A new International Monetary Fund (IMF) assessment of China’s financial system has raised “tensions” between growth and financial stability-oriented measures. The first such IMF study in more than five years pointed to several key issues, including government support for non-viable firms, risky off-balance-sheet lending and implicit financial sector guarantees.
But we see signs indicating that the country has struck a balance between growth and reform impulses so far:
- Conditions still supportive. Chinese growth is moderating, not flat lining. The property market is heading for a soft landing, while supply side reforms have boosted corporate earnings. Better demand and production have kept China's PMI well above the 50 mark that denotes expansion.
- Reforms on track. Financial deleveraging is gathering pace, with the growth rate of M2 money supply slowing to 8.8% in October (versus 11.6% one year ago). Shadow credit momentum has faded as Chinese banks’ outstanding balance of wealth management products rose just 4% y/y in September, compared to an average 40% growth rate last year.
- Policy fine-tuning. Policymakers remain responsive. The People's Bank of China has been carefully managing liquidity conditions in recent weeks. The new state council-level regulator will see a more unified framework for reducing systemic risk.
While we continue to monitor credit risks in China, we are comfortable with policy efforts to address credit risks and reduce leverage. We remain overweight China within our tactical asset allocation for Asia.
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