9 Jul 2015
Chinese equity: deleveraging process and intensified policy support – Deutsche Bank
FXStreet (Barcelona) - The Deutsche Bank Research Team notes that the Chinese stock market is going through a deleveraging process which is having global implications, and that the government might be able to manage the systemic risks in the financial sector.
Key Quotes
“China’s equity market is going through a deleveraging process that starts to have global implications, as we witnessed rising volatility for commodities, CNY and CNH exchange rates, and Chinese stocks listed overseas overnight.”
“The PBoC released a statement yesterday that it will “provide ample liquidity support to the China Security Finance Company through bond issuance, collateralized financing, relending etc to stabilize the stock market” and “avoid systemic and regional financial risks”. We take this as the government taking one step further to address the stock market volatility, and think the government may intensify policy support to the financial sector if there are more signs of risks spreading to the other assets and the real economy. The volatility in the FX market is particularly alarming to the government, as China experienced large capital outflows in Q1 when the FX market priced in depreciation.”
“We continue to believe the systemic risks in the financial sector can be managed by government, as China’s economy depends predominantly on the banks whose exposure to the high leverage system is limited. So far there is no major financial institution reportedly facing liquidity or solvency problem, and the domestic money market rate is stable, hence the government has not taken aggressive action to boost the stock market. But we believe the government may have prepared contingency plans in case the risks escalate.”
Key Quotes
“China’s equity market is going through a deleveraging process that starts to have global implications, as we witnessed rising volatility for commodities, CNY and CNH exchange rates, and Chinese stocks listed overseas overnight.”
“The PBoC released a statement yesterday that it will “provide ample liquidity support to the China Security Finance Company through bond issuance, collateralized financing, relending etc to stabilize the stock market” and “avoid systemic and regional financial risks”. We take this as the government taking one step further to address the stock market volatility, and think the government may intensify policy support to the financial sector if there are more signs of risks spreading to the other assets and the real economy. The volatility in the FX market is particularly alarming to the government, as China experienced large capital outflows in Q1 when the FX market priced in depreciation.”
“We continue to believe the systemic risks in the financial sector can be managed by government, as China’s economy depends predominantly on the banks whose exposure to the high leverage system is limited. So far there is no major financial institution reportedly facing liquidity or solvency problem, and the domestic money market rate is stable, hence the government has not taken aggressive action to boost the stock market. But we believe the government may have prepared contingency plans in case the risks escalate.”