Broker's View

Where is China’s monetary policy headed?

The loosest phase of monetary policy in China has passed, analysts said, although April’s credit growth weakened again after rebounding in the first quarter.

PUBLISHED : Wednesday, 18 May, 2016, 4:44pm
UPDATED : Wednesday, 18 May, 2016, 5:40pm

The People’s Bank of China (PBOC), the country’s central bank, will slow its pace of interest rate cuts and is less likely than before to lower the amount of money banks must keep in their vaults, analysts said.

Credit growth in the country slowed in April.

“We expect no interest rate cuts this year and see less room for lowering reserve requirements,” CICC analysts Yu Xiangrong and Liang Hong wrote in a note.

Reserve requirements set the amount of funds that banks must hold against deposits made by their customers.

ANZ Research expects only one reserve requirement ratio cut this year and sees the PBOC to be less aggressive in its monetary easing and to adopt measures targeted at specific regions of the country.

April’s new loan growth was just 555.6 billion yuan (HK$661.0 billion). That’s down 59.4 per cent from March compared with a market forecast of 900 billion yuan, according to a poll by Reuters.

Total social financing slumped 68 per cent to 751 billion yuan.

The growth of M2 — a measure of money supply that includes cash and checking deposits — eased to 12.8 per cent from 13.4 per cent.

We expect no interest rate cuts this year and see less room for lowering reserve requirements
CICC analysts Yu Xiangrong and Liang Hong

The monetary data was significantly distorted by government debt swaps, a financial instrument used to ease repayment pressure, CICC said.

Local government bond issuance — their buying of debt — reached 1.06 trillion yuan in April. That amount is not included in the total social financing, but is still represented in the financial system’s support to the real economy, CICC said.

If local government bond issuance is included, the total social financing number should have grown 17.2 per cent year-on-year in April, up from 16.7 per cent in March. CICC said.

In April’s new local government bonds, there was 910 billion yuan in debt swaps — a scheme to shift high-cost local government debt to cheaper bonds in order to reduce their repayment pressure. That was a record high. The debt swaps partly replaced bank loans and other forms of local government financing, CICC said.

New loan growth should have reached market expectations of 900 billion yuan if it had not been affected by the debt swaps, CICC said.

It said that the credit data should be evaluated against other economic indicators, such as inflation and economic growth. In the first quarter China’s gross domestic product rose 7.2 per cent and the average lending rate among banks was 5.3 per cent, compared with 6.6 per cent nominal GDP growth and a lending rate of 6.56 per cent a year earlier.

“Monetary policy has shifted from tight to accommodative,” Liang and Yu said. “Real interest rates have dropped notably. The economy should continue to gradually recover.”

They said the room for further monetary easing is limited but any tightening is unlikely.

The PBOC could maintain its accommodative monetary policy before inflationary pressures become more visible, given the recovery of economic activity is not yet solid, CICC said.

Economic data in April has been weak for the mainland. Manufacturing slowed and industrial production growth in April fell 0.8 percentage points to 6 per cent year-on-year. Fixed asset investment also slowed.

“Of course, these numbers are not as exciting as we saw in the past few months. But they are good enough and more sustainable,” Macquarie Research said in a note. “Overall, policy makers should feel quite comfortable with April’s data, which shows a steady macro environment with risks largely balanced.”

Policy makers will swing between supply-side reform and monetary stimulus, Macquarie said.

The People’s Daily, a mouthpiece for the ruling Chinese Communist Party, this month quoted an unnamed “authoritative person” as saying the country’s economy is heading to an L-shaped trend.

An L-shaped trend is an economic decline followed by stability.

If growth faces downside risks as they did earlier this year, the central bank would use demand side stimuli by pumping more money into infrastructure investment. If growth stabilises, like now, they would then spend more time on supply-side reform such as cutting industrial and manufacturing over-capacity and cleaning up bad loans, Macquarie said.