China’s Bad Loan Giant Awakes

In the aftermath of the record cash crunch in the Chinese interbank market, many financial institutions in China and abroad have been hoping that the PBOC would either end its stance of aloof detachment or at least break its vow of silence and if not act then at a minimum promise good times ahead. Alas, despite repeated confusion in various press reports that it has done that, it hasn’t aside from the occasional “behind the scenes” bank bailout. And at today’s Lujiazui Financial Forum, PBOC governor Zhou Xiaochuan kept the status quo saying the central bank will adjust liquidity “at the proper time to ensure market stability.” That time, however, is not now.

The reason is that the PBOC is actually doing what all other developed world banks have been mouthing off they would do but are terrified to – let the commercial banks forcibly deleverage without any central bank assistance, in order to end the capital misallocation. Or so the bank states. The bigger issue is that the lack of easing by the PBOC implicitly means massive deleveraging within the financial sector, likely compounded by asset impairments and deposit haircuts. But at least the intention is admirable.

Among the other soundbites from Zhou’s speech:

  • Financial markets are sensitive to signals
  • China will use various tools to adjust liquidity
  • China will maintain stable market conditions
  • China’s economic growth is “stable” in general
  • China’s growth slowdown remains in a “reasonable” zone
  • China to speed up economic restructure and adjustment
  • China’s economy remains a key engine for global growth
  • Zhou says he is fully confident about the nation’s economic prospect and financial system

Caixin has more details of his speech:


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