China Credit Surging to Record Underscores PBOC Shift to Tighten

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  • Aggregate financing jumped to 3.74 trillion yuan in January
  • Central bank says broad M2 money supply increased 11.3%

China added more credit last month than the equivalent of Swedish or Polish economic output, revving up growth and supporting prices but also fueling concerns about the sustainability of such a spree.

  • Aggregate financing, the broadest measure of new credit, climbed to a record 3.74 trillion yuan ($545 billion) in January, exceeding the median estimate of 3 trillion yuan in a Bloomberg survey
  • New yuan loans rose to a one-year high of 2.03 trillion yuan, less than the 2.44 trillion yuan estimate

The credit surge highlights the challenges facing Chinese policy makers as they seek to balance ensuring steady growth with curbing excess leverage in the financial system. The PBOC recently moved to tighten monetary policy by raising the interest rates it charges in open-market operations and on funds lent via its Standing Lending Facility.

"China is learning what other central banks realized decades ago: trying to control monetary aggregates in a modern financial system is next to impossible," said James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology in Sydney. "I expect the PBOC will focus more on interest rates and prudential regulation and supervision going forward."

China’s major state-backed banks tend to splurge at the start of the year as they seek to maximize their profits on lending.

The main categories of shadow finance all increased significantly. Bankers acceptances -- a bank-backed guarantee for future payment -- soared to 613.1 billion yuan from 158.9 billion yuan the prior month.

"The PBOC is restraining loans but allowing private credit to flow through shadow banks," said Andrew Collier, an independent analyst in Hong Kong and former president of Bank of China International USA. "This is not a policy designed to conquer China’s debt burden."

Two years of PBOC easing have been accompanied by increased borrowing, and the nation’s top leaders are pledging to ease financial risk and keep policy prudent and neutral. Outstanding credit at year-end was equal to about 260 percent of GDP, up from 160 percent in 2008, according to Tom Orlik, chief Asia economist for Bloomberg Intelligence.

The broad M2 money supply increased 11.3 percent from a year earlier, the same pace as the prior month.

"It becomes more and more difficult to imagine how the fight against asset price bubbles and rising debt levels might become a success, at least in the short term," said Frederik Kunze, chief China economist at German lender NordLB in Hanover. "It shows that China’s financial market is still under construction."