China: PBoC’s Zhou highlights risks in financial sector – ING

The two policy implications of Zhou’s article imply tighter liquidity in the interbank market pushing interest rates higher in the period ahead, according to Iris Pang Economist at ING.

Key Quotes

“In his latest article on the PBoC’s website Governor Zhou has highlighted financial sector risks and the need to actively avoid systemic risks. Mr. Zhou pointed out risks of nonpayments in banks and bond markets, in wealth management products maturity mismatch and implicit guarantee, and in online-platform sales.”

“Zhou’s article means two things for us. First, the PBoC policy will continue to be geared toward financial deleverage, which confirms our view that RRR cut for inclusive finance is not a monetary loosening policy. Second, the PBoC will tighten or formalise regulations on fintech areas, which has been benefited from very loose regulatory environment.”

“The two policy implications imply tighter liquidity in the interbank market, and in wealth management products’ underlying debt, pushing interest rates higher. We expect this to spread from short end of the interbank curve to longer end of the sovereign curve. However, with an eye on avoiding risks we expect the PBoC will smooth out any sudden spike in interest rates. Therefore, we do not expect any spikes in short term interbank rates in December 2017.”