China Monetary Gauge at 5-Year High Aids Fiscal Boost, HSBC Says

  • ‘Credit conditions have been favorable,’ economist Wang writes
  • Easy money has helped aid growth of infrastructure investment

Easier money in China should help policy makers increase their fiscal support for the world’s second-largest economy amid signs of growth slowing further, HSBC Holdings Plc said.

HSBC’s China Monetary Conditions Indicator rose to a five-year high in June, aided by improved bank lending and a more "market-aligned" yuan. That should help support further fiscal expansion, Julia Wang, a Hong-Kong based China economist for the bank, wrote in a report Monday. She also warned of risks to growth after recent steadying.

"Overall credit conditions have been favorable since the start of the year and have helped support further fiscal expansion," Wang wrote. Easier credit has aided improved financing, which "has been a primary driver of the growth of infrastructure investment."

While that helps brighten the prospects for policy support, Wang said even after growth stabilized in the second quarter the economy still faces challenges from cooling manufacturing investment and a slowing property market. Also, private investment is flat amid weak demand and deteriorating business confidence, while Brexit uncertainty could cause already-fragile external demand to deteriorate further.

For more on how Chinese companies are enjoying cheap liquidity, but not spending it, click here.

"Given these headwinds to growth and worsening business sentiment, more timely policy action and reforms are a must to turn things around," Wang wrote, adding that monetary accommodation will help support more fiscal expansion this year. "This will help to bring about continued growth stabilization and enable policy makers to focus more on reforms."

Second-quarter growth of 6.7 percent from a year earlier matched the first-quarter pace, which was the slowest since 2009. Meanwhile, authorities have been pumping cheap credit into banks, companies and local governments, with an additional $244 billion of financing flowing into the economy in June alone.

HSBC’s gauge is designed to give a relative sense of how China’s monetary conditions are evolving over time, according to Monday’s report. It incorporates money supply growth, real interest rate changes and exchange rates. The currency contribution rose in June as the yuan, or RMB, depreciated at a faster pace.

"Over the past year, China has made considerable progress towards the transition of the RMB from a highly managed FX regime to more of a floating one," Wang wrote. "The market has also come to realize that a better aligned RMB is important for China and the global economy. As a result, despite the RMB’s gradual correction, markets have not reacted adversely and FX outflows have slowed notably."

— With assistance by Jeff Kearns

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