This month China’s
leading party announced a package of economic reforms. This involved promise of changes to the one-child
policy and residency laws; more important to buy-side firms were the financial
measures. State-owned banks now face competition from the private sector; there
will be deregulation with regards to interest rates; and capital controls will be
relaxed. Whilst a dream for proponents of the free-market, it may not be a good
one. Aside from other external factors, there are a lot of issues that will arise
from these economic reforms which the street truly has not taken into much
consideration. SOEs have stayed afloat under cheap credit, although often not repaid
loans; and banks, to compensate, have profited from inflated net interest margins.
China gorges on cheap credit. Liberalising this would raise borrowing costs,
and would certainly bring a tide on many struggling firms with insolvency
becoming a lot more evident. In addition, Chinese Banks cannot continue current
lending practices. So whilst the sell-side may upgrade many, caution should definitely
be taken if ‘buys’ are fuelled by macro thoughts. Additionally, the street
truly has not accounted for China’s capital account liberalisation potentially seeing
capital outflows rather than inflows.
this is great shomil.
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