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Macro Monday:Temporary relief in regulatory storm

类型:宏观经济  机构:麦格理证券股份有限公司   研究员:麦格理证券研究所  日期:2017-05-23
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Last week MSCI China rose by 1.2% and property was the best performingsector again. Meanwhile, the global market was impacted by the politicaluncertainties from the US and Brazil. The dollar index dropped to 97 lastFriday, erasing all the gains since Trump’s election. Weaker US$ implies aneasier life for China’s policy makers regarding the RMB and capital flows.

    Indeed, last week the Yuan’s implied volatility dropped to a new low since thefixing reform in Aug 2015. On the data front, China released April economicdata last Monday (our comment). Overall, most data in April send out thesame message: the economy started deceleration from 2Q17 after the peak in1Q17. The latest data suggest that the slowdown continues into May.

    Bond Connect to be launched: Last Wednesday, the PBoC and the HKMAannounced the Bond Connect program. The date is unknown, but likely to bethis July. The immediate goal of the program is of course to attract moreforeign money inflows. From a longer-term perspective, it’s a step towardChina’s financial market openness. The short-term impact should be limitedas in Feb 2016, China already significantly lowered the barriers for foreigninstitutional investors to its onshore bond market (our comment then). As aresult, foreigners increased their Chinese treasury holdings by RMB175bn in2016, vs. RMB27bn 2015. Currently, the biggest concern for foreign bondinvestors is not the investment channel, but the RMB depreciation and capitalcontrols. That said, the potential is clearly out there in the long run, asforeigners now only hold less than 2% of China’s total bond market.

    Meanwhile, the Chinese bond market grows at an extraordinary pace. In thethree years from 2014 to 2016, the total size of the market increased fromRMB30tn to RMB64tn. Even policy makers believe that it’s way too fast, sothey started a regulatory storm nine months ago which hasn’t ended yet.

    Easing of financial regulations: Confucius used to say that a “wise manalternates tension with relaxation”. Over the past few days, both the PBoCand the CBRC came out to ease the market sentiment. Last week the PBoCalso net injected RMB160bn to the interbank market and repo rates droppedaccordingly. Interestingly, now is like a replay of last Dec, when the regulatorsdidn’t back down until the market was about to panic. However, if the marketcalms down, regulatory pressure would return. The bottom line for policymakers is clear: They want to reduce the financial risks but don’t want to seeanother credit crunch like the one in June 2013. The next couple of monthswould remain as the window for regulation, until the growth decelerationthreatens the 6.5% target.

    Larger impact on the financial markets than the real economy: Thesqueeze in the interbank market is also negative to the A-share market due tothe rising cost of equity. The yield of Yu’E Bao, China’s largest online moneymarket fund with over 300mn users, rose from 2.3% last Sep to above 4% lastweek (Fig 34 inside). Meanwhile, it also hurts the real economy through thefinancing channel, but the impact should be modest, in our view. In Jan-Aprilthis year, the net issuance of corporate bonds and local government bondscombined was RMB0.7tn, vs. RMB3.5tn during the same period last year.

    That said, it’s partly offset by the off-balance sheet lending, which rose fromRMB0.4tn to RMB2.2tn (Fig 31). According to M2 and total social financinggrowth (Fig 14 and 32), the liquidity in the real economy holds up much betterthan the liquidity within the financial system.

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