Snap AV: The x stages of Chinese deleveraging

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The chunk below is from Bank of America as Chinese interbank rates came in a touch after hitting two-year highs earlier this week. Those rates had climbed after President Xi told a politburo meeting last week that financial security was “strategically important” for economic and social development.

You can click here for a Shibor chart and a summary of the PBoC’s recent moves from Nomura, but the general hope is that the pain being inflicted on Chinese stocks and commodities from this recent round of tightening — aimed at doing Xi’s bidding by cutting financial risk while ideally not capsizing the economy — might be limited.

The market widely regarded CBRC‘s recent series of announcements (Article No 4, 5, 6, 7, 43, 45, 46, 52, 53) and President Xi‘s speech at the Politburo meeting as evidence that policy tightening has been ramped up, and PBoC may step up hiking. News on banks‘ Wealth Management Products (WMP) redeeming from delegated investment also led to the concern that a repeat of 2H13 may be in front of us.

However, we believe that deleverage has probably come to the second stage. In our view, the first stage was aimed at cracking down policy arbitrage by financial institutions, i.e., positive carry with capital gains on the expectation that monetary easing will continue. This stage started from July 2016, seen from higher value-weighted rates from PBoC, higher levels of repo and higher volatility.

The second stage of deleverage is about coordinated regulatory work aimed at cracking down regulation arbitrage, i.e., building up leverage via asset management products, regulated by different regulators in a relatively isolated manner. Typically, such business models involve multiple layers of products (WMPs, trust products, brokerages‘ asset management products (AMPs), mutual funds, insurers‘ AMPs) built on the same underlying assets, with each layer

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About David Keohane