China is open to more debt to support its economy

People walk past the headquarters of the People’s Bank of China (PBOC), the central bank, in Beijing, China, September 28, 2018.

Jason Lee | Reuters

BEIJING – As China recovers from Coronavirus pandemic, the country’s central bank is more open to increasing loans to an already heavily indebted system than to reducing it.

The People’s Bank of China on Wednesday released data for the first three quarters of the year showing steady growth in lending.

Total social finance, a general measure of credit and liquidity in the economy, increased by nearly 3.5 trillion yuan ($ 522 billion) in September to reach a total of 280.0 trillion yuan. This is a 13.5% increase from a year ago – faster than the 12.8% pace recorded at the end of the second quarter, and 2.8 percentage points above from the same period last year.

Central bank statistics department chief Ruan Jianhong rebuffed the idea that the pace of third-quarter debt growth was “rapid”, saying it was still “reasonable,” according to CNBC translation of sound in Mandarin. remarks at a press conference Wednesday.

Covid-19 hit China earlier this year as the country tried to reduce its reliance on debt for growth. Total Chinese debt in the household, government, financial and non-financial corporate sectors rose from over 300 percent of GDP to nearly 318 percent in the first quarter, according to estimates released in July by the Institute of International Finance. . The trade group expects this ratio to reach 335% of GDP in the following months.

China is in a “special situation” and a “gradual increase” in debt should be allowed to support the economy, Ruan said Wednesday. She added that after the economic growth in the second quarter, GDP is expected to increase further in the third quarter, thus creating the conditions for reasonable indebtedness.

Official figures showed China’s gross domestic product contracted 6.8% in the first three months of the year at the height of the coronavirus outbreak, before growing 3.2% in the second trimester.

China’s third-quarter GDP is expected on Monday.

“The high credit growth in September suggests that market concerns about a tightening of the People’s Bank of China (PBOC) are overblown,” Nomura’s chief economist for China, Ting Lu, and a team said on Wednesday. in a note. “The rise in bond yields in recent months reflects high demand for financing instead of a tightening of the PBOC, and infrastructure spending is likely to further push overall GDP growth.”

The credit data echoes our view that the stimulus package in China has been significant, its effect being magnified by the institutional response to Covid-19.

Robin xing

Chief Economist of China, Morgan Stanley

Nomura maintains its forecast for real GDP growth of 5.2% year-on-year for the third quarter and 5.7% for the fourth quarter, Lu said. “Due to the ongoing recovery in growth but winds still strong opposites, we expect Beijing to maintain its political wait-and-see approach through the end of the year by neither easing nor tightening any further. “

Nomura analysts said they did not expect rate cuts, policy tightening measures or cuts in the reserve requirement ratio – the amount of cash banks must keep in reserve.

Concerns about increasing debt

While other major economies have taken bold stimulus measures, the PBOC has been more measured. The central bank maintained the prime lending rate, the main benchmark for lending, unchanged in September for a fifth consecutive month.

The pace of credit growth remains low compared to that of the global financial crisis of 2007-2008.

Overall, Chinese authorities have tried to make it easier for small private companies to obtain loans in a system that tends to favor large public companies.

Growth of M2 – a broad measure of readily available money supply, including cash, savings, checking accounts, and mutual funds – slowed from 11.1% year-on-year in June at 10.9% in September, but remained well above the 8.4% growth. rate registered a year ago.

“The credit data echoes our view that the stimulus package in China has been significant, with its effect amplified by the institutional response to Covid-19,” Robin Xing, chief economist for China at Morgan Stanley, and his team said in a report released Thursday.

“We (…) expect the monetary position to remain in the regulator to allow continued return of economic growth and the labor market to its potential level,” Xing said. “Broad credit growth could therefore remain strong in the near term thanks to government bonds and resilient loan demand amid an upturn in activity.”

A private investigation of Chinese Companies by the United States-based China Beige Book raised a different concern – that many small businesses were not borrowing as much as they should if they had significant demand for their products and services.

Small and medium-sized businesses borrowed significantly less in Q3 than in Q2, says China Beige Book CEO Leland Miller told CNBC last week. “When you come out of a coronavirus shutdown or downturn, we should see a lot more borrowing,” he said. “Since it isn’t, you must be wondering what companies see that makes them hesitate.”

The central bank said on Wednesday that medium and long-term loans for non-real estate service businesses were up 17.3% from a year ago in late September, the highest since 2018.

– CNBC’s Weizhen Tan contributed to this story.

About Wanda Reilly

Check Also

PPP And EIDL Loan Advances And Changes Under New Act

PPP And EIDL Loan Advances And Changes Under New Act

getty Note to readers: On January 6th the SBA released additional guidance further clarifying the …