Short-term interest rates are climbing in China as the authorities look to slow the pace of borrowing. Rising corporate defaults have unsettled the bond market. The risk posed by Chinese corporate bonds for equities has been highlighted before. Nevertheless, interest rates are not the only tool at the authorities’ disposal.
China’s new chief banking regulator has issued a wave of policy directives to clamp down on shadow banking. The focus on financial regulation is positive. China’s Banking Regulatory Commission (CBRC) has promised to “thoroughly examine and rectify the problem of transactions with too many participants, complex structures and excessively long chains” and eliminate “regulatory arbitrage”.
The rise in corporate sector debt levels would be a concern if the growth in new sectors had stalled. However, the number of 4G users in China hit 836m in Q1, up 8.6% q/q. E-commerce sales jumped 32.1% y/y in Q1. Foreign direct investment flows into IT sectors have been very strong.
The emergence of tech services has been driven by R&D, and does not depend on credit. This new growth model makes it easier for the CBRC and the PBoC to pursue the Chinese version of cheap, but tight, which should sustain the current economic expansion. It will also mean that China will become an important stimulus for other EMs experiencing a similar shift towards services.
Summary
- China’s version of cheap, but tight
- Underlying innovation will support growth
- FDI flows highlight giant strides made by China and the benefit for EMs
