First Published: The Financial Times, 23/08/2017
The risk of a financial system funding shock will be more advanced if policy eased
Twelve months ago, capital was still haemorrhaging out of China, draining the foreign currency reserves and dragging the renminbi down. Today, China’s markets seem becalmed. Gentle but sustained credit and monetary policy tightening has yielded the economic stability that the government needed ahead of the crucial 19th Party Congress in coming months.
The real test, though, is whether the newfound political acceptance of tightening, and slowing economic growth, will work and endure. Whether they do or don’t, markets are not discounting the implicit discontinuities.
The authorities have acted in three ways over the past year. First, they tightened capital controls, foreign exchange payments abroad and Chinese overseas investment flows to stabilise the decline in reserves. Second, all the main regulatory agencies acted for the first time in concerted fashion to contain excessive risk taking and reduce the effect of some of the more egregious forms of financial indiscipline; for example, by insurance companies. Third, short-term interest rates rose steadily until about May this year by between 40 and 60 basis points, with bond yields rising nearly 100 basis points…..Read more: