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Xie Yu

Beijing has signalled a softer stance in its campaign to cut debt from the economy, removing a key statement of intent from a monetary policy document.
The move to downplay its deleveraging ambitions appears to be a reaction to slowing economic growth, an increase in credit defaults, and the devaluation of the yuan amid rising tensions over trade with the US in the past month.
The Chinese currency has now fallen for 14 consecutive days, and was trading below 6.70 per US dollar on Tuesday for the first time since last August.
Yuan’s decline stretches to 14th straight day as it falls to 11-month low
In a second-quarter briefing issued by the monetary policy committee (MPC) last Thursday, a stated objective to “effectively rein in macro leverage” had been removed from an earlier version released in the fourth quarter of 2017.
Moreover, the target for liquidity conditions had changed to “reasonably adequate” from “reasonably stable”, suggesting there will be more easing of liquidity supply in the coming months.
The briefing recognised that China is facing “an increasingly complicated external environment” and an uncertain global economic outlook.
China’s economy cools in May as Beijing’s efforts to reduce debt levels start to bite
The MPC is the highest monetary advisory body to the People’s Bank of China (PBOC), the country’s central bank. There was no briefing at the end of the first quarter – this is the first to be released this year, following a reshuffle of the committee.
Analysts view the changes in the wording as signalling Beijing is becoming less willing to tolerate the effects of deleveraging on growth, which have been reinforced by escalating trade friction with the US.
The market reacted positively to the changes. The benchmark Shanghai Composite Index recovered by 2.2 per cent on Friday, while the yuan also strengthened against the US dollar, before they fell back on Monday after disappointing manufacturing data came out.
“We see some key changes [in the policy brief],” said a research note issued by analysts from Nomura on Sunday.
“The PBOC has become more cautious on its global economic outlook, calls for better forward-looking policy fine-tuning and ‘reasonably adequate’ liquidity conditions, and has softened its tone on deleveraging. These changes are in line with recent shifts, and support our view of more policy easing measures in coming months.”
The analysts expect there will be at least one more cut in banks’ reserve requirement ratio before year-end, probably by 100 basis points, after the 50 basis-point cut that is due to take effect this week.
And they believe the central bank will employ an “asymmetric” strategy in currency-market intervention – which will result in little room for the yuan to appreciate against the greenback in the next few months.
China’s debt-cutting efforts are sinking private companies, while debt-ridden state firms float on
Analysts with BofA Merrill Lynch said in a research report on Friday they believed deleveraging “has a more evident impact on fundamental growth [than the US-China trade tension], which is likely to continue to decelerate further in 3Q.”
And they expected Chinese policymakers to adopt measures to gradually ease credit constraints, in light of increasing signs of slowing growth.
Meanwhile, they believed China “will ultimately have to accept more concessions on import tariffs and relax investment constraints, while shoring up more imports from the US to avoid an outright trade war with its largest trading partner.”
“China’s monetary policy is becoming more dovish while other central banks are tightening,” said analysts with Natixis in a note issued last week. They expect the yuan will be subjected to higher depreciation pressure because of the divergence in monetary policies between the PBOC and the Federal Reserve.
Late last year, top leaders including president Xi had ordered a three-year approach to contain financial risks by removing excessive debts, accompanied by monetary policy that would remain “prudent and neutral” in 2018.
The PBOC and financial regulators have since maintained a tighter liquidity supply, to try and squeeze debts out of the economy.
As a result, China’s “total social financing”, a broad measure of credit and liquidity in the economy, dropped sharply to 760.8 billion yuan in May from 1.56 trillion yuan the previous month.
Total social financing includes off balance-sheet forms of financing that exist outside the conventional bank lending system, an area that has been the focus of a crackdown since the deleveraging campaign began.
But the rising borrowing costs and tighter liquidity conditions have started to bite the real economy, as investment remains the key driver of growth in China.
In May, industrial output, retail sales and fixed-asset investment all came in below expectations as car sales dropped and local governments scaled back building projects amid scrutiny from Beijing over their borrowing.
As of early June, 12 companies had defaulted on the principal or interest payments on 19 bonds this year worth a total of 17.4 billion yuan, according to data compiled by Reuters.
The concern has been transmitted to capital markets – during the last week of June, China’s offshore stock market declined 3.5 per cent and its A shares lost 2.7 per cent from a week earlier.


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The headquarters of the People's Bank of China (PBOC), the central bank, in Beijing. Photo: Reuters