On Wednesday, some suggested markets had taken a hit based on some bad news out of China.
But should they be concerned?
Bank of America’s Ting Lu lays out the four concerns and points out why they aren’t as worrisome as markets think.
- Nonperforming loans written off by the five largest banks tripled. Lu writes that the “tripling was mainly due to a very low base.” We addressed this issue yesterday and Lu reiterates the point that the write-off is “inevitable and should be welcome.” The surge in credit growth has seen NPLs rise but, he points out, Chinese banks “a quite high provision coverage ratio at 290% (above the required 150%), so the room for writing off NPLs is quite big.”
- A repeat of the June-July liquidity worries as interbank rates rise. It is unlikely that we will see a repeat of June’s liquidity squeeze writes Lu. But the spike in rates could be driven by a few things. First, the central bank has stopped its reverse repo as interbank rates approached 3%. Second, it could be increasing liquidity demand ahead of the October tax that is due before the month-end. He expects the central bank to act to stabilise rates.
- Reports that a central government official announced policy tightening. Lu writes that this comment was “actually made by Beijing university professor who was an external member of the insignificant non-voting “PBoC monetary policy committee.” Moreover, he said monetary policy should be “adjusted a bit from the easing stance in Q3.”
- Central government pressuring local governments to set 2014 target based on realistic targets. This has prompted some to think that the government will cut its growth forecast to 7% from 7.5%. Lu thinks there is nothing wrong with the central government pushing local governments to be more realistic but that the likelihood of the central government setting a 7.5% 2014 growth target is higher than a 7% growth target.
What investors should take note of however is that with economic indicators suggesting that growth is stabilizing the government is shifting their focus back to risk management, according to Societe Generale’s Wei Yao.
The government announced a property tightening policy on Wednesday and withdrew almost 100 billion yuan in the past two weeks.
“The leadership still intends to delever the economy, which is the main reason behind our call that the secular deceleration trend is far from over,” said Yao.