24 February 2019
The People's Bank of China has been trying to reduce leverage by gradually raising borrowing costs. Photo: Bloomberg
The People's Bank of China has been trying to reduce leverage by gradually raising borrowing costs. Photo: Bloomberg

China deleveraging bid erases US$500 bln from stocks, bonds

China’s stepped-up campaign to clamp down on financial leverage has erased at least US$453 billion from the value of Chinese stocks and bonds since mid-April, Bloomberg reports.

The move has also resulted in the cancellation of US$21 billion worth of debt sales and spurred the People’s Bank of China to inject US$48 billion into jittery money markets, the report said.

Sales of asset-management products by lenders and trust companies have dropped by more than 30 percent, while domestic property transactions have slowed and metals prices have buckled, it added.

Amid the market declines, authorities are trying to maintain economic growth before a Communist Party leadership reshuffle later this year.

“It would take a lot for the country to move into easing mode,” Howard Wang, head of Greater China at JPMorgan Asset Management, told Bloomberg.

“They will adjust their policies if markets go down another 10 percent or the currency cracks under pressure. Only these very drastic swings will make them move the other way.”

The current clampdown adds to a nine-month-long effort by China’s central bank to reduce leverage by gradually raising borrowing costs.

The nation’s key seven-day repo rate has climbed to about 3 percent from 2.3 percent in August, and would likely be higher if not for cash injections by the PBOC via daily open-market operations over the past month, Bloomberg said.

The rate topped 12 percent during a brief shakeout in the shadow banking system in 2013.

Overseas money managers including Franklin Templeton Investments and Fidelity International have applauded the latest clampdown as necessary to curb a US$28 trillion debt pile that threatens China’s long-term economic stability.

But the domestic investors’ reaction is far from positive.

The Shanghai Composite has dropped for four straight weeks to the lowest level in more than three months, even as MSCI Inc.’s gauge of global equities rallied to all-time highs, the report said.

Last week, the selloff spread to commodities. Concerns over tighter credit conditions, combined with signs of excess supplies, sent iron ore futures in Dalian down more than 8 percent.

The metals-hungry real estate industry is also affected.

Home sales in square meter terms dropped about 30 percent in the final week of April from the same period a year ago, according to data for 26 major Chinese cities tracked by CREIS, a research institute run by the country’s most popular property website.

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