Credit growth in China is gradually slowing as policymakers seek to navigate the world’s largest recovery from the pandemic without fueling unsustainable debt.
China this week kept its benchmark lending rate unchanged for the 12th consecutive month, but other indicators show that Beijing, which exercises greater control over its state-dominated banking system than most major economies, uses other policies to curb. the risk of overheating in its unbalanced and heavy recovery of the industry.
Total social funding, the country’s leading credit growth indicator that measures lending across the national financial system, rose 12 percent year-over-year in March, its slowest pace since April of the last year, according to official data released this month.
Mike Riddell, a senior fund manager at Allianz Global Investors, warned that China’s credit cycle is “the main global growth dynamic to watch” because it has “driven strong global reflation” so far.
Any further tightening would dampen global growth as it recovers from the pandemic, he said.
“China was once the first major economy to tighten its policies,” said Julian Evans-Pritchard, senior economist for China at Capital Economics.
The latest signs of decelerating credit growth come after the central bank asked lenders to curb their activity in February. Policy makers have targeted real estate sector through the so-called “three red lines” policy, which aims to limit the leverage effect of major developers measured by three balance sheet indicators.
The approach is designed to limit their access to credit, which has helped spur a construction boom that has pushed steel production to its highest level ever. Last year.
The rate of credit growth had risen sharply by mid-2020, encouraged by a drop in the prime rate for one-year loans – one of many used to guide borrowing costs – that China introduced last April when the economic consequences of the pandemic set in.
But by the end of 2020, credit growth had started to decline relative to trend output growth, according to Evans-Pritchard’s analysis which adjusts for seasonality. He added that China’s stimulus package relies heavily on behind-the-scenes advice to banks.
“The slowdown in credit growth over the remainder of the year will be fueled by the deleveraging initiatives of policymakers – the most important being deleveraging in the real estate sector,” said Michelle Lam, China economist at Société Générale.
Interest rates in the country’s bond market also rose late last year and remain high. 10-year government bonds are trading at 3.16%, up from 2.5% a year ago.
“On the capital markets side, there has certainly been a tightening,” said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management.
The surge in credit growth last year pushed China’s debt-to-GDP ratio to 281%, according to JPMorgan, the highest level on record. China is not alone – global debt has risen sharply as governments seek to extricate themselves from the pandemic – but Chinese policymakers are more concerned than most about the resulting debt burden, according to analysts.
Guo Shuqing, the country’s main banking regulator, in March warned on bubble risks abroad and in the domestic real estate market, and in January, an adviser to the People’s Bank of China raised concerns that loose liquidity could fuel an asset bubble.
“They seem to be much more concerned about the impact of Covid on debt sustainability than a lot of other countries, which is why they are working so quickly to normalize their policies,” Evans-Pritchard said.
But Chinese policymakers are taking a sectoral approach rather than raising rates – which would spill over to the entire economy – in part because the recovery is uneven.
Although last week’s gross domestic product data documented a strong rebound from the depths of the first quarter of last year, quarter-on-quarter growth was disappointing at just 0.6 percent. Inflation has remained close to zero, although producer prices have started to rise rapidly since the start of this year.
The government told the National People’s Congress in March that its macroeconomic policies would remain favorable.
“It seems that the economy has slowed down,” said Dariusz Kowalczyk, an economist at Crédit Agricole. “I think that’s why money market rates have been guided down by the PboC, to make sure the economy is doing well.”
Interbank rates have increased – the three-month Shanghai interbank offered rate is 2.6%, down from 1.4% last April, although below its November level of 3.1%.
Steve Cochrane, chief economist for Asia-Pacific at Moody’s Analytics, doesn’t expect any rate hikes until next year. He underlined the risk that “small and medium-sized enterprises will be deprived of credit” if overall rates are raised.
As global attention has focused on the United States, where President Joe Biden’s fiscal stimulus package has boosted global economic growth forecasts, some investors point to China’s shift in lending patterns as one indicator. underestimated the trajectory of the global recovery.
“US tax spending completely dominates the inflation debate,” said Bhanu Baweja, chief strategist at UBS investment bank. “I’m surprised how little people talk about the Chinese credit boost.”
Additional reporting by Wang Xueqiao in Shanghai