China: Further deleveraging coming? – Rabobank

Analysts at Rabobank suggest that this year is likely to see further attempts at deleveraging in China, which is usually deflationary.

Key Quotes

“The latest reiteration of that particular meme is to try to ban ‘entrusted loans’, whereby companies basically provide loans to each-other using banks as an intermediary. That ‘niche’ market is currently worth USD2.1 trillion(!), or around 20% of China’s GDP. Let’s wait and see what secret gadget they rustle up to fill that gap given banks’ loan-to-deposit ratios are also under strain and the IMF estimates the total fiscal deficit is around 13% of GDP. Perhaps another equity bubble is the way they will have to go? If so, as they used to say at the end of the movie credits, “Bond Will Return” – though we usually have to wait 18-24 months.”

“China also made headlines yesterday with news that it is going to drop its “counter-cyclical adjustment factor” for USD/CNY, which allows it to set the daily FX fix wherever it wants regardless of what the previous day’s close was if the market says something that the PBOC doesn’t like. Initially that saw CNH sell off quite sharply, but the overall message is probably just a warning that this key cross is ‘not allowed’ to go below 6.50 – though that doesn’t mean it ‘is allowed’ to go much higher either. The relevance for the Bond debate is that a stronger CNY is inflationary, and that just got ruled out, even if a weaker CNY is not on the cards yet. And today we saw Chinese CPI and PPI. The former rose from 1.7% to 1.8% y-o-y, but is not really watched; the latter fell from 5.8% to 4.9% y-o-y, and is watched. And what it says is that deflation is going to loom later in 2018 on base effects alone.”