China economy

China digs deeper credit hole as households keep borrowing

Country in the grip of a credit fever despite efforts to tamp down real estate transactions, analysts warn

PUBLISHED : Sunday, 15 October, 2017, 6:45pm
UPDATED : Sunday, 15 October, 2017, 10:48pm

China’s household borrowing and shadow banking activities surged last month despite Beijing’s repeated pledges to rein in overall debt.

With just days to go until a key Communist Party meeting to decide the country’s leadership line-up for the next five years, the latest central bank numbers show there is little sign that the world’s second-biggest economy has quenched its thirst for fresh credit.

Aggregate social financing, a broad measure of credit, rose 23 per cent to a six-month high of 1.82 trillion yuan (US$276.6 billion) in September, buoyed by growth in bonds and entrusted loans, according to figures published by the People’s Bank of China on Saturday.

New yuan lending was strong last month at 1.27 trillion yuan, 58 per cent of which was granted to households, according to the central bank.

At the same time, China’s broad money supply indicator, M2, rose 9.2 per cent at the end of September, up from 8.9 per cent a month earlier and the first increase in the monthly indicator this year.

Why China’s latest bank reserve ratio cut comes with strings attached

JZ Securities analyst Deng Haiqing said China was in the grip of a credit fever.

“A credit fever is another form of economic stimulus, and goes against China’s broad trend of macroeconomic control,” Deng said.

He warned that the rapid rise in Chinese household debt was adding “systemic financial risks”.

“China needs to be aware of the lesson from the US subprime crisis – an indebted household sector can be the biggest source of risk,” Deng said.

Industrial Bank analysts led by Lu Zhengwei also said September’s high household loan total showed Chinese residents still had a strong demand to buy property with bank credit, despite efforts by big cities across the country to curb real estate transactions.

But a relatively accommodative credit policy could help ensure money and stock market stability in the lead-up to the national party congress starting on Wednesday.

Lian Ping, chief economist for Bank of Communications, the country’s fifth largest lender, said the figures showed China’s monetary authority was “enhancing its guidance of market expectations”.

“It is showing its determination to stabilise market liquidity and interest rates,” Lian said.

In a statement just hours after the data was released, central bank governor Zhou Xiaochuan said China was expected to maintain a similar growth rate in the second half of this year to the 6.9 per cent it registered in the first six months.

Chinese central bank official insists new cash reserves rule won’t affect resolve to cut financial risk

At the same time, Zhou said China had achieved “initial results” in cutting leverage with improved economic growth quality and efficiency.

“China will continue to … manage risks from shadow banking activities and property market bubbles,” he said at a meeting of G20 finance ministers and central bankers in Washington.

The Chinese leadership headed by President Xi Jinping has listed “cutting leverage” and “financial risk control” as top national economic priorities.

The central bank is also trying to strike a balance between growth and risk control by squeezing capital from speculation into “real economic activities” on the ground.

In its latest policy move, the PBOC said banks that met specific lending targets to small businesses and rural households would be allowed to have a lower reserve ratio from next year, giving the lenders an incentive to channel more credit to workshops and farms instead of property developers and homebuyers.

China Merchants Securities analysts led by Xie Yaxuan said new yuan loans in China could amount to 14 trillion yuan this year, or 2 trillion more than the informal target of 12 trillion yuan.