An underlying rise in China’s short-term interest rates over the past year reflects persistent concerns about the nation’s financial system, according to AllianceBernstein.
In an Asian economic report by AllianceBernstein, Asian sovereign strategist – global economic research Anthony Chan notes that interbank volatility, coupled with recent commotion about a possible failure of shadow-banking financial products, suggests that Beijing’s reform resolve may soon face a tough test.
China has not started 2014 on a particularly good footing and there have been heightened concerns about financial system stability, according to the report.
Amid fears of a slowdown in Chinese economic growth, there is now the prospect of a default on trust products, which has unnerved investors, it said.
“Interbank liquidity has tightened, the People’s Bank of China (PBOC) has maintained a tough credit policy, and prospects of a default in trust products have unnerved investors,” Mr Chan said.
“We expect the net outcome will be a sharp decline in domestic investors’ appetite for wealth management products and trust funds, which in turn should result sharply in tighter liquidity in the shadow-banking market in the coming quarters,” he said.
“As liquidity tightens and the central bank refuses to budge, the downside risk to economic growth will rise.”
The recent commotion about the possible default of a trust fund issued by China Credit Trust (CCT) may also be adding to the slowdown in investors’ appetite for managed funds, the report noted.
“This high profile case has already done considerable damage to the shadow-banking sector, and more similar headaches are likely to follow in the coming quarters,” Mr Chan said.
“To get an idea of the scale of the problem, consider this: Outstanding assets in the trust industry totalled some RMB10 trillion (US$1.65 trillion) at the end of September 2013,” he said.
“The most risky borrowers are mining firms and commodity producers – classified in official statistics as ‘industrial and commercial companies’ – which account for about 30 per cent of the total.
“About RMB2.2 trillion of the total trust assets are pooled through the banking channel and securitised into wealth management products.”
What was a bullish view on China in November and December last year is turning decidedly bearish as new manufacturing data comes in below expectations.
Such indicators have caused global equity markets to react accordingly.
Chinese equities have been on a steep downward trend since 2007 and look set to continue their fall in 2014, according to wealth advisory firm Wealth Within.
The bearish outlook is sharply contrasted with AMP Capital’s opportunistic position on Chinese equities in early December. Credit Suisse also had China as a top investment strategy for 2014.
Speaking to InvestorDaily, Wealth Within analyst David Thang said he is bearish on both the Shanghai Composite Index (China) and Hang Seng (Hong Kong).
“If you have a look at the Shanghai Composite Index, it has been in a steep downtrend since October 2007 and really, momentum flow over the long term is still very much biased to the downside,” Mr Thang said.
“I don’t think Chinese equities will bottom any time soon,” he said.
China released its CPI numbers earlier in the month, which were below market expectations, adding to the negative outlook.
“Market expectation was 2.7 per cent and the actual release was 2.5 per cent,” said Mr Thang.
“Past predictions have pretty much been in line with expectations and it is quite surprising for these figures to come in under expectations. It only adds to the trend of lower levels ahead.”
One key indicator to keep an eye on would be whether the Chinese government lowers its 2014 growth target to seven per cent from the usual 7.5 per cent, AllianceBernstein’s Anthony Chan said.
“If the higher growth target is maintained, then the PBOC – under pressure to protect underlying growth – may need to ease up its tight grip on money and credit, if only temporarily, and continue its stop-go monetary policy cycle,” he said.
“If Beijing makes a bold move to lower the growth target to seven per cent, it could imply that monetary policy would be more stringent.
“It is worth noting that as of this writing [24 January], seven major provinces have already announced lower local growth targets for 2014 relative to 2013.”
