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Credit growth in China is gradually declining as policymakers try to navigate the world’s most important recovery from the pandemic without fueling unsustainable debt.
This week, China has kept its benchmark lending rate unchanged for the 12th consecutive month, but other indicators show that Beijing, which has greater control over its state-dominated banking system than most major economies, uses other policies to try to lessen the risk of overheating in its unbalanced and heavy recovery of the industry.
Total social funding, the country’s leading credit growth indicator measuring loans across the national financial system, rose 12% year-on-year in March, the slowest pace since April last year, according to official data released this year. month.
Mike Riddell, chief fund manager at Allianz Global Investors, warned that China’s credit cycle is “the main global growth dynamic to watch out for,” because so far it had “driven a lot of global thinking.”
Any further hardening would lead to global growth as it recovers from the pandemic, he said.
“China has already been the first major economy to tighten policy,” said Julian Evans-Pritchard, senior economist at Capital Economics.
The latest signs of a slowdown in credit growth come after the central bank asked lenders they slow down their activity in February. Political leaders have addressed the real estate sector through the so-called “three red lines” policy, which aims to limit the leverage of major developers measured by three balance sheet metrics.
The approach is designed to limit their access to credit, which has helped drive a construction boom that boosted steel production to its highest level in history. last year.
The credit growth rate had risen sharply by mid-2020, driven by a reduction in the primary one-year loan rate – one of several used to guide borrowing costs – that China introduced last April as the economic consequences of the pandemic were achieved.
But by the end of 2020 credit growth had begun to fall compared to the trend of output growth according to Evans-Pritchard’s analysis, which adjusts to seasonality. He added that the stimulus in China depends largely on targeting behind-the-scenes banks.
“The slowdown in credit growth over the rest of the year will be driven by deleveraging initiatives by policymakers, the most significant of which is deleveraging in the real estate sector,” said Michelle Lam, China’s senior economist. Société Générale.
The country’s bond market interest rates also rose late last year and remain high. Ten-year government bonds are trading at 3.16%, compared to 2.5% the previous year.
“As for the capital markets, it has definitely hardened,” said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management.
Last year’s rise in credit growth pushed China’s debt-to-GDP ratio to an estimated 281% according to JPMorgan, the highest level on record. China is not alone: debt has risen sharply around the world as governments try to get out of the pandemic, but Chinese policymakers are more concerned than most of the resulting debt burden, analysts say.
Guo Shuqing, the country’s leading banking regulator, warned in March on the risks of bubbles abroad and the domestic real estate market, and in January, an adviser to the People’s Bank of China he was concerned that the lost liquidity could fuel an asset bubble.
“They seem much more concerned about the impact of Covid on debt sustainability than many other countries, which is why they are moving so quickly to normalize policy,” Evans-Pritchard said.
But Chinese policymakers are taking a sector-specific approach instead of raising rates, which would affect the entire economy, in part because the recovery is uneven.
While last week’s gross domestic product data documented a sharp rebound from the depths of the first quarter of last year, quarter-on-quarter growth was disappointing at just 0.6%. 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 Congress in March that its macroeconomic policies would remain supportive.
“It looks like the economy has shrunk,” said Dariusz Kowalczyk, an economist at Crédit Agricole. “I think that’s why the PboC has guided money market rates to make sure the economy is working well.”
Interbank rates have risen: Shanghai’s three-month interbank rate stands at 2.6%, compared to 1.4% last April, although it is below the 3.1% level of November.
Steve Cochrane, chief Asia Pacific economist at Moody’s Analytics, expects the rate not to rise until next year. He noted the risk that “small and medium-sized businesses would run out of credit” if global rates were to rise.
While 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 the change in China’s lending patterns as a little-considered indicator for the trajectory of the global recovery.
“U.S. tax spending completely dominates the inflation debate,” said Bhanu Baweja, chief strategist at investment bank UBS. “I’m amazed at how much people don’t talk about the Chinese credit crunch.”
Additional reports from Wang Xueqiao in Shanghai
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