Xi Meeting Shows China Crackdown to Be Intensified, Nomura Says

(Bloomberg) -- New shadow banking measures may be unveiled and China's central bank will probably continue to raise money-market rates after President Xi Jinping met with the country's top officials over risks to the financial system this week, according to Nomura Holdings Inc.

Xi gathered with members of the Communist Party Politburo and the chiefs of China's four financial regulators April 25, ordering them to prevent systemic risks. Concern over a regulatory crackdown has whipsawed Chinese assets over the past two weeks.

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“We expect stricter financial regulatory measures to be rolled out, which we believe should be seen as targeted tightening, particularly in the shadow banking system, to de-leverage financial speculation and reduce capital outflows,” Nomura analysts Zhao Yang and Wendy Chen wrote in a report. “The overall monetary policy stance is likely to remain neutral.”

Policy makers have been mounting a campaign to tackle leverage built up since the global financial crisis as they shift toward what the central bank calls prudent and neutral monetary policy. At the same time, they're wanting to ensure stability in markets ahead of a twice-a-decade leadership transition this fall at the 19th Communist Party Congress. Economic growth is projected to slow gradually this year after accelerating for two straight quarters.

People's Bank of China Governor Zhou Xiaochuan attended the meeting, along with the chiefs of the banking, securities and insurance regulatory agencies, according to the official Xinhua News Agency.

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Nomura focused on Xi's calls to:

• deepen financial reform
• strengthen financial regulation
• take measures to deal with risk
• support the real economy
• educate government officials
• strengthen Communist Party leadership in financial areas

“We interpret this as a targeted tightening, focusing on de-leveraging shadow banking to curb asset bubbles and the associated financial risks,” Zhao and Chen said. “The PBOC's open market operations rates could continue to rise in coming quarters, particularly if, or when, Fed hiking expectations escalate.”

Chinese growth is likely to slow to 6.6 percent this year as infrastructure and fixed-asset investment remain the biggest drivers for the country's expansion, the China Academy of Social Sciences said Friday in its 2017 forecast.

The Politburo's removal of the phrase “expanding aggregate demand” puts more emphasis on financial risks, Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong, wrote in a report Friday. The banking sector's balance sheet expanded 16 percent in 2015-16, up from 13 percent to 14 percent in 2013-14, he said.

“No wonder policy makers choose to focus on risks,” Hu wrote. “The last thing they would want to see during the Party Congress this fall is a market crash like the one in summer 2015.”

Read more: China Risks Spoiling Global Markets Party as Stocks Tumble Again

To contact Bloomberg News staff for this story: Jeff Kearns in Beijing at jkearns3@bloomberg.net, Yinan Zhao in Beijing at yzhao300@bloomberg.net.

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Emma O'Brien

With assistance from Jeff Kearns, Yinan Zhao