China Credit Engine Goes Into Reverse

A sharp contraction in lending in China is forcing the central bank of the Asian country to assist, and from the government’s point of view, it is a source of need to spend more money.

Last month, China recorded a decrease in the volume of aggregate financing. The corresponding tendency was recorded for the first time in almost two decades. Recently, private borrowers and municipal authorities in China have largely tapped out their funds.

On Monday, May 13, the central government of the Asian country unequivocally stated its readiness to increase spending. The Chinese Ministry of Finance announced that this week it will begin selling the first batch of special ultra-long bonds worth 1 trillion yuan ($138 billion). In this case, funds will be raised, which over time can be used to invest in infrastructure.

The People’s Bank of China currently has the capacity to lower the cost of borrowing. Many analysts expect that the financial regulator of the Asian country will make an appropriate decision, even though in this case a source of downward pressure on the yuan will form. At the same time, the easing of monetary policy in China has so far failed to stop the downturn in the local real estate market, which has been observed for the third year in a row.

Against the background of falling housing costs and a weak labor market, households do not want to take on additional debt obligations, even if it is very cheap.

If the financial regulator of an Asian country tries to steer loans to consumers and companies, ways to support fiscal spending instead. According to some analysts, the People’s Bank of China will lower the reserve requirement ratio in the coming months. If the appropriate decision is made, the financial institutions of the Asian country will have the opportunity to buy the bonds that Beijing is going to issue.

Also, analysts interviewed by the media last month said they expect China’s central bank to cut its key lending rate slightly by the end of June.

Everbright Securities, in its report released on Monday, noted that the growth of the money supply in the Asian country has been demonstrating a dynamic of the slowdown for quite some time. According to them, the main reasons for the corresponding tendency are the low level of consumer demand, idling financial resources, and weak market confidence. They also noted that the second quarter of 2024 is still a potential period for lowering the reserve requirement ratio and interest rates.

The media reports that the leaders of the People’s Bank of China fear that the subsequent easing of monetary policy will increase the gap in the cost of borrowing between the Asian country and the United States, which may cause the yuan to weaken. It is worth noting that expectations have increased recently that the Federal Reserve System will maintain its tough action strategy.

Becky Liu, head of the Greater China Macroeconomic Strategy unit at Standard Chartered Bank, says that now the Asian country’s financial regulator may be ready to act under any conditions. According to the expert, it is increasingly likely that the People’s Bank of China will make additional decisions on monetary policy easing shortly, regardless of which strategy the Fed will adhere to.

The Asian country’s financial regulator also faced a problem, which is that it is extremely difficult to spur more borrowing growth by cutting interest rates when households and businesses are facing damage amid a sharp drop in asset prices and do not take on debt. It is worth noting that in recent decades, the central banks of many other countries have found themselves in a similar situation.

As we have reported earlier, China’s Services Activity Growth Eases.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.