Highlights:

• China’s strong recovery from the Covid-19 crisis has allowed Beijing not only to withdraw some monetary and fiscal support but also to start tackling again potentially big, but less visible structural risks on financial markets (“grey rhinos”). This mainly concerns the real estate sector and state-owned enterprises (SoEs).
• While the PBoC already slowed credit growth on cyclical grounds (but is wary of a too strong CNY appreciation), tackling the structural issues will add to the deleveraging of the economy implying some softer growth.
• Regarding the real estate sector, authorities have already introduced the three-red-lines approach, caps on property lending and a land supply policy reform. Regarding SoEs, Beijing is gradually withdrawing implicit guarantees.
• We expect the deleveraging process to be appropriately cautious and to help China to shift to more qualitative growth. However, investors need to pay more attention to idiosyncratic credit risks to avoid negative surprises.
   

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