China’s record expansion of credit in January reveals Beijing’s policy priorities. It sees avoiding a “hard landing” for the economy as more critical than imposing control over what some analysts call a debt “bubble”.
Several other strands of China’s broader economic policy were also discernible in the January lending numbers. Beijing wants to funnel relief to debt-laden companies, crank up investment, boost the property market, pay off foreign loans and use the bond market to effectively bail out local governments.
“This strategy [is to] help avoid a hard landing in the economy in 2016, though at the cost of continuing to fuel the credit bubble,” wrote David Hensley of JPMorgan in a research note.
Though the jump in lending was partly driven by seasonal influences, it was clear from the composition of lending that Beijing, which wields considerable influence over its financial sector, was also seeking to stimulate activity in the real economy.
Medium and long-term corporate loan growth — the portion of lending that tends to be channelled most directly to long-term productive investments — rose sharply, rising 205 per cent month-on-month and 73.2 per cent year-on-year to Rmb1.06tn ($162.6bn).
“This suggests that lending to infrastructure projects is increasing and that earlier bottlenecks in the funding of these projects are being cleared,” according to a research note from FT Confidential Research, a unit of the Financial Times.
Total renminbi loans rose to a monthly record high of Rmb2.51tn in January, up from Rmb597.8bn in December to form the main portion of a total Rmb3.42tn in total social financing (TSF), the broadest official measure of credit expansion. This figure, also a monthly record, was nearly double the Rmb1.81tn in December’s TSF.
Policymakers had been seeking to strike a balance between encouraging gross domestic product growth without exacerbating longer-term risks from excessive debt. January’s numbers have revealed that their immediate priority lies with generating growth, though analysts said it would be unthinkable for January’s high levels to continue all year.
Indeed, local media reported in late January that central bank officials told commercial banks to slow the pace of lending following a flood of credit in the initial weeks of the year.
Bond issuance rose sharply in line with Beijing’s strategy of promoting direct financing to alleviate stress on the banking system, which suffers from proliferating non-performing and overdue loans. China’s bond market grew by 34 per cent in size last year, its fastest pace since 2008.
In January, corporate bond issuance picked up to Rmb454.7bn, compared with Rmb356bn in December as companies used bonds to help repay outstanding loans and raise funds to invest.
Beijing was also likely to continue relying on the bond market to alleviate the financial distress of local governments, which have been banned from borrowing from banks or the corporate bond market since the start of last year. Instead, they have been selling municipal bonds, which are not picked up by the TSF numbers, according to Julian Evans-Pritchard, China economist at Capital Economics, a research company.
However, if these muni bond issues are added back in to the TSF numbers, it is clear that overall credit in China has been expanding since mid-2015 (see chart).
Separately, January’s numbers showed a continuation of the shift away from foreign currency lending, as concerns over further renminbi depreciation weighed upon corporations and banks. Foreign currency-denominated loans declined by Rmb172bn. Over seven months, foreign loans have slumped by Rmb859bn in total.
Shen Jianguang, chief Asia economist at Mizuho Securities, said that the People’s Bank of China was likely to keep the renminbi exchange rate relatively stable in order to guide market expectations. “As renminbi depreciation expectations as well as capital outflows start to ease, there is more room for the PBoC to cut the required reserve ratios or interest rates in the near future,” Mr Shen said.
A cut in the required reserve ratio, which defines what proportion of deposits banks should keep with the central bank, has the impact of injecting more liquidity into the economy.
Medium to long-term household loans also rose to their highest monthly amount since 2012 in January, in a sign that China’s housing market is gradually recovering from a downturn that began in 2014.