China may have started to rein in the pace of credit growth at the start of 2021 as December’s financial data fell below market expectations, and with policymakers signalling that they are leaning toward tapering off the expansionary monetary policy conducted last year. Weak financial data released by the People’s Bank of China (PBOC) on Tuesday has reinforced the belief held by many analysts that the central bank has started to gradually tighten credit. However, to ensure financial stability and continued progress in the nation’s economic recovery, steps taken by the central bank are expected to be relatively modest. Tighter credit conditions would test certain parts of the economy, with analysts pointing to the property sector in particular, and would likely result in the issuance of fewer bonds by heavily indebted local governments and their financing vehicles. The growth of total aggregate financing, which measures fund flows from the financial sector to non-financial sectors in the forms of loans, bonds and trust investment plans, slowed to 13.3 per cent in December from the recent peak of 13.7 per cent in October, the data shows. And growth of a broad measure of money supply, known as M2, fell sharply to a nine-month low of 10.1 per cent in December from 10.7 per cent in November. China’s economic activity slowed modestly in December New yuan bank loans increased by 2.82 trillion yuan (US$436 billion) from a year earlier to 19.63 trillion yuan last year, just below the 20 trillion yuan cap mentioned by central bank governor Yi Gang in June. New bank loans totalled just 3.37 trillion yuan in the fourth quarter – or 17 per cent of the annual amount – though most of the annual lending by banks is made early in the year to increase annual interest income. The PBOC injected about 9 trillion yuan into the economy via a variety of its tools to support growth after the coronavirus outbreak early last year. However, it refrained from further policy-loosening in the second half, leaving unchanged both the loan prime interest rate and policy interest rates. Despite calls from some officials and analysts for a continued accommodative monetary stance to consolidate the economic recovery, the PBOC’s decision comes in response to orders by the central government to stabilise the nation’s rising debt level . The overall debt-to-GDP ratio rose by 25.7 percentage points in the first three quarters of last year to 270.1 per cent, according to the National Institution for Finance and Development. The International Monetary Fund estimated last week that China’s economy grew 1.9 per cent last year and will expand 7.9 per cent this year. “Stability is the top priority for monetary policymaking in 2021,” PBOC governor Yi Gang told the official Xinhua News Agency last week, adding that policy-exit concerns were relatively small for China, as it is “one of the few countries implementing a normal monetary policy that hasn’t flooded [the economy] with money”. Yi said the PBOC would ensure reasonably ample liquidity in the economy and align the growth of its money supply and overall financing with the nominal economic growth rate before adjusting for inflation. Larry Hu, chief China economist with Macquarie Capital, said that the growth rate of aggregate financing could slow to 11 per cent this year amid lower fiscal spending and tighter controls on financing for property developers . China must avoid ‘premature’ exit from economic support given ‘precarious’ global outlook: World Bank The Chinese government has capped individual bank’s exposure to real estate loans and ordered the largest developers to lower their debt ratios. However, “more property curbs could be announced”, Hu cautioned. Morgan Stanley estimated that fiscal tightening and the new property-financing regulations will lower the credit growth rate to 11.5 per cent by the end of 2021. “The weaker credit readings in December support our view that countercyclical tightening is under way to rein in leverage and financial risks,” Morgan Stanley economists said in a note. However, “the pace of [China’s] stimulus exit will likely be gradual and flexible”, they added, citing the central government’s directive of preventing a major policy U-turn .