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China: Financial deleveraging continues - Nomura

Analysts at Nomura note that China’s regulators have issued a document to strengthen regulations in the asset management business and Nomura views this as a further step to rein in the rapid growth of the shadow banking sector and contain systemic risks. 

Key Quotes

Does this change your economic view? No. The continuation of financial deleveraging is generally in line with our expectations. The implementation of new measures will further tighten liquidity conditions and weigh on economic growth. We continue to expect a growth slowdown in coming quarters and a 50bp RRR cut in H2 2018.” 

Strategy implications? For rates, we believe these regulations show financial deleveraging remains a concern for the bond market. However, this news is partly expected and CGBs should be less affected than other risky assets by these regulations. We expect 10yr CGB yields to stay within a 3.8-4.0% range until year-end before gradually rallying in 2018. On swaps, we continue to recommend a combination of receive 2yr and 2s5s steepener. For FX, stronger regulatory and deleveraging efforts by the authorities should make China’s net flow backdrop even more challenging owing to downside growth risks and credit concerns, thereby causing medium-term headwinds for the RMB.”

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