Posted inRegulation

China’s de-risking push may signal big changes

The Chinese government’s warning on financial risk this week has put pressure on the country’s equity and bonds markets.

This week, China’s politburo said that regulators should attach great importance to preventing and controlling financial risks and step up punishment for illegal activities.

“[T]he fact the Communist Party’s premier decision-making body met and decided to act on financial risk means there’s consensus at the very top and things are about to change,” according to a Bloomberg report.

Risk control measures include tightening leveraged trading; a general regulatory focus on controlling the growth of the real-estate financing business; an expected move to require insurers to set up a prudent mechanism in their investments to control risk, according to a statement from Fidelity.

The warning comes at a time when China is worried about government, corporate and houshold debt, which together is around 264% of the country’s GDP, Bloomberg reported.

The country’s shadow banking sector has also ballooned, with wealth management products (which are associated with the shadow banking sector) tripling to $3.8trn in just three years.

These products have become popular because of the higher yields they offer compared to other assets in the current low-interest rate environment. Mainland media has recently reported on a potential $435m wealth management product scandal.

Regulators have been active with risk control efforts. In March 2016, China’s central bank asked banks to submit reports on entrusted investments, or funds that Chinese banks farm out to external asset managers to rectify any irregularities involving high leverage, multiple layers of investment or regulatory arbitrage, according to the Bloomberg report.

Early this month, China also required banks to speed up bad loan disposal and crack down on illegal funds flowing into the real estate sector, the report said.

China’s stock markets went down ahead of the announcement on stricter risk control. Both the Shanghai and Shenzhen stock markets started to plunge on April 13, according to Bloomberg data. 

Positive on China bonds

Bryan Collins, Fidelity International’s fixed income portfolio manager, views the impact of the regulatory announcement as short-term.

“It is important to take a step back at these times and focus on long-term opportunities,” Collins said in the Fidelity statement. 

Collins was positive on China bonds. He said China government bond yields are expected to rise because the PBOC has a tightening bias due to strong underlying economic growth.

With less volatility, short duration Chinese bonds are extremely attractive and 10-year Chinese government bonds will present buying opportunities as yields move above 3.6%, he believes.

Catherine Yeung, Fidelity’s investment director, was positive over the long-term, adding: “We expect continuous deleveraging will take place after de-capacity i.e. supply side reforms and destocking of the property market.

“If we see the market go down further, it could be an attractive level to buy as the measures will not change the fundamentals of the companies we like nor the broader economic landscape.”

Yeung added that with the reporting season showing good results, coupled with a stable economic backdrop, she expects that Chinese equities will be supported by strong fundamentals and reasonable valuations.  

The performance of Collins’ China High Yield Fund versus the Asia-Pacific and RMB fixed income sectors since December 2015, when the product was launched, according to FE data.




Part of the Mark Allen Group.