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Credit growth in China is slowly slowing, with politicians trying to navigate the most important recovery in the world pandemic without pushing for unsustainable debt.
China has maintained its benchmark lending rate this week for 12 consecutive months, but other indicators show that Beijing has more control over the state-dominated banking system than most major economies, using other policies to reduce the risk of global warming, industry in a recovery that is very hard on the side.
Total social funding, the main measure of credit growth that measures loans in the country’s financial system, rose 12% year-on-year in March, the slowest pace since April last year, according to official data released this month.
Mike Riddell, chief executive officer of Allianz Global Investors, warned that China’s credit cycle is “the main growth dynamic to be seen” because it has so far “encouraged a lot of global reflection”.
Any other tightening would result in global growth as the pandemic heals, he said.
“China has already been the first major economy to tighten its policy,” said Julian Evans-Pritchard, China’s chief economist at Capital Economics.
The latest signs of slowing credit growth come after central banks applied to lenders to control their activity in February. They have been directed by politicians property sector through a policy called “three red lines,” which aims to measure the balance of major developers according to the metrics of the three balance sheets.
The approach is designed to limit access to credit, which has led to a rise in construction that has pushed steel production to an all-time high. in the first year.
The growth rate of credit rose sharply in mid-2020, driven by a reduced first-year loan rate – one of several used to address borrowing costs – China presented its economic consequences of the pandemic in April last year.
But by the end of 2020, credit growth was beginning to decline compared to the growth in trend production, according to Evans-Pritchard’s analysis, as it adjusts to seasonality. He added that stimuli in China are based on backward orientations for banks.
“The slowdown in credit growth over the course of the year will be triggered by maladaptation initiatives by policymakers – the most significant of which is the disintegration of the property sector,” said Michelle Lam, China’s chief economist at Société Générale.
Interest rates in the country’s bond market also rose at the end of last year and continue to rise. The 10-year government bond traded at 3.16 percent, up from 2.5 percent a year ago.
“In terms of capital markets, it has definitely tightened,” said Zhikai Chen, head of Asian stocks at BNP Paribas Asset Management.
Last year’s credit growth boosted China’s debt-to-GDP ratio to 281 percent, according to JPMorgan, the highest level on record. Not only is China in debt — debt has risen around the world as governments try to get out of the pandemic — but Chinese policymakers are more concerned about the resulting debt burden, analysts say.
Guo Shuqing, the country’s main regulatory bank, warned in March bubble above risks abroad and in the domestic real estate market, and in January, adviser to the People’s Bank of China has expressed concern that loose liquidity could create a bubble of assets.
“They seem much more concerned with the impact on Covid’s debt sustainability than many other countries, and that’s why they’re moving so fast to normalize policy,” Evans-Pritchard said.
But Chinese policymakers are taking a sector-specific approach rather than raising rates, which would be skewed across the economy, partly because the recovery is inadequate.
Although last week’s gross domestic product data rebounded sharply in the depths of the first quarter of last year, quarter-on-quarter growth was only 0.6 percent. Inflation has remained close to zero, although producer prices have started to rise rapidly since the beginning of this year.
The government told the National People’s Assembly in March that its macroeconomic policies will be supportive.
“The economy seems to have slowed down,” said Crédit Agricol economist Dariusz Kowalczyk. “I think that’s why they’ve driven money to lower PboC market rates to make sure the economy is doing well.”
Interbank rates have risen: the three-month Shanghai Interbank Bank Rate is 2.6%, up from 1.4 per cent in April, although it was below the 3.1 per cent level in November.
Steve Cochrane, chief economist for Asia Pacific at Moody’s Analytics, hopes it won’t raise rates until next year. He noted the risk of rising credit rates for “small and medium-sized businesses”.
While global attention has shifted to the U.S., where President Joe Biden’s tax stimulus package has boosted economic growth forecasts, some investors point to a shift in China’s lending patterns as an underlying indicator of the world’s recovery trajectory.
“U.S. fiscal spending is completely dominant in the inflation debate,” said Bhanu Baweja, chief investment strategist at UBS. “I’m amazed at how much people are not talking about China’s credit boost.”
Additional report by Wang Xueqiao in Shanghai
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