A falloff in the volume of Chinese bank lending – Have the efforts of the Chinese government’s clampdown of credit growth paid off?

Bloomberg News Online, Reuters, and several financial newswires reported on November 11, 2013 that total new bank lending in China hit a 10-month low during the month of October 2013, with total new Chinese Yuan loans of 506.1 billion yuan (USD 83.1 billion), which was lower than the forecasted 600.0 billion yuan. The data was obtained in a press release issued by the country’s central bank, Peoples’ Bank of China (PBOC). The news release seems to suggest that there are some signs of progress in the various measures implemented by the Chinese government in clamping down credit-induced growth declines through reductions in government-financed infrastructure spending projects, various rounds of property loan curbs, and the moves initiated by the PBOC to tighten the nation’s bank liquidity, including the various episodes of interbank lending rate spikes during the late summer, and late fall of 2013.

According to Reuters, the fall in new bank loans was matched by slower growth in the total social financing aggregate, a broad measure of liquidity in the economy, which stood at 856.4 billion yuan during the month of October 2013, as compared to 1.4 trillion yuan during the month before. It is a sign of a sharp reversal of the previous Chinese administration’s efforts to bolster the nation’s economic growth numbers through the widespread issuance of credit, and other financing methods to fund growth. Premier Li Keqiang has emphasised repeatedly through the media that the new administration will no longer take on a massive role in managing the economy through infrastructure spending, and will instead focus on domestic-led growth, including the recent developments where foreign participation in the economy has been steadily increasing, liberalising the financial sector, such as the setting up of offshore Chinese Yuan trading hubs, opening up several free trade zones, such as the Shanghai Free Trade Zone (FTZ), among others. The various measures undertaken by the new administration are intended to ensure that the global community understands that China is willing to move towards a market-oriented economy, and gradually introduce various reform measures in order to make the nation become globally competitive.

China’s new leadership transition appeared to take on a different approach as compared to the previous administrations, which has a firm grip on the economy. The new Chinese leaders have wanted to guide the country to a more sustainable path of economic growth, and will take all measures to ensure that the gradual easing of the nation’s economic growth does not lead to a so-called ‘hard’ landing, and instead taking the necessary tiny baby steps to implement policies that will allow the domestic markets to adjust to the new reforms. It also indicates the government is willing to lend its listening ear to some of the hard-pressed issues faced by many Chinese people, and work towards achieving an amicable solution in resolving these issues. Despite adopting the softer approach by the Chinese government, it is still far from willing to agree with the adoption of policies intended to liberalise the media and entertainment sectors, which is still being tightly controlled by the government in order to limit the occurrence social tensions, which could significantly impact its iron grip of the country.

The loan volume declines have also impacted some of the nation’s largest financial and banking institutions through various restrictions in bank lending activities, tripling the amount of loan losses, and provisions, lending policy curbs for property purchases, and industry expansion related loans. The PBOC has no intention to sharply tighten the amount of credit available and choosing instead to initiate various rounds of measures to limit the emergence of ‘shadow’ banking activities, including deliberately not making timely interventions to stem the rise interbank lending rates as witnessed in the various rounds of interbank lending rate rises taking place this year.

However, the financial markets tend to take a different read on the intentions of the PBOC to adopt such delayed measures in ensuring that money markets function smoothly, preferring to see that one of utmost priorities of the PBOC as a central bank is to ensure that it maintains the stability in the financial system, and not stay on the side lines while watching the markets react in a disorderly manner in response to the tightening measures being put in place. There has to be a certain limit on how the PBOC takes steps to curb excessive loan growth, and not extending too much whereby its original intentions of not adopting excessive tightening measures are not in congruence to what the markets have been expecting.

The slowdown in overall bank lending volume is quite significant as the Chinese leaders are scheduled to wrap up its Third Plenum meetings later in the day on November 12, 2013. The keenly watched event by the media and around the world is also a sign of global acknowledgement that China’s economic influence does create impacts across the world, and not just on its domestic front. The latest data on the bank lending volume declines is also an indication that China’s economy is slowing down, and gradually moving towards a more sustainable path of economic growth. The Chinese leaders are well aware that it needs to do more to in implementing social reforms that will make sure that its citizens’ welfare are being taken care of, reduce the amount of income disparities among the country’s rich and poor, and limit the amount of citizen discontents, which could upset the overall social stability of the country.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc