MonitorBeijing sends clear message to banks to slow credit creation
The central bank has eased the liquidity squeeze in money markets but with conditions as investors downgrade their expectations for growth
China's central bank eased the liquidity squeeze in mainland money markets yesterday, but only after it made sure the financial system had got the message: credit creation must slow.
As the first chart below shows, Fitch Ratings calculates that in the first three months of this year China's financial system created 7.5 trillion yuan (HK$9.4 trillion) of new credit.
That's more new credit than China created in the whole of 2007 at the height of its Olympic investment boom. As a result, the total amount of outstanding credit in the Chinese economy has climbed to around 200 per cent of gross domestic product, a ratio that has prompted unwelcome comparisons with the United States ahead of the subprime crisis.
The effect of the central bank's signal was dramatic. Although overnight interbank rates dropped to 6.6 per cent from as high as 25 per cent last Thursday, the plunge in Chinese stock prices accelerated.
Accepting that credit will be tighter in the second half of the year, investors downgraded their expectations of economic growth and concluded that the earnings prospects for Chinese companies are looking bleak.