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Takeaway: The risk of a Chinese financial crisis is heightened to the extent that financial sector reforms are not appropriately managed.

SUMMARY BULLETS:

  • In yesterday’s Politburo Standing Committee (PSC) meeting, China’s executive leadership mapped out guidelines to address a slew of structural ailments that were brightly highlighted in China’s disappointing 1Q growth statistics. Indeed, a “lack of growth momentum” was identified as the most serious challenge to the Chinese economy.
  • Ironically to us, there was hardly a mention of China’s domestic financial sector risks in the official transcript, though recent commentary by PBOC Governor Zhou Xiaochuan which highlighted his call for urgency on the reform front suggests that financial sector risks are, in fact, the elephant in the room: “China has to make economic reform its top priority,” he said.
  • All told, we continue to see elevated risk of a Chinese financial crisis – however one may materialize – and destabilizing capital outflows over the long-term TAIL (3yrs or less) – IF financial sector reforms and capital account liberalization are not appropriately managed by the powers that be.
  • To follow up on our deep-dive presentation on this very topic from this past Tuesday’s call on the upcoming cycle of emerging market crises, we’ll be hosting a conference call on Monday morning (4/29) at 11am EST featuring Carl Walter of Stanford's Walter H. Shorenstein Asia-Pacific Research Center. On the call, we will examine the key risks currently embedded across China's financial system and assess the probability of a Chinese financial crisis in light of the Chinese Communist Party's financial sector reform agenda. Email if you’re interested in attending or would like to be earmarked to receive the replay materials.

In yesterday’s Politburo Standing Committee (PSC) meeting, China’s executive leadership mapped out guidelines to address a slew of structural ailments that were brightly highlighted in China’s disappointing 1Q growth statistics: slowing GDP and consumption growth amid accelerating growth in credit and fixed assets investment. China’s first APR growth data point leaves much to be desired in the way of a meaningful rebound:

  • APR MNI Business Sentiment Indicator: 58.5 vs. 59.3 (APR flash) vs. 58.2 (MAR)
    • New Orders: 58.2 vs. 59 (APR flash) vs. 54.8 (MAR)
    • Production: 57.3 vs. 57.8 (APR flash) vs. 55.2 (MAR)

Indeed, a “lack of growth momentum” was identified as the most serious challenge to the Chinese economy – partly affected by slow global growth (exacerbated by “liquidity in some developed economies”) and a broad-based lack of sustained investor confidence due to Europe’s sovereign debt crises.

Ironically to us, there was hardly a mention of China’s domestic financial sector risks in the official transcript, though recent commentary by PBOC Governor Zhou Xiaochuan which highlighted his call for urgency on the reform front suggests that financial sector risks are, in fact, the elephant in the room: “China has to make economic reform its top priority,” he said.

NOTE: This is very much in line with what we have identified in our recent work on China – specifically in that the clock is ticking rather loudly for China’s unsustainable economic growth/public official wealth accumulation model…

What’s perhaps most interesting is that Chinese leaders remained committed to stringent macroprudential policies in the face of an obvious growth slowdown. As we have been saying for the past ~3 years: it’s because they architected the aforementioned growth slowdown! Indeed, they remain reluctant to hit the “go” button on large-scale stimulus, instead opting for further growth-negative policies, such as curbing the expansion of resource-intensive industries – many of which are rife with overcapacity. To this point, Chinese banks have already begun tightening loans to the iron and steel industries amid fear of rising NPLs.

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All told, we continue to see elevated risk of a Chinese financial crisis – however one may materialize – and destabilizing capital outflows over the long-term TAIL (3yrs or less) – IF financial sector reforms and capital account liberalization are not appropriately managed by the powers that be (PSC, PBOC, MOF, CBRC, CSRC, NDRC, etc.). Indeed, the next round of reforms will be a sizeable team effort across all of China’s major regulatory and strategic planning agencies.

To follow up on our deep-dive presentation on this very topic from this past Tuesday’s call on the upcoming cycle of emerging market crises, we’ll be hosting a conference call on Monday morning (4/29) at 11am EST featuring Carl Walter of Stanford's Walter H. Shorenstein Asia-Pacific Research Center.

Carl is arguably the world’s preeminent expert on the Chinese financial system, having lived and worked in Beijing from 1991 to 2011, first as an investment banker involved in the earliest SOE restructurings and overseas public listings, then as chief operation officer of China's first joint venture investment bank, China International Capital Corporation. Over the last ten years he was JPMorgan's China chief operating officer as well as chief executive officer of its China banking subsidiary. Walter is also the co-author of Red Capitalism: The Fragile Financial Foundations of China's Extraordinary Rise (2012) and Privatizing China: Inside China's Stock Markets (2005).

On the call, we will examine the key risks currently embedded across China's financial system and assess the probability of a Chinese financial crisis in light of the Chinese Communist Party's financial sector reform agenda. Email if you’re interested in attending or would like to be earmarked to receive the replay materials.

Have a great weekend,

Darius Dale

Senior Analyst

 

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