China: Deleveraging has shown results, but tightening likely to continue – Nomura

An annual industry report for China showed that tighter regulation succeeded in curbing wealth management product (WMP) growth significantly in 2017, notes the research team at Nomura.

Key Quotes

“The prioritisation of regulation in 2018 was recently re-emphasised at the China Banking Regulatory Commission’s (CBRC) annual meeting. Financial deleveraging will likely be a multi-year process, with the focus now likely to shift to local government financing and highly leveraged companies, in our view.”

“Does this change our economic view? No. We maintain our forecast for a gradual economic slowdown and real GDP growth of 6.5% in 2018.”

“Strategy implications? We see two implications from deleveraging on the rates market. First, we expect it to put pressure on bonds, but at the same time we believe the People’s Bank of China is likely to keep short-term money market rates broadly stable. This supports our 2s5s repo steepener trade. Second, it should result in a gradual flight to quality and continue to support outperformance of CGBs relative to policy bank and corporate bonds.”