Central bank chief says China will rein in credit after IMF rings debt alarm bell
Bank governor’s comments mark subtle shift in policymakers’ priorities
China will try to rein in excessive bank credit growth, the People’s Bank of China governor Zhou Xiaochuan said in comments published on Saturday, after the International Monetary Fund said the country’s debt-to-GDP ratio was “increasing at a dangerous pace”.
“As global economic recovery gradually normalises, China will exert certain control over credit growth,” said a statement on the central bank website, summarising Zhou’s comments at the meeting of G20 central bankers and finance ministers in Washington.
The comments marked a subtle shift in the priorities of Chinese policymakers. China’s central bank is leaning towards debt control as hard-landing risks are smaller in a delicate balance of bolstering economic growth without exacerbating financial risks.
“It’s a kind of fine-tuning of policy priorities,” said Li Weisen, an economics professor with Fudan University in Shanghai. “China needs to improve control over bank credit, and home mortgage loans are expected to slow from October on.”
But Li added that the PBOC didn’t have the luxury to tighten monetary policy because it would hurt growth too much.
China has opted for debt-fuelled spending to keep its economy afloat, and helped to increase global debt to a record level of US$152 trillion. China’s debt-to-GDP ratio is also higher than the global average of 225 per cent although the country is a “developing” one.
Massive credit unleashed by Chinese banks is keeping zombie companies alive and inflating housing prices in major Chinese cities – a few cities reporting more than 30 or even 40 per cent increases in home prices in a 12-month span, forcing China’s top leaders to act.
At least 19 Chinese cities, including Beijing, Shenzhen and Guangzhou, have tightened control over home purchase and mortgage loans in the last week to cool off the property investment frenzy.
“The Chinese government has attached great importance to this and is actively taking measures to promote the healthy development of the real estate market,” Zhou was quoted as saying in the statement.
But Yi Xianrong, a former researcher with the Chinese Academy of Social Sciences who now teaches at Qingdao University, said the government’s efforts to tame the property market by restricting home purchases could only achieve results on the face value.
“The government is basically saying ‘please don’t buy property here in big cities and go buy property there in small cities’, but the market doesn’t operate like that,” Yi said.
“The property market trouble is just a reflection of China’s financial problem” with excessive money chasing limited viable investment channels, he said. “Last year it was the stock market, and this year it’s the housing market.”
China’s quickly rising debt level has become a global concern. The IMF warned in its global economic outlook report released earlier this week that “vulnerabilities continue to accumulate with the economy’s rising dependence on credit” for China and that credit growth is complicating Beijing’s efforts to rebalance the economy.
China’s outstanding yuan loans increased 13 per cent at the end of August to 102 trillion yuan (HK$118 trillion), and home mortgage loans accounted for the lion’s share of newly granted credit in recent months.
In a move to explain China’s bank credit expansion, Zhou, who is in his 14th year as China’s central bank chief, said it reflected Beijing’s efforts in “coping with sluggish global economic recovery and striving for growth targets set by the G20”. Meanwhile, China needs to keep growth in bank credit to play a “countercyclical” role as the country seeks to phase out excessive capacity, Zhou was quoted as saying in the statement.
Lou Jiwei, China’s finance minister, echoed Zhou in the same statement.
China’s debt and overcapacity problem is a byproduct of China’s efforts to help global growth, according to Lou. “After the outbreak of the global financial crisis … China implemented a massive stimulus policy to make an important contribution to post-crisis growth, but it also left problems of rising debt level and overcapacity,” Lou was quoted as saying.
In terms of the yuan exchange rate, Zhou said China would strive to seek a balance between “improving exchange rate flexibility and maintaining exchange rate stability”.