China's Credit Target Implies Adding Entire German GDP This Year

  • Pace of leverage increase will be slowing, UBS economist says
  • Money supply growth target cut to 12%, outpacing 2016 increase

China’s credit engine will keep humming this year, adding the rough equivalent of Germany’s annual economic output to its already massive stock of total social financing, according to estimates derived from the nation’s 2017 targets.

Adding higher equity market financing and about 5 trillion yuan ($725 billion) worth of local government bond swaps to the official credit growth target of 12 percent, analysts at UBS Group AG see TSF expansion of 14.8 percent this year. They calculate that’s equal to a whopping 23 trillion yuan, or $3.3 trillion, addition to the amount of total credit already swishing around the world’s second-largest economy.

"China’s pace of leverage increase will be slowing, albeit not by that much," economists led by Hong Kong-based Wang Tao wrote in a report. "The government’s intention for a still strong pace of credit growth and recent notable tightening in China’s money market and bond market attest to the difficulties facing the PBC in balancing monetary policy."

China’s great ball of money creates a constant headache for policy makers as money flows from asset class to asset class, creating bubbles along the way. It’s a particular dilemma for the People’s Bank of China because it needs new credit to generate the kind of growth its leaders desire -- around 6.5 percent or higher if possible this year.

Read more: China’s Li walks a knife edge on growth

The M2 money supply target was cut to 12 percent this year from 13 percent in 2016, while still higher than the 11.3 percent actual expansion last year.

— With assistance by Malcolm Scott, and Xiaoqing Pi

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