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Goldman Builds China Financial-Stress Index - and It's Risen (1)

Christopher Anstey

(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 country’s financial markets.

With corporate bond sales being canceled, stocks sliding and government debt yields climbing in recent months, it’s no surprise that the measure shows an increase in strain. But the financial-stress index, or FSI, has dropped from the recent high in late 2016 and early 2017, 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 Zhennan Li wrote in a note dated May 16. “Growth will not necessarily be affected significantly if a sharp increase in financial stress is followed by a quick reversal.”

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, as noted in the chart above. A Z-score is a normalized measure based on standard deviation, which gauges moves compared with a longer-term average.

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 FCI has shown some tightening in financial conditions recently, thanks in part to a slowing in money-supply growth.

For an account of how retail investors in China are reacting to the shadow banking crackdown, click here.

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 new Goldman index indicates. That may 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 policy makers want to calibrate their deleveraging efforts to avoid the kind of market volatility seen in 2015 or 2013.

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.

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.

(Updates with context on recent liquidity injections, in paragraph above second chart.)

To contact the reporter on this story: Christopher Anstey in Tokyo at

To contact the editors responsible for this story: Christopher Anstey at, Ravil Shirodkar

©2017 Bloomberg L.P.