Successful Deleveraging Is No Mean Feat, Tianfeng Securities' Chief Economist Says
She Qingqi
/SOURCE : Yicai
Successful Deleveraging Is No Mean Feat, Tianfeng Securities' Chief Economist Says

(Yicai Global) Jan. 8 -- Financial deleveraging is like rendering lard and controlling monetary policy is like finessing the flame that melts it, Liu Yuhui, chief economist at Tianfeng Securities Co., said at the 2018 China Chief Economist Forum.

Rendering lard is the process of melting down hard animal fat to make it suitable for cooking.

"Monetary policy and interest rates are like the flame," Liu said. "You have to have control. If the heat is too low, you won't get the lard, but if it's too high, you'll make a mess of the pot."

Controlling the temperature is an art, he added. The central bank needs to lift the policy interest rate above the economy's natural interest rate, which is the equilibrium rate required for full employment.

"When the policy interest rate is gradually lifted above the natural interest rate and stays there for an extended period of time, you'll get the lard," he said.

China's policy rate has long been below the economy's natural rate, which is clearly shown in the CNY170 trillion (USD26 trillion) of existing M2 broad money supply and CNY460 trillion of credit, Liu added.

It has become a general trend for A-share movements to become similar to those on the H-share market, but small- and mid-cap stocks are unlikely to diverge, he said of China's capital markets. A-shares trade on mainland exchanges and H-shares are issued by companies listed in Hong Kong.

"Many strategy reports said that the A-share market will be slow and bullish this year, with an expanded scope of products," Liu said. "Such judgments are not consistent with China's current financial conditions. The movement of stock indexes is hard to predict."

Daily turnover on China's stock markets was about CNY410 billion last year and could decline in 2018 given the current environment, he added, suggesting the H-share market has more investment opportunities than its mainland counterpart.

On the domestic bond market, Liu believes that the 10-year sovereign yield will stay around 4 percent for most of this year and won't rise substantially if it does go up. The central bank will implement liquidity management if it surpasses 4.5 percent, he added, saying the yield is unlikely to fall and shouldn't drop below 3.8 percent.

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Keywords: Monetary Policy , Financial Markets , China Chief Economist Forum , Tianfeng Securities , Deleveraging