China: New entity to enforce macroprudence - ING

The 5th Financial Working Conference held on 14th and 15th July sets the Chinese policy reform framework for the next 5 years and historical records tell us that most of those reforms will be achieved before the next working conference, explains Iris Pang, Economist at ING.

Key Quotes

“In this working conference, the highlight is the creation of a supervision entity at the State Council that stabilizes financial developments, strengthens the PBoC’s macro-prudential assessment (MPA) and prevents systemic risks. This entity was originally anticipated to reside within the PBoC.. Putting it in the State Council is a surprise, which indicates how the government values the importance of coordinated work across regulators.”

“As a result, we expect that it will be more difficult for banks and non-bank FIs to take advantage of policy grey areas across regulators to earn profits.”

“Another anticipated result is a tighter MPA set by PBoC, which would shrink shadow banking activities further, and put more pressure on capital requirements. This could be mainly on bigger banks as the working conference also emphasized support for small to medium size banks. This is utterly out of market expectations. We see this as a way to say “we won’t let small to medium size banks default”.”

“On the monetary policy stance, the media interprets that the absence of the word “neutral” implies that monetary policy will be looser compared to June. But we disagree with this view. Tighter MPA and increasing capital requirements would only push interest rates higher in the future. On a short term view, we do not see that the liquidity in July could in any case be described as an easing monetary policy. It was still a net absorption for July so far. For us, the absence of the word “neutral” though keeping the word “prudent” means monetary policy will continue its current tightness. This means interbank rates will not fall in coming months. Further tightening in terms of liquidity would be finely handled by the PBoC so that it will not create liquidity crunch.”

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.