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China Record Credit Growth Boosts Outlook for Economy in 2014
Perspective | 21 February 2014

Record new credit in China in January will help the economy maintain momentum while highlighting challenges for officials trying to limit the risk of financial turbulence from defaults and bad loans.

Aggregate financing, the broadest measure of credit, was Rmb2.58 trillion (US$425 billion), the People’s Bank of China (PBOC) said in a statement on 15 February. New local-currency lending was Rmb1.32 trillion, the highest level since 2010. Trust loans, under scrutiny because of default risks, were about half the level of a year earlier.

The data add to better-than-forecast trade numbers, suggesting that China can limit the scale of any slowdown from last year’s 7.7 percent expansion in gross domestic product (GDP). At the same time, the figures contrast with a central bank call in mid-January for lenders to control surging loans and highlight diminishing economic returns from credit growth.

“These numbers show that the firming up of the central bank’s monetary stance is going to be a gradual, balanced exercise, not an aggressive one,” said Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong. “The authorities want to slow down the pace of credit growth and contain financial risks but they also want to ensure that sufficient credit continues to come online to support economic growth.”

Annual Meeting
Aggregate financing exceeded the Rmb1.9 trillion median estimate in a Bloomberg News survey and the previous high of Rmb2.54 trillion in January 2013. Growth in new credit slowed to about 10 percent last year from 23 percent in 2012, according to PBOC figures.

As China’s Communist Party leaders prepare for next month’s annual meeting of the legislature, the National People’s Congress (NPC), officials are grappling with swelling local-government debt, volatility in money markets and risks from shadow banking, highlighted by a bailout in January 2014 that averted the nation’s first trust default in at least a decade.

A 10.6 percent jump in exports in January may help Premier Li Keqiang achieve annual economic growth of at least 7.2 percent, the level that he says is needed to protect jobs. The premier usually presents the government’s expansion target for the year in his annual work report to the NPC. The goal was 7.5 percent for 2013.

GDP may increase 7.4 percent this year, according to the median estimate in a Bloomberg survey. That would be the weakest pace in 24 years.

Credit Warning
“Banks are still extending a lot of credit and this will somewhat cool down fears that China is slowing dramatically,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group (ANZ) in Hong Kong. “Liquidity is plentiful and able to support growth.”

The jump in loans contrasts with the central bank’s January warning that bank credit was increasing rapidly and also its statement in November that the economy may face long-term deleveraging. Each US$1 of credit added the equivalent of US$0.17 in GDP in the first quarter of 2013, down from US$0.29 the previous year and US$0.83 in 2007, according to data compiled by Bloomberg.

Economists’ estimates for aggregate financing, which includes bank lending, corporate bond issuance and shadow-banking products like entrusted loans, ranged from Rmb1.5 trillion to Rmb2.39 trillion. January’s figure compared with a previously reported Rmb1.23 trillion in December.

Worries Exaggerated
New local-currency loans compared with the median economist estimate for Rmb1.1 trillion and Rmb1.07 trillion a year earlier. New loans were Rmb482.5 billion in December.

“Worries about policy being too tight or that rate increases are hurting credit and economic growth are exaggerated,” said Wang Tao, chief China economist at UBS in Hong Kong.

The weighted average lending rate in China was 7.2 percent in December, up from 6.22 percent a year earlier, PBOC data released earlier this month show. In December, 63.4 percent of loans had interest rates above benchmarks, up from 59.7 percent a year earlier, according to the central bank.

Money-market rates have also increased. The benchmark seven-day repurchase rate, a gauge of interbank funding availability, averaged 4.7 percent in January, up from 3.08 percent a year earlier.

Bond Issuance
“High interest rates prompted companies to reduce bond issuance and turn to bank loans,” Peng Wensheng and Zhao Yang, economists with China International Capital Corporation in Beijing, wrote in a note. With financial risks rising, officials are unlikely to loosen monetary policy in the short term and “pressure to tighten regulation is increasing.”

Bank lending usually surges in January as financial institutions receive new quotas and offer credit at the start of the year to earn more interest, according to economists at ANZ, Citigroup and Mizuho Securities Asia. January’s figure may also have been boosted as loans postponed from December were handed out.

Banks may have pushed out credit even more aggressively in January than usual because of the timing of the Lunar New Year holiday, said RBS’ Kuijs. The week-long festival started on 31 January 2014 and 9 February 2013. That could mean “substantially more modest credit numbers in February,” he said.

Money Supply
M2, China’s broadest measure of money supply, rose 13.2 percent from a year earlier in January, the Beijing-based central bank said. That matched the median economist estimate and compared with 13.6 percent in December. The growth in outstanding local-currency loans slowed to 14.3 percent in January from 15.4 percent a year earlier.

New trust loans issued in January were Rmb106.8 billion, the PBOC said, down from Rmb210.8 billion a year ago.

“There could be a demand issue here,” said ANZ’s Liu. “Investors have been hearing scary stories about trust loans so maybe they are finally starting to realise the risks in this sector.”


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