Mizuho daily market insights by Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
China Credit: Not Throwing the Baby Out with the Bathwater
China’s January-February credit data allay concerns that the PBoC is prematurely engaged in sweeping, and potentially devastating, policy tightening. Clearly, while the PBoC may be calibrating liquidity to avoid excesses, especially with respect to risk of frothy asset markets, there is no evidence of disproportional collateral damage to credit growth to the detriment of the nascent recovery (from COVID) in the real economy.
Specifically, enduringly strong aggregate financing of CNY5.17trln in Jan (up 2.4% from CNY5.05trln in Jan 2020) and CNY6.88trln for Jan-Feb combined (up 16.1% for the corresponding period last year). In fact, compared to Q4 average aggregate financing of CNY2.64trln, early-2021 aggregate financing suggests higher than usual policy accommodation in absolute and relative terms; even after accounting for the seasonal pattern of front-loaded credit in the beginning of the year.
This comes as a relief after weeks of hand-wringing on concerns that the PBoC might be tightening policy more broadly and indiscriminately given sustained liquidity tightening. To be sure, Chinese equities have been subject to the blow-back (down >4% in March) from tighter liquidity; especially against a backdrop of allusions to frothy asset markets during the NPC (National People’s Congress). But fears of crippling credit tightening are overdone as the NPC clearly has no intention to throw the baby out with the bathwater. In fact appropriately directed credit growth is critical for China’s vital “dual circulation strategy.
To that end, the PBoC’s versatile use of a very large toolbox is fine-tuning policy adeptly to balance diametrically opposed policy objectives. First and foremost, adequate and appropriately directed credit (to productive, hi-tech, sensitive sectors, with large productivity/growth multipliers) continues to be pumped out to ensure a strong recovery stays intact. But at the same time, excess liquidity is also being drained to ensure that the froth in the property market is not exacerbated. This targeted approach to credit and liquidity sets the stage for “growing out of debt” rather than drowning in debt at a later point. In addition, financial stability is also not unnecessarily compromised as a by-product of needed policy stimulus; a lesson taken to heart from the post-GFC era, when China’s debt burden doubled from 162% of GDP in 2008 to 314% of GDP (2019).
Credit Source: Mizuho Bank Ltd