Is the Chinese government serious in reining in on excessive loan growth?

Thomson Reuters, Bloomberg News Online, and various news agencies have reported on December 11, 2013 that the latest loans data released by China’s central bank, the People’s Bank of China (PBOC) for the month of November 2013, indicated a relentless growth in new lending. According to the information provided in the report, the amount of new bank lending came in at 624.6 billion yuan (USD 102.88 billion), higher than the forecast of between 580.0 to 590.0 billion yuan, and it surpassed the October 2013 new loans data which was recorded at 506.1 billion yuan. In addition, total social financing aggregate, a broad measure of liquidity in the economy, jumped to 1.23 billion yuan during the month of November 2013, compared to 856.4 billion yuan in October 2013. The broad M2 money supply rose year-on-year (yoy) to 14.2 percent during the month of November 2013, and is expected to surpass the central bank’s target of 13.0 percent for the entire year. It is widely expected that policy makers will stick to the same target in 2014. (An earlier article written on this issue entitled “A falloff in the volume of Chinese bank lending – Has the efforts of the Chinese government’s clampdown of credit growth paid off?” indicated some of my thoughts that the PBOC might have found some success in tightening credit growth. However, with the release of the latest November 2013 loans data suggested that the PBOC has not found real success in curbing excessive loans growth).

The latest data release is quite puzzling, considering that China has made several moves over the course of the last six months in trying to tighten lending; imposing various stringent rules that curb speculative asset purchases, including private property; undertaking steps to limit credit growth through imposing curbs on the so-called ‘shadow’ banking system (non-traditional sources of lending, including hedge funds, websites such as, among others); and the apparent lack of timely monetary actions made by the PBOC earlier, nearly caused the Chinese equity markets to suffer its worst weekly drops during the month of June and October 2013 as a result of the various instances where interbank rates, most notably the Shanghai Interbank Lending Rate (SHIBOR) spike to approximately 14.0 to 15.0 percent in late June 2013, before coming back down to the current 3.5 percent as of last close on December 11, 2013. The question is whether the Chinese government is following through its current reform plans in curbing excessive, speculative types of investments, including property, bitcoins, consumer loans, among others, or is the November 2013 loans data to be treated as an exception, and should not be read as anything confusing, until there is evidence of a significant trend developing on loans growth going forward.

The concerns expressed by many economists and market observers interviewed by various news wires echoed a common theme that given that the Chinese government has implemented various measures to curb speculative loan growth, especially those loans coming from the ‘shadow’ banking system, how is it that policy makers could not figure out whether the policies implemented so far in restricting credit growth are working well, and whether there has been a follow-through of the reform plans that many Chinese government officials have originally envisioned, especially after the conclusion of the Third Plenum Meetings in November 2013? Should the PBOC be on the tightening bias, rather than allowing banks to continue lending without proper restraints being placed on such forms of lending, including those originated from the ‘shadow’ banking system? Also, are those various rounds of spikes in Chinese interbank rates we’ve observed for the past six months or so enough to scare lenders from issuing credit, or are these simply tools used to ward off some occasional instances of speculative market behaviours? It is very difficult to determine what exactly the PBOC is trying to convey its message to the markets in terms of its overall monetary policy objectives that should be in line with the Chinese government.

According to excerpts taken from the December 12, 2013 Bloomberg Online News article which highlighted a quote taken from the front page commentary on December 11, 2013 by China Securities Journal, which is operated by the official state media, Xinhua News Agency, as saying that “China should phase out its “proactive” fiscal policy, which resulted in a large deficit and adds to risks from local-government debt.” This quote made by the state media shows clearly that the Chinese government is taking steps to restrain lending at the government level, but the question is whether the growth in the loan numbers during the month of November 2013 is a one-off issue, and is generally difficult to tell exactly what the PBOC and/or the Chinese government is following through in the alignment of the actions undertaken so far and the reform plans announced in November 2013.

The latest loans data for the month of November 2013 points to some indications, at least from the various commentaries made in China’s state media reports, that the country is showing some progress in curbing loan growth. However, until future data proved otherwise, sceptics like myself are doubtful that that the country will find successes in its goal of implementing stricter loan polices. Take for instance, the relentless rise in property prices, despite the various rounds of cooling measures being implemented; it has not seriously resulted in a falloff of any significant loan growth. Businesses, especially the state-owned enterprises (SOEs) are still receiving funding from the government for the purposes of capital expenditures, despite the various messages that Chinese leaders have earlier conveyed to the markets suggesting the new leadership is determined to maintain status quo, and not disrupt the pace of growth projections of 7.0 percent annualised gross domestic product (GDP) growth for 2014. The Chinese government has openly stressed that it will be limiting its involvement in undertaking massive infrastructure building, and worked towards creating social stability among the people, but it remains to be seen whether the Chinese government is following through its overall goal of maintaining a non-interventionist approach in managing the economy.

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