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Déjà Vu All Over Again

The late, great Yogi Berra once again hit the mark in characterizing China’s recent monetary policy actions. Using policy settings very similar to those in early 2018, the PBOC has combined regulatory tightening measures limiting overall credit growth with monetary easing steps, of which the latest was last Friday’s cut to banks’ reserve requirements. As cyclical economic momentum slows and credit growth decelerates, more monetary easing steps will be necessary to prevent broader financial risks from materializing.

At the same time, Beijing is currently facing difficult choices in deciding where to shore up the credibility of state guarantees, with financial pressure building on asset management company Huarong, China’s largest property developer Evergrande, and several local government financing vehicles (LGFVs). These choices will be critical for how markets evaluate credit risks across China’s financial markets in the years ahead.

Posted July 26, 2021
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