(Yicai Global) Feb. 16 -- The process of deleveraging and economic restructuring should be properly managed to avoid liquidity risks and 'debt-deflation' risks that could be triggered by too-rapid tightening of credit creation and investment, as well as avoiding asset bubbles caused by too rapid growth of leverage rate, in its latest China's central bank advised in a recently-published working paper.
This working paper released on the People's Bank of China (PBOC) website yesterday says neutral, prudent macro policies should be maintained. This means that the macro environment should be properly controlled to be neither overly tight nor too relaxed. Direct government resource allocation by the government should be reduced to create a market for fair competition. The financial regulatory system must be reformed to break the unofficial 'rule of rigid redemption' requiring a trust company to return principal and earnings to investors when trust products expire, even if the investment trust project goes bust, and further regulated equity financing should be vigorously fostered.
Macro analysis indicates that the investment-led growth model backed by high saving rates has largely determined the relatively high leverage rate in China, says the paper, which stressed in its conclusion that leverage itself is not the problem, but that the key lies rather in its efficiency. A correct practice is to let the market serve as arbiter in allocating resources and deciding who should leverage and who should deleverage.
The high debt ratio in China has prompted the government to emphasize deleveraging in recent years. Yet, this may also trigger crises, such as cash-flow shortages, stock market crashes, peer-to-peer fraud and the debt disasters that have played out in past years.