British Embassy Beijing
There have recently been gyrations in China’s credit markets as the People’s Bank of China has desisted from providing inter-bank liquidity: putting pressure on the banks to sort out their own problems rather than continue to seek help.
The spike in the interbank interest rates reflecting a liquidity shortage has hit headlines in China and abroad. Several financial commentators have asked if this will trigger a crisis.
It helps to understand where these worries originate. The 5-year story is one of tremendous credit growth in China, both in terms of bank lending, as well as a broader measure called Total Social Financing (which includes bonds and Trusts) – as illustrated.
Until recently, the worry has been too much not too little credit.
But the move from credit growth to credit tightening has been swift. This can be seen in the M2 (a measure of money supply) data (graphic below).
The latest Total Social Financing data also supports the view that the government is now be leaning against credit growth: TSF was RMB 1.19 trillion in May, down from RMB 1.54 tr in April, as the new policies (restraining Wealth Management Products) came into effect (WMPs new issuances fell 8.8% in April from March).
While the trends in credit (slowdown in M2 growth, falls in Total Social Financing, Wealth Management Product sales) have proceeded almost un-noticed since April, this issue has come to the fore because the People’s Bank of China surprised the market recently byrefusing to supply liquidity to the interbank market. The PBOC’s decision caused some observers to ask whether there was a policy vacuum.
We see it instead as a conscious decision by the PBOC to signal to banks that they should be more responsible in their liquidity management and that they should not rely on the central bank.
Why is the PBOC doing this?
This policy fits with the broader narrative on financial sector reform. The government is concerned about ongoing growth in the non-bank sector. State Council Premier Li KeQiang said recently that China must prioritize reform in the financial sector, and not allow excess credit to go to the wrong institutions; he also spoke of the need to bring the shadow-banking sector into the remit of the formal financial sector. The PBOC has a clear mandate from above to address moral hazard and encourage responsible behavior by the banking sector (in this instance, successfully managing their own liquidity without relying on the PBOC for help).
This stance is also reflective of the macroeconomic decisions the Chinese government has taken: such as not implementing further fiscal or monetary stimulus, introducing measures to cool the housing market, trying to hold back credit growth, and measures to reduce lavish government entertaining. All these measures are positives for China’s long term economic development, despite their drag on the quarterly GDP statistics. The continuation of such policies demonstrates their determination to prioritize the long-term benefit over the short-term depressed GDP data.
The Government (Huijin – an arm of China Investment Corporation) has also bought-back shares in the big-4 Chinese banks – this is not unprecedented (they did this in 2008 and 2010) and the amounts are small (increasing their stake by about 0.01 percentage points). This is NOT a recapitalization of banks (the shares were bought from the stock-market) but a measure to retain confidence and support the sluggish stock market.
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