen in 2013 due to similar regulatory tightening, will not happen as China's deleveraging process is manageable and balanced.

China's financial regulators have rolled out a string of harsh regulations to crack down on financial irregularities in the past three months, with palpable effects.

The broad measure of money supply, M2, hit a record low in May, growing at single-digit speed, according to the People's Bank of China (PBOC).

While keeping cash conditions relatively tight to underpin the government's deleveraging efforts, authorities have been careful not to squeeze liquidity too much to avoid dampening demand.

PBOC data shows that the total social financing and Chinese yuan loans both increased year on year in May, indicating robust financial support in the real economy.

Meanwhile, recent economic indicators show that the economy is expanding steadily with strong consumption and slightly slower investment.

"Slow M2 growth might continue in the near future as deleveraging efforts continue, but deleveraging too fast might raise financing costs for enterprises, hurting the real economy," said Lian Ping, chief economist with the Bank of Communications.

Compared with the clampdown on risk in 2013, China is deleveraging the economy in a more pragmatic, balanced and coordinated manner, according to a research note from the China International Capital Corporation (CICC).

Chinese financial regulators has improved coordination to maintain stable liquidity conditions and anchor market expectations since May.

The PBOC has increased its net open market operation injections recently, injecting over 400 billion yuan ($58.6 billion) into the market last week, nearing a five-month high.

Meanwhile, local government bond insurance also accelerated while the top banking regulator decided to give banks more time to check and rectify their problems.

CICC expects incremental easing of market liquidity stress levels from June if the PBOC continues with open market operations to guide short-term rates to a more sustainable level.

However, there will be no backtracking on China's process of deleveraging.

"Lessons from the global financial crisis showed us that guarding against financial turmoil should start from keeping financial institutions clean and not tolerating high-leverage and bad loan practices," Zhou Xiaochuan, governor of the PBOC, said at a forum Tuesday.

China's regulatory adjustments targeting financial leverage will likely be a dynamic process, rather than following a strict pre-set path, according to CICC.

Going forward, regulatory tightening will be gradual and pragmatic to balance the longer-term goal of financial deleveraging and the objective of maintaining stable growth and liquidity, CICC added.