China economy

Why China can’t get rid of its bank credit obsession

Any flood of bank credit in January would be seen as exacerbating risks in Beijing’s financial system and increase nation’s debts

PUBLISHED : Tuesday, 07 February, 2017, 5:09pm
UPDATED : Wednesday, 08 February, 2017, 8:38am

Mainland Chinese banks may have pumped an unprecedented amount of fresh credit into the economy in January – defying instructions from President Xi Jinping that asset price bubbles should be contained and borrowing levels reduced.

While January is traditionally a peak season for granting new loans for Chinese banks, a record monthly new loan size in January would be regarded as excessive because a flood of bank credit can only exacerbate risks in Beijing’s financial system and further enlarge the country’s debts.

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That will undermine Xi’s top two policy guidelines – of phasing out unwanted facilities and reducing leverage in the overall economy.

The People’s Bank of China (PBOC) is scheduled to release the monthly money supply and bank credit number in the coming days and before the official release of the data the central bank has already been tightening its monetary stance, by raising interest rate in money markets and reportedly instructing banks to slow down loan approvals in the last days of January to tame bank loans.

Institutions, from ANZ to Morgan Stanley, are expecting a bigger-than-ever loan size in the first month of 2017 to beat the 2.51 trillion yuan record in January 2016.

One reason for the aggressive bank lending is that the Chinese government is trying to achieve a growth rate at about 6.5 per cent for 2017, which requires the country to stick to a traditional growth model of relying on bank loans and fixed-asset investment.

“To achieve a 6.5 per cent economic growth, China still needs to maintain a moderate growth of money supply and new loans,” said Zhao Yang, chief China economist at Nomura International in Hong Kong. “January demand for bank loans was pushed up by price rises.”

The loan size is a vital indicator for measuring the status of the Chinese economy as it is the major source of financing for economic activities.

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Premier Li Keqiang, when he was a Communist Party provincial boss, was quoted in diplomatic cables as saying that he did not look at headline gross domestic product but electricity generation, bank loans and railway cargo to get an idea of economic soundness.

Meanwhile, the PBOC is sending signals that it will not provide limitless cheap funds to lenders. It raised the money market rates by 10 basis points last week.

“The central bank’s liquidity and interest rate policies should be coupled with window guidance and other macro-control tools to better rein in the expansion of commercial banks,” Harrison Hu, chief Greater China economist at NatWest Markets in Singapore.

Strong bank lending is a key factor behind Beijing’s booming car sales and property sales.

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Geely, a Chinese carmaker, said it sold 102,653 vehicles in January – a rise of 71 per cent from a year ago, while China Evergrande, which overtook Vanke as China’s biggest property developer, reported that its sales in January amounted to 37.2 billion yuan – a rise of 75.2 per cent from a year ago.

Certainly, not every penny of new loans reflects “organic” growth in demand for bank credit.

As the PBOC is tightening controls and oversight of shadow banking activities, many lenders have been forced to shift “off-balance” business onto their account books.

Meanwhile, the central bank will not tighten its stance aggressively.

“In a politically important year like 2017, we should not expect to see any dramatic shift of policies, especially when the economy does not justify a dramatic tightening,” said Louis Kuijs, head of Asia economics at Oxford Economics.