China likely to continue process of financial deleveraging with tighter regulations, says Scotiabank

China is expected to carry on with the process of financial deleveraging with tighter regulations, which might further be a drag on onshore market sentiment, according to a Scotiabank research report. According to Financial News, China is expected to introduce additional deleveraging. On Monday, PBoC’s Research Bureau’s Chief Economist Ma Jun stated that excessive leverage poses financial risks and China’s monetary policy is “more prudent” than last year. Last week, China Banking Regulatory Commission stated that it will concentrate on protecting against financial risks.

Meanwhile, in the month of March, the PBoC contracted its balance sheet for the second straight month, lowering its Claims in Other Depository Corporations under the Assets and Deposits of Government on the Liabilities side.

In the meantime, the central bank governor stated in the IMFC statement that the Chinese monetary policy would continue to be wary and neutral, keeping a better balance between stabilizing economic growth and the task of deleveraging, preventing asset bubbles and containing the accumulation of systematic risks.

The PBoC has injected a net CNY 170 billion to the banking system month-to-date via reverse repos after draining excess liquidity post the Chinese New Year holiday.

In the coming months, the People’s Bank of China is expected to increase yuan primary money market rates again if required, while maintaining the key interest rates. It is also likely to keep the medium-to long- term funding costs appropriate to boost the economy via unconventional monetary policy such as PSL and MLF, noted Scotiabank. It is also expected to closely watch cross-border outflows.

“Meanwhile, the yuan is anticipated to remain relatively steady amid tightened liquidity conditions”, added Scotiabank.