Monetary tightening and a stricter prudential and regulatory framework for the financial sector should curb domestic credit growth in 2017. For the time being, the main consequences are a slowdown in interbank financing, a bond market correction and the slower expansion of certain shadow banking activities. Commercial bank loan growth has not really decelerated yet. The slower growth in the real estate sector in recent months could spread to other sectors that are credit-dependent, and economic growth is likely to slow again in the quarters ahead.
China’s monetary policy stance has changed since the last quarter of 2016. The authorities have adjusted their priorities at a time when economic growth was stabilising, industrial activity was improving, inflation was accelerating, asset market bubbles were forming and capital outflows were surging. After bolstering support for economic growth, they have focused more on reining in risks of financial instability since last fall1.
Firstly, the People’s Bank of China (PBOC) has adjusted its open market operations in order to guide money market rates higher. Repo rates have been gradually increased since October 2016, then the central bank increased the rates on its “liquidity facilities” (which enable it to provide liquidity to certain well-targeted institutions) in Q1 2017. These measures are mainly designed to discourage the use of interbank financing (which has increased rapidly in recent years), thereby reducing the leverage levels of financial institutions and curbing the expansion of their lending and investment activities.
Although benchmark rates for loans and deposits have remained unchanged for more than two years, the cost of borrowing for corporates has begun to rise as a result of the tightening of liquidity conditions in the interbank market. The weighted average rate on bank loans, which had mirrored the benchmark rates between late 2014 and Q4 2016, started to rise in early 2017. It increased to 5.5% in January 2017 from 5.3% in December. Bond yields have also increased rapidly since October 2016: this has been the consequence of monetary tightening measures, but also of a confidence crisis in the bond market that led to the reassessment of risk premia. See chart 2.
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by Christine PELTIER