China's central bank to focus on controlling risks in financial system
It may signal concern that non-bank lending will lead to defaults that could trigger social unrest
The central bank says it will focus on controlling risks in the financial system and seek "stable and appropriate" growth in aggregate financing - a measure of funding that includes loans, stock and bond sales.
The PBOC's addition of "controlling risks" as a policy objective may signal growing concern that a surge in non-bank lending over the past two years will lead to defaults that could trigger social unrest. Citic Trust, a unit of the nation's biggest state-owned investment company, said on December 21 that it missed a biannual payment to investors in one of its wealth management products after a steel company did not make interest payments on the underlying loan.
Regulators "may tighten control on the quality and quantity of credit supply, particularly through non-bank channels such as trust loans" in the first half of next year, said Zhang Zhiwei, chief China economist at Nomura Holdings in Hong Kong. A slowdown in credit growth would result in a moderation in economic expansion, he said.
The central bank last year introduced aggregate financing as an indicator designed to capture broader funding sources in the economy with such money raised through trust investment products and bond and stock sales.
The wording "stable and appropriate growth" of aggregate financing in the PBOC statement differed from previous statements that referred to a "reasonable scale" of financing.
Loans made outside the formal banking system, including funds raised through wealth management vehicles that offer higher interest rates than bank deposits, expanded at a faster pace than bank credit this year.
Yuan-denominated bank loans accounted for 45.8 per cent of aggregate financing last month, down from 58.8 per cent in the same month last year, according to data compiled by Bloomberg. At the same time, the share of trust loans rose from 7.5 per cent to 17.5 per cent.
"China's central bank is in a very delicate situation," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia in Hong Kong. "It wants more bank loans and greater financial support for economic growth next year, but it also has to keep a close eye on risks in the shadow banking system."
Shadow banking on the mainland refers to lending that is not subject to the same regulation as bank loans, and includes banks' off-balance-sheet vehicles, such as commercial bills and entrusted loans, and wealth management products as well as underground lending by individuals.
In its statement, the central bank said it would use various tools to ensure steady and appropriate growth in credit and money supply and reiterated that it would push ahead with overhauling interest rates and the yuan's exchange-rate system while keeping the currency basically stable.
It omitted comments made in previous statements that it would increase the currency's "two-way movement".
"Whether the PBOC explicitly said it or not, the trend towards a freer yuan exchange rate won't change," said Shen, who previously worked for the International Monetary Fund.
The central bank said the nation's economy was stable and prices were "basically stable", while the global economy remained "relatively weak" with lingering uncertainties.
The statement is a summary of a meeting of the central bank's monetary policy committee, an advisory body that includes academics and officials from ministries and government agencies.
