A statement from the People’s Bank of China on Monday made it clear that Chinese policymakers are willing to take on short term pain (spiking interbank rates and a liquidity squeeze) for longer term gains (more stable economic growth).
In fact policymakers have been pushing through reforms on new financing channels for some time now. Here’s a quick recap:
- Tighter credit conditions for local government financing vehicles which have caused slower infrastructure growth.
- A crackdown on “gift-giving.” This temporarily hurt retail sales and China’s catering industry earlier this year.
- The China Banking Regulatory Commission’s (CBRC) restrictions on non-standardized credit assets (NSCA) wealth management products (WMPs) in March.
- State Administration of Foreign Exchange (SAFE’s) regulations on foreign exchange inflows and banks’ Forex position management in May.
- Other regulatory tightening of new financing channels like the CBRC’s crackdown on accounting mistreatment of bill-backed repos in May, according to Morgan Stanley.
- Premier Li Keqiang recently said credit growth should now be channeled towards sectors that will drive economic growth, and away from sectors with overcapacity like steel and solar power. “This is a new policy that could result in bankruptcies if followed through to its conclusion,” writes Stephen Green of Standard Chartered.
- Tolerating higher interbank rates despite rising concerns about China’s banking sector and a hit to second quarter GDP growth.
One of the biggest debates following China’s leadership handover in November 2012 was whether the new leadership was committed to reform.
Reforms rolled out since then have shown that policymakers are willing to rebalance their growth model and push through economic reforms, even if broader political reforms take more time to manifest.
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