A surge in loan financing in China – Is this a worrying trend or a sign of economic growth?

Bloomberg News reported on February 15, 2014 that according to the latest statistics published by the People’s Bank of China (PBOC), aggregate financing stood at 2.58 trillion yuan (USD 425.00 billion) during the month of January 2014, as compared to the December 2013 figure of 1.23 trillion yuan. Bloomberg News median estimate of a poll taken from economists was showing a 1.90 trillion yuan during the same month, and the previous high of 2.54 trillion yuan in 2013. The PBOC also reported that growth in new credit slowed to about 10.0 percent in 2013 as compared to the 23.0 percent registered for the whole of 2012. The rise in lending activities for the month of January 2014 adds to the various favourable economic data releases last week, including China’s trade data, which unexpectedly surged to 10.6 percent in exports on a year-on-year (yoy) comparison during the month of January 2014, as compared to low, or no growth being registered.

The surge in aggregate financing to 2.58 trillion yuan adds to some impetus over the pace of Chinese economic growth, albeit at a slower rate. But, the surge in credit is an indication of the growing trends in lending growth, which have also add to the overall worries that overexpansion in credit lending might lead to more financial risks, which could work against PBOC’s overall goal of slowing the pace of credit growth. The aggregate financing data also includes the use of shadow banking activities. However, it is not unusual to see credit growth surging during the beginning of the year, as most Chinese financial institutions front load some of their lending activities in anticipation of demand arising from the Lunar New Year festivities which began on January 31 this year, as compared to February 07 last year. Also, bank lending usually surges in January as financial institutions receive new quotas and offer credit during the start of the year. However, the credit growth is not to be taken lightly as just part of seasonality adjustments, as the surge in credit growth, if not managed well by the Chinese government, could result in drastic consequences to China’s overall goal of achieving a ‘soft landing’ for the economy.

So far, several economists interviewed by Bloomberg News have not expressed any major concerns, as the credit growth does correspond to the M2 money supply data which was released earlier showing that growth surged to 13.2 percent during the month of January 2014. M2 money supply is considered the broadest measure of monetary expansion in China. In addition, the PBOC has also released its fourth quarter monetary policy report in early February 2014 which indicated that it will strive to strengthen supervision of the wealth-management products and the interbank business that many smaller financial institutions turn to for financing. The Chinese government appears to have everything under control. However, the spectre of last month’s bailout of China Credit Trust by its parent company, the Industrial and Commercial Bank of China (ICBC) does point to growing signs of concerns, and anxieties expressed by many Chinese depositors that the Chinese financial institutions are not as financially sound as they have previously thought, and could face trillions of yuan in potential loan defaults and write-offs. The Chinese people are some of the world’s largest group of savers, and market confidence has to be emphasised with great importance in order to ensure a smooth-running economy

The Chinese Communist Party is scheduled to hold its annual Spring meetings of its legislative assembly, the National People’s Congress in March 2014 where it will outline several key economic targets for 2014, including the highly anticipated GDP forecast for 2014 which many economists have pencilled it for an annualised growth of 7.0 percent to 7.5 percent. The latest releases of economic growth may help Premier Li Keqiang in reinforcing his original goal of 7.2 percent needed to sustain employment growth.

The Chinese government has also been expressing its concerns on credit growth, and have tried to rein in on credit growth through the introduction of various lending/borrowing restrictions, including prolonging the duration of its injection of liquidity into the monetary system, which caused money market rates to surge during several occasions in 2013, and most recently in January, where the benchmark seven-day repurchase (repo) rates, a gauge of interbank funding availability, averaged 4.7 percent during the month of January 2014, up from the 3.08 percent a year earlier. These measures are being introduced in order to tame down credit growth, and over exuberance in lending, especially for property and luxury purchases which many government policy makers have been trying to clamp down growth and not further inflate the asset bubbles which are still growing, despite several anti-property speculation measures being introduced. In addition, the Chinese government is also trying to crack down on public corruption among local government officials and limit the amount of extravagance that has angered many Chinese people, and caused lots of unhappiness over the issues surrounding income inequalities.

I believe that there are continuing improvements that the Chinese government needs to work in order to successfully tame down credit growth, including tightened lending measures being introduced, and strengthening its monitoring and supervision authorities on Chinese financial institutions to ensure tough compliance, and breach of lending rules are not to be taken lightly. The issue of shadow banking is a difficult, but not an impossible task for Chinese government policy makers to tackle. There has to a set of tighter criteria, and capital requirements being issued for non-financial institutions before they are allowed to market their financial products/services. The proposed set of regulations have to be consistent and applicable to all entities interested in participating in the shadow banking system. In addition, financial education among Chinese individuals and borrowers need to be emphasised in order to create awareness and understanding of the types of investments and the potential risks associated with it.

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

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

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

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