The People’s Bank of China warned that the country’s credit and money supply have increased rapidly and indicated that it will refrain from broader monetary easing to support growth.
“The total debt level has been rising relatively quickly,” the PBOC said in its second-quarter monetary policy report on Aug. 1. “Our existing money supply and credit are already relatively large and their growth is also high.”
The International Monetary Fund said last week that China’s reliance on debt and investment has created “rising vulnerabilities” and that failure to change its growth pattern increases the likelihood of a sharp economic slowdown. The Washington-based lender urged the nation’s leaders to lower the country’s annual expansion target, rein in credit and speed up reforms.
“Restructuring and reform of the economy remains an arduous task,” the central bank said in its 54-page report. “It’s not appropriate to expand overall liquidity sharply to solve structural problems.”
The PBOC reiterated its “prudent” monetary-policy stance and pledged to “keep overall liquidity stable while improving its structure.” It said it will exploring resolving local-government debt problems in “market-oriented” ways.
The central bank reiterated it will use tools including open market operations, reserve requirement ratios, relending, standing lending facilities, and short-term liquidity operations to adjust liquidity, according to the report.
Governor Zhou Xiaochuan is trying to balance implementing Communist Party orders to protect this year’s 7.5 percent economic-growth goal without resorting to broader monetary easing that stokes debt and inflation risks. The central bank has turned to unconventional tools including relending and selective cuts to banks’ reserve requirement ratios to channel credit to areas highlighted by Premier Li Keqiang, including public housing and small companies.
Targeted measures have become a “new trend of major central banks” since the beginning of the global financial crisis, the PBOC said in its report, adding that it will continue to use tools such as relending and rediscounting to guide financial institutions to “optimize their credit structure.”
The central bank has also moved to implement State Council orders to lower financing costs. The benchmark seven-day repurchase rate fell 22 basis points last week to 3.90 percent, the biggest weekly drop in a month, after the PBOC guided funding costs lower in open-market operations.
It cut the interest rate on 14-day repurchase agreements to 3.7 percent after setting it at 3.8 percent at the last such auction in April. The previous rate reduction was for seven-day reverse-repos in August 2013.
Barclays Plc’s Hong Kong-based economist Chang Jian described it as a “small but meaningful move” that sends a signal of policy easing.
China Business News reported in June that the PBOC created a revamped relending tool known as pledged supplementary lending to manage medium-term interest rates and lower the cost of financing for some industries and lenders. The paper said on July 21 that the PBOC conducted a 1 trillion yuan ($162 billion) transaction with China Development Bank Corp., the country’s largest policy lender.
The banking regulator said last week it approved CDB to start a housing-finance business to provide loans for shantytown renovation and related city infrastructure.
While the PBOC’s report made no mention of pledged supplementary lending, it did say it will “deepen reform” of CDB to support shantytown redevelopment and city infrastructure. The bank is proposing to become the sole financier to local governments, as mounting debt threatens efforts to promote urbanization, its chairman, Hu Huaibang, wrote in February.
Expansion in China’s economy-wide credit has exceeded nominal gross domestic product growth in every quarter since 2008, according to data compiled by Bloomberg. Financing rose 16.6 percent in June from a year earlier, compared with the second quarter’s 8.5 percent increase in GDP unadjusted for inflation.
Outstanding credit rose to 206.3 percent of GDP last quarter from 202.1 percent in January-to-March, according to data compiled by Bloomberg.
China’s stock of aggregate financing, its broadest measure of credit, rose by 73 percent of GDP in the past five years, the IMF said in its report last week. Out of 43 countries studied by the the lender over 50 years, only four saw credit expansion on a similar scale to China and all four had a banking crisis within three years following the boom, it said.
— With assistance by Tian Ying, and Nerys Avery