Deleveraging in the financial sector is a hot topic in China. It’s one of the key factors behind the recent decline in A shares.
China’s economy has over-expanded in the past couple of years, in terms of both manufacturing capacity and lending activity. That’s why Beijing has outlined eliminating excessive capacity, de-stocking and deleveraging as core tasks of supply-side reform.
China accelerated the efforts in phasing out excessive capacity last year, leading to a price recovery in commodities and a revival in key industries such as steel and coal.
This year, the central government wants to focus on financial deleveraging.
In fact, most of China’s financial leverage is tied to the housing sector. Given the huge housing boom over the past few years, it is believed most of the financing raised through corporate loans, wealth management products or the shadow banking system have been eventually funneled to the real estate sector, leading to skyrocketing home prices.
A key objective of financial deleveraging is to tame the housing bubble, reduce the risk posed by the property industry and guide capital into the real economy.
The authorities have repeatedly stressed that the stock market, insurance firms and banks should support real economic growth.
The housing industry has lots of connections with numerous upstream and downstream sectors. For example, if the housing sector gets into trouble, sales of construction materials will slump, as well as sales of home appliances and furniture.
With so much at stake, it is easy to see why the authorities have taken a mild approach. While the government cracks down on speculation, it keeps encouraging first-time homebuyers.
A dozen cities have tightened home mortgage loans in recent months, and second-home buyers have struggled to obtain mortgage loans.
Central bank data shows that mortgage loans account for 34.6 percent of all new loans at the end of March, down 10.3 percentage points from the end of last year.
Overall, China’s banks extended 4.22 trillion yuan in new yuan loans in the first quarter of 2017, down 385.6 billion yuan from the year before.
Although mainland shares have been under pressure amid the deleveraging campaign, and it may remain so over the near term, the negative impact over the long run should be limited, as policy directives seem to be working already.
This article appeared in the Hong Kong Economic Journal on Apr. 28
Translation by Julie Zhu
[Chinese version 中文版]
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