China Credit Growth Set To Slow As Policymakers Clamp Down

Yesterday, a few hours after the Federal Reserve announced that it was increasing interest rates by 0.25%, targeting a range of 1.25% to 1.5% for its benchmark rate, China’s central bank responded by raising the rates it charges in open-market operations and on its medium-term lending facility.

The cost of seven-day and 28-day reverse-repurchase agreements was raised by five basis points while the cost of the medium-term lending facility was also increased by five basis points, with the 1-year rate raised to 3.25%.

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Tightening financial conditions is high on the list of priorities for China's policymakers.  At the October Party Congress and Politburo meeting on December 8, lawmakers expressed a desire to bring credit growth under control. The Politburo set "effective control of macro leverage ratio" as one of three key targets next year.

So far, however, it seems lenders are not cutting back. In the month of November, new yuan-denominated loans rebounded by more than expected to Rmb1,120 billion compared to Rmb 663 billion in October. Following this expansion, the year-on-year growth of outstanding loans rebounded to an 11-month high of 13.3%, compared to 13% in October.

China Credit Growth

Most of the growth in credit was with household and corporate loans. The growth of short-term household loans accelerated in November to 19.9% vs. 19.2% in October. Meanwhile, corporate loan growth rose for the third consecutive month, to 9.7% vs. 9.3% in October.

Total social financing rose to 1,600 billion in November vs. 1,039 billion in October.

According to analysts at Morgan Stanley, overall broad credit growth (TSF- equity financing + government bonds) slowed, but not by much during the month. The analysts' estimate broad credit growth was 13.6% for November, down from 13.9% during October.

China Credit Growth Set To Slow

Even though credit growth in China continues at a rapid rate, Morgan's analysts believe that policymakers will look to act in the second half of 2018 through rate increases and efforts to inspire consumers/companies to de-lever:

"We expect stronger regulatory tightening ahead. We also maintain our out-of-consensus calls for policy rate hikes in 3Q18 and 1Q19, which could help curb excessive leverage buildup and prevent further moderation in time deposit growth. Indeed, the better inflation dynamics have sent both real lending and deposit rates toward the threshold that we see for the PBoC's first rate hike. The combination of ongoing regulatory tightening and policy rate hikes could slow broad credit growth to 11.5% YoY by end-2018 and ~11% by end-2019 (vs. 13.6% currently)"

China Credit Growth