Thu, May 18, 2017 - Page 10 News List

Goldman builds financial-stress index for China

GROWTH:Economist Li Zhennan said ‘an increase in financial stress hurts economic growth, but only to the extent that broader financial conditions tighten’

Bloomberg

With China’s leadership focused anew on curbing the economy’s leverage, Goldman Sachs Group Inc analysts are rolling out a new gauge of stress in the nation’s financial markets.

With corporate bond sales being canceled, stocks sliding and government debt yields climbing in recent months, it is no surprise that the measure shows an increase in strain.

However, the financial-stress index (FSI) has dropped from the recent high of late last year and early this year and might not necessarily translate to weakness in the economy, Goldman analysis showed.

“We find that an increase in financial stress hurts economic growth, but only to the extent that broader financial conditions tighten as a result,” economists, including Hong Kong-based Li Zhennan (李真男), wrote in a note dated Tuesday.

“Growth will not necessarily be affected significantly if a sharp increase in financial stress is followed by a quick reversal,” Li said.

Some of the metrics underlying the index have short histories, so Goldman Sachs built both an extended-history measure with the ingredients that have longer histories, and a “full” version.

The analysts incorporated measures from the banking sector, interbank lending and the bond, stock and foreign-exchange markets to build the FSI, which is distinct from their existing financial conditions index.

Goldman’s Financial Conditions Index has shown some tightening in financial conditions recently, thanks in part to a slowing in money-supply growth.

Stress levels remain well below highs reached during the 2008 global credit crisis and more recent turmoil, such as that triggered by the surprise August 2015 yuan devaluation, the index indicates.

That might help explain why China’s deleveraging initiative has so far stirred little concern among foreign investors.

China’s central bank has boosted cash injections this week, in a sign that policymakers want to calibrate their deleveraging efforts to avoid the kind of market volatility seen in 2013 and 2015.

With regard to the banking sector, Goldman Sachs used measures of lenders’ stocks and bonds in the FSI.

“Overall stress in the banking sector is not high in the long-term context, though has increased since end-2016,” the analysts wrote.

As for measures of interbank lending, such as the gap between the three-month Shanghai interbank offered rate and three-month government bills, these indicators have shown sharp jumps since October last year.

In taking the temperature of the bond-market, the analysts used items including the swings in 10-year Chinese government bond yields. For stocks, margin finance outstanding along with fluctuations in the overall equity index were picked and showed less stress than other components.

Most of the inputs on the foreign-exchange front “are closely related to capital outflow pressure,” the analysts wrote.

Since the 2015 devaluation trauma, “financial stress in the market has been relatively high, though the stress has decreased in recent months,” the report showed.

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