In fact, ANZ expects the People’s Bank of China will keep policy rates in the money markets at the current level for the rest of 2017 in order to sterilise the negative impact of further tightening.
As the central government becomes extremely serious in curbing debt growth more corporate defaults are expected as local officials shy away from refinancing activities. Banks will likely tighten credit policy in the near term, risking the cash flows of some borrowers. Credit risks will increase.
However, for China to upgrade its monetary and financial systems, there are some gaps the NFWC has left out.
In ANZ’s view China still needs to establish an effective interest-rate transmission mechanism so borrowing and lending rates can be priced properly and efficiently.
In addition, more efforts are needed to strengthen SOE reforms, improve local governments’ fiscal positions and crack implicit government guarantees. These issues are crucial to reduce local governments’ indebtedness.
Raymond Yeung is Chief Economist, Greater China, ANZ