Credit growth is slowing just gradually with the economy back to its pre-Covid path. Interbank stress should ease; financial stability risks look manageable despite idiosyncratic corporate bond defaults. We see higher CGB rates and stronger CNY.
Remain OW on A-shares amid near-term volatility.
The PBoC is not overtightening: The recent tightening remains countercyclical; it shouldn't be taken as an asset bubble warning. The PBoC deliberately kept interbank liquidity quite loose in December and early January to ease the impact of onshore credit default in November. However, 4Q GDP data confirmed that the economy has returned to its pre-Covid path, and the corporate bond market has normalized. Thus, policy tightening naturally came recently under Beijing’s countercyclical framework. That said, credit growth is slowing just gradually rather than falling off a cliff, at a much milder pace than the same period in 2018.
Roadmap of future tightening: We expect some normalization in liquidity to be in sight. The PBoC could inject more liquidity in the coming weeks, consistent with its historical pattern of heavy injection approaching Lunar New Year holidays.
The seven-day interbank repo rate could fall, narrowing its gap with the policy rate. Nevertheless, with financial tightening policies aimed at banks' on-balancesheet credits, off-balance-sheet shadow credits, and bond issuance standards, we expect broad credit growth could gradually moderate 2ppt this year.
Financial stability risks look manageable: Policy exit could lead to idiosyncratic bond defaults, but we expect a decline in overall financial system NPLs via frontloading of NPL digestion in the past year, as well as improved cash flow for more companies and households amid economic recovery.
Investment implications: Min Dai and Kelvin Pang are fixed income strategists and are not opining on equity securities. Robin Xing, Jenny Zheng, Zhipeng Cai and Helen Lai are economists and are not opining on any securities. Their views are clearly delineated.
Due to the nature of the fixed income market, the issuers or bonds of the issuers recommended or discussed in this report may not be continuously followed. Accordingly, investors must regard this report as providing stand-alone analysis and should not expect continuing analysis or additional reports relating to such issuers or bonds of the issuers.
Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.
For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to FINRA restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Equity strategy: Despite expecting heightened near-term volatility, we stay OW on A-shares. We cite strong earnings, lack of signs of overheating.
Fixed income and FX: We also recommend buying 10-year CGBs vs. paying five-year NDIRS, and remain long CNH/JPY.