Photo: Reuters / Damir Sagoli
The PBOC pledged to comprehensively improve financial services for private and small enterprises, including encouraging banks to increase credit supply. Photo: Reuters

Chicken Little was disappointed once again when China’s big banks announced better-than-expected earnings with lower-than-expected leverage overnight.

Bank of China’s second quarter income rose 23%, the best in the group, Agricultural Bank of China rose 4.8%, and Industrial and Commercial Bank of China rose 2.3%.

Investors evidently anticipated the good news, because Chinese bank shares have led the HSCEI upwards during the past three months. Interbank leverage fell during the first half, the first decline in seven years, while the volume of wealth-management products outstanding fell sharply in May. Conventional bank loan demand increased.

Asia Unhedged has been telling the same story from the outset: China suffered a bout of deflation during 2014-2015 when it kept the RMB pegged to a rising dollar. It let the RMB depreciate starting in August 2015 to correct its excessive appreciation against the currencies of its trading partners. As the RMB adjusted, producer prices rose, and as producer prices rose, industrial profits rose. It’s easy to contain leverage when earnings are up.