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Asia-Pacific | Economy

China: Balancing Financial Reform and Stability

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  • Tighter financial regulations in China have been a major concern for investors, as many fear the measures could hurt growth in the world's second largest economy. Should markets worry as regulators tighten their grip?
  • Citi analysts’ answer is no. Citi analysts believe it is necessary for China to clean up financial sector before opening its financial services and capital markets to foreign participation and to ensure China’s financial stability and security, as mentioned by President Xi Jinping lately, leading into the 19th Party Congress and beyond.
  • China’s banking assets expanded very rapidly from RMB 174trn in 2015 to RMB 236trn in April this year, rising by 1.36 times in size over two years. Overall banks’ claims on non-bank financial institutions, a major part of shadow banking activity, increased remarkably from less than RMB 12trn two years ago to RMB 27.5trn now. Citi thinks this segment could be the main target of the regulatory crackdown on the asset side of the banks.

 

 

  • China's Caixin PMI fell to 49.6 in May from 50.3 in April, the lowest reading in 11 months. The private measure (with a smaller sample size), contrasts with the official PMI reading, which indicated manufacturing was steady last month. The official manufacturing PMI stayed unchanged at 51.2, beating expectations for a decline. Non-manufacturing PMI rebounded to 54.5, suggesting services activity expanded at a faster pace.
  • The broad picture is consistent with a roll back in the strong economic performance year to date. But the data still indicates continued cyclical expansion, just not as robust as in 1Q. Even though the pace of GDP growth has moderated, it is still on track to exceed 6.5% target in Citi’s view.
  • Citi believes this is an opportune time to tighten financial regulations while growth momentum is still strong enough to absorb the impact of China’s policy shift.

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