China: SOE debt risk likely triggered the PBoC easing – Nordea Markets

FXStreet (Barcelona) – Amy Yuan Zhuang of Nordea Markets, notes the key possible objectives behind PBoC’s recent aggressive easing.

Key Quotes

“We see this aggressive monetary easing as mainly a reflection of Beijing’s concerns about the rising bad debts among the SOEs. This is also our biggest concern for China. Overcapacity remains a serious issue for the heavy manufacturing sectors, such as coal and steel, which are dominated by SOEs. This has caused producer price deflation and shrinking profitability. The SOEs’ ability to service their huge pile of debt has become questionable. Anecdotal evidence suggests that some banks have been forced to keep lending to the SOEs in order to avoid rising NPL ratio. Before, the government has kept an eye closed on this practice because it has no better solution. Now, the government is directly encouraging this by lowering the RRR for finance companies by 300bp. Allowing taking new debt to repay old debt will temporarily relieve the funding squeeze and the default risk. But it adds to the medium term risks, because the Ponzi scheme is not sustainable.”

“The second goal with the monetary easing could be to comfort equity investors for the 20% plunge in the Chinese A shares in the last two weeks. But the easing risks to again fuelling speculation in the stock markets and does not benefit the real economy.”

“Growth was likely a minor reason for the monetary easing and would probably not even prompt an easing if not for the debt concerns. Lately, the economy has shown signs of recovery, or stabilisation. Property sales have recovered and prices bottomed. The PMI index has increased, albeit still below 50. The beige book survey for Q2 has shown rising business confidence. In a speech this week, Premier Li also said that economic indicators are improving. Against the backdrop of the accommodative policies, monetary, fiscal as well as property market regulations, we expect growth to continue stabilising. However, the medium-term risks are continuous large, especially the SOE debts.”

Amy Yuan Zhuang of Nordea Markets, notes the key possible objectives behind PBoC’s recent aggressive easing.

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