Curbing loan growth proving tough task for PBoC
Updated: 2010-11-26 08:21
(HK Edition)
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The explosive growth in yuan loans last year has created some problems for the mainland economy, including price bubbles in both the equity and real estate markets. Consequently, the Central Government planned to reduce loans by more than 2 trillion yuan this year. However, recently released data by the People's Bank of China (PBoC) shows that this may prove to be a tough task.
Figures from the PBoC reveal that yuan loans and deposits grew 19.3 percent and 19.8 percent year-on-year (all on a YoY basis unless otherwise specified) respectively, in October, compared with 18.5 percent and 20 percent rise in September. M2 money supply growth saw a slight pick-up of 19.3 percent in October after rising 19 percent in September, while M1 supply jumped 22.1 percent in October compared with 20.9 percent growth in September. M0 growth also accelerated from 13.8 percent in September to 16.6 percent in October, boosted by the holiday effect.
The pick-up in M1 and M2 growth was actually beyond expectations, mainly caused by a significant surge in capital inflows as well as greater-than-expected new bank loans. Looking forward, we maintain the view that M1 and M2 growth will see gradual mitigation due to the decrease in new lending and a rise in the comparison base. The growth rates may remain high in the short-term on the back of surging capital inflows.
Official data showed that capital inflows to the mainland started to rebound in August, and accelerated in September and October. As the US and other developed countries launch a new round of quantitative easing, emerging economies including China should see stronger capital inflows going forward. At the same time, the narrowing gap of the Sino-US exchange rate, China's increasing trade surplus and political pressure from the US suggest there will be sustained upward pressure on the Chinese currency.
China is likely to see ongoing liquidity pressure in the banking system as well. The PBoC will likely continue to use required reserve rate (RRR) hikes, central bank bill issuances and other quantitative tools to suppress liquidity and lending expansion. In view of the mounting inflation risk, the monetary authority is likely to announce another interest rate hike before the end of the year.
According to PBoC statistics, incremental yuan lending in October amounted to 587.7 billion yuan, significantly above the market consensus of 500 billion. The October figure was actually down from 595.5 billion in September but was 334.7 billion higher than that of the corresponding period last year. Incremental loans to households saw a significant decline to 165.6 billion yuan in October from 247 billion in September, reflecting the direct effects of the authority's new round of tightening measures targeting the real estate sector that kicked off at the end of September. New household mortgage loans and incremental medium- and long-term loans to non-financial corporations started to show a significant decline in October, a considerable lag after the launch of tightening policies in the second quarter of this year.
The author is executive director of BOCI Research Limited. The opinions expressed here are entirely his own and do not represent BOCI or any other affiliated companies within the group. Nothing in this article constitutes an investment recommendation.
(HK Edition 11/26/2010 page2)