China uses credit to accelerate economy; understand how

Beijing is trying to kick-start China’s depressed economy with a fresh injection of liquidity, and credit easing appears to be the authorities’ preferred tool.

“We will accelerate the implementation of prudent monetary policy,” Chinese Premier Li Keqiang said in the country’s government work report for 2022, presented to the legislature on March 5. “We will use monetary policy tools both to adjust the monetary base and and to offer more robust support to the real economy”.

The prime minister’s pledges come amid a decline in demand for credit and at a time when the rapid post-Covid-19 economic recovery is starting to stall.

The expansion of total social financing (TSF), a broad indicator of available credit and liquidity in the economy, slowed for most of last year. In the fourth quarter, an indicator of overall loan demand fell for the third straight quarter, both year on year and from the previous quarter, according to a report on a survey of finance executives released by China’s central bank.

Economists anticipate that the central bank will cut further interest rates and bank reserve requirements this year, although some of them are concerned that the war between Russia and Ukraine could generate further inflationary pressure, which would create obstacles. for monetary relaxation.

Chinese demand for credit is weak, and government wants to reverse it

In recent months, the Chinese government has taken a series of measures to increase the availability of credit, but demand for credit remains weak.

In December, China’s central bank lowered financial institutions’ reserve requirements, which determine what proportion of their assets institutions must keep on deposit with the central bank, resulting in an injection of 1.2 trillion yuan. .8 billion) in the financial system.

On January 17, the central bank cut the interest rate on its one-year medium-term loan facility (MLF), the first cut since April 2020. The next day, Liu Guoqiang, vice president of the bank central bank, promised that the institution would “further open the monetary toolbox, maintain the stability of the monetary base and avoid a credit collapse”.

Despite these indicators, credit growth weakened in February, after a strong start to the year the previous month. In February, new yuan-denominated loans totaled 1.23 trillion yuan (BRL 896.6 billion), up from a record of nearly 4 trillion yuan (BRL 2.9 billion) in the previous month, and the 1.36 trillion yuan (BRL 991.4 billion) as of February 2021, according to central bank data. Also that month, total new social financing fell to 1.9 trillion yuan (BRL 1.4 trillion) from a record 6.17 trillion yuan (BRL 4.5 trillion) in January and 1.72 trillion yuan (BRL 4.5 trillion) in January. trillion yuan (BRL 1.2 trillion) as of February 2021.

The February numbers were both below market expectations. Even taking into account the seven-day Chinese New Year holiday, which ends on February 6, the figures show that demand for credit in the real economy was weak, analysts said. Credit expansion was mainly driven by government measures rather than market demand, some of them claimed.

Weak demand for credit indicates that there is still downward pressure on the economy, analysts said. As a result, short-term interest rate cuts are likely.

Why China’s central bank faces restrictions to cut interest rates

But the scope for Chinese monetary policy could be reduced by Russia’s war on Ukraine, according to Ren Zeping, former China chief economist at the Evergrande Group. Moscow’s invasion of the neighboring country has forced world commodity prices up and increased the risk that China will import inflation.

Since the war began on February 24, the Chinese central bank has been more cautious about the pace of reductions in reserve requirements. On March 15, the central bank unexpectedly left the interest rate on its one-year MLF unchanged, defying forecasts for a cut.

Still, some economists have argued that the risk of global inflation will have little impact on Chinese monetary policy. Xu Gao, chief economist at BOCI Securities, said domestic inflationary pressure was not heavy because the government relaxed restrictions on energy production that boosted inflation last year. In addition, Xu also anticipates that the rising costs of industry and mining companies will not be easily passed on to consumers, which means that the inflationary pressure arising from this will be limited.

Economists at Nomura Holdings said in a research note released March 15 that the Chinese central bank is highly likely to cut interest rates on the one-year MLF and seven-day reverse repo agreements at its April meeting; the estimated reduction is 0.1%. They also anticipated that rates on one-year and five-year national loan bonds would be reduced by 0.1% in April. In the coming months, the Chinese central bank is likely to reduce its reserve requirement for banks by 0.5%.

Zhong Zhengsheng, chief economist at brokerage Ping An Securities, said the initial effect of easing credit policies and the fallout from tightening US monetary policy will make the Chinese central bank act more cautiously about times for general cuts. interest or reserve requirements. The central bank may prefer to use structural monetary tools to provide credit support to some sectors, according to Zhong.

Real estate financing falls in China and government should encourage popular housing

The government work report stated that more funds will be directed to important fields as well as weaker areas of the economy. The report also stressed that financial institutions must “prevent sectoral lending restrictions, loan prepayment demands, and arbitrary suspension of loan agreements from arising.”

The remarks came at a time when many Chinese financial institutions are reluctant to lend money to the real estate sector, following the debt crisis that rocked real estate companies amid government efforts to combat an overheating housing market last year. While finance regulators have taken steps to correct lenders’ overreactions to government rules, financing activities remain weak in the real estate sector.

In February, 100 major Chinese real estate companies monitored by consultancy China Real Estate Information raised a combined total of 39.8 billion yuan, 58.8% below the month’s total a year ago and 58.9% below the January total, according to a report released by the company. China’s central bank data shows that medium and long-term loans to households, including mortgage loans, fell by 45.9 billion yuan in February from a month earlier, the first drop in more than a decade.

Real estate has long been a mainstay of China’s economic growth, and some worry that this crisis will weigh on economic growth. Xu, the economist at BOCI, said the government needs to increase credit support to realtors and homebuyers this year if it wants to relax credit conditions in the economy.

But the government is unlikely to want to derail its long-term effort to reduce real estate indebtedness.

“While local governments continue to ease some local restrictions on real estate operations, the pace appears moderate and we continue to believe that Beijing will maintain most of its major restrictions on the real estate sector,” economists at Nomura said in a research note in the Friday (1st).

There is hope in some areas, however. For example, the authorities have promised to offer support to real estate groups that build low-cost rental housing, and to companies that need credit to acquire struggling rivals.

Translation by Paulo Migliacci