Tight credit cuts China’s 1st half growth, but economy will rebound

Shadow banking to be cleaned up

The big surprise for most foreign investors will be moves to clean up “Shadow Banking”. The National People’s Congress (NPC) March meeting will point the way ahead. Action should take place soon after. The moves may well precipitate market turmoil, but the eventual outcome should be immensely bullish.

Chinese financial institutions have significantly expanded their asset management products in recent years. The interconnected system exposes them to liquidity and credit risks. For good reason both the Chinese authorities are worried.

China’s regulatory authorities have published a set of draft guidelines for  management of financial assets. The comprehensive regulatory framework. covers all financial products. Several banks and other financial institutions have attempted to oppose potential regulations. This is hardly surprising, as they have profited from shadow transactions.

The word is that the regulatory authorities will not back down. Sometime after the NPC meeting the authorities will issue the new tough guidelines. Regulatory action will take place soon afterwards. As one friend remarked to us, ‘’The financial gangsters will be knocked over.’’

The implications are clear: the shadow banking sector will be cleaned up.


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Growth projections

Credit is exceptionally tight even for most state-owned enterprises. Many importers of key raw materials are asking for higher credit limits from their suppliers.

The reformation of the system in the second quarter will bring shadow banking into the mainstream economy. The authorities should thus have  greater financing capacity to unleash a new round of economic growth.

The Chinese government may also cut taxes, fees and red tape. The aim would be to offset potential market turmoil when regulators restrict shadow banking practices. These developments could well surprise global investors.

Rural areas, emerging from the backwater, will be new driver of growth 

China’ is to focus on improving the living standards of 576 million people living in the rural community. The advent of electricity into the 900,000 rural villages should help raise disposable income. The arrival of new banking facilities and specialised lending services suggests that the countryside is on the threshold of robust growth. Appliance and manufacturers of cell phones and other items, have begun focusing their activities deep into rural areas.

Beijing has only scratched the surface of China’s economic potential, having focused mostly on 21 percent of the population. The implication is that growth in the early months of this year will slow but will accelerate in the second half and into 2019.

China should again lead the global economy’s recovery later this year.

Simon Hunt, who heads Simon Hunt Strategic Services, regularly visits China. This report follows a visit in the past few weeks.

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