Siti Muinah
China’s financial landscape in November witnessed a notable acceleration in money supply growth and a significant increase in newly issued yuan-denominated loans, signaling a strategic push to bolster economic momentum. This surge in credit, however, arrives against a persistent backdrop of the central bank’s unwavering commitment to financial risk prevention, a policy priority that continues to shape the nation’s monetary and regulatory agenda. The delicate equilibrium between stimulating growth and safeguarding systemic stability remains the central challenge for China’s financial authorities as the year draws to a close and projections for the coming year take shape.
November’s Credit Impulse and Money Supply Dynamics
Data released by the People’s Bank of China (PBOC), the nation’s central bank, on Monday, revealed a compelling picture of November’s financial activity. The M2, a broad and closely watched measure of money supply encompassing currency in circulation, demand deposits, and various savings deposits, expanded by 9.1 percent year-on-year. This figure represented an acceleration from the 8.8 percent growth recorded in October, indicating a deliberate easing of liquidity conditions. Despite this monthly uptick, the November M2 growth rate was still 2.3 percentage points lower than the same period a year earlier, highlighting the broader trend of a more restrained monetary policy compared to previous years of rapid expansion. This deceleration from earlier peaks reflects the PBOC’s efforts to temper overall credit growth and manage inflationary pressures, while still providing ample liquidity for economic functioning. Historically, China’s M2 growth often hovered in the double digits, even reaching over 20% during stimulus periods, making the current single-digit growth a significant shift towards a "new normal" of more moderate monetary expansion.
The increase in M2 was largely mirrored by a robust performance in new yuan-denominated loans, which surged to 1.12 trillion yuan ($169.69 billion) in November. This figure represented an almost doubling from October’s 663.2 billion yuan and significantly exceeded market expectations, which had typically anticipated around 800 billion yuan. The strong lending activity also compared favorably to the 1.27 trillion yuan recorded in September, which itself was a substantial figure. By the end of November, the total outstanding yuan loans had increased by a solid 13.3 percent from a year earlier, underscoring the sustained demand for credit within the economy. Furthermore, the cumulative new loans in the first 11 months of the year reached an impressive 12.94 trillion yuan, already surpassing the full-year record of 2016 by 290 billion yuan. This substantial lending indicates that despite the broader deleveraging drive, banks are actively supporting key sectors of the economy, channeling funds towards infrastructure projects, manufacturing, and consumer spending, all critical components for meeting annual GDP growth targets.
Beyond traditional bank lending, the central bank also published data on China’s total social financing (TSF), a more comprehensive gauge of credit and liquidity in the economy. TSF includes off-balance sheet financing activities that bypass conventional bank balance sheets, such as corporate bonds, equity financing, trust loans, and entrusted loans. In November, TSF increased to 1.6 trillion yuan, a significant jump from 1.04 trillion yuan recorded in the preceding month. This broader measure confirms the overall loosening of financial conditions and the increased availability of funds across various channels, not just through state-owned banks. The growth in TSF is particularly relevant in the context of financial risk prevention, as it captures the often less regulated "shadow banking" activities that have been a focal point of regulatory scrutiny. A controlled expansion of TSF, especially if it reflects a shift from riskier off-balance sheet activities to more transparent, regulated channels, could be interpreted as a positive development.
The Central Bank’s Dual Mandate: Growth vs. Risk Prevention
The simultaneous increase in credit and the reiteration of risk prevention as a policy priority highlight the complex dual mandate facing the People’s Bank of China. On one hand, the central bank is tasked with ensuring sufficient liquidity and credit to maintain stable economic growth, especially as China navigates structural reforms and transitions towards a consumption and innovation-driven economy. On the other hand, it must aggressively address the accumulated financial risks stemming from years of rapid, often unchecked, credit expansion.
PBOC Governor Zhou Xiaochuan articulated this delicate balance during an internal meeting, stating that financial regulators "need to prevent financial risks more proactively and effectively" while also balancing this imperative with economic growth. He further emphasized the importance of identifying "the key targets of financial reform, opening-up and innovative development." Zhou’s remarks underscore the strategic intent behind the current financial policies: not merely to suppress growth, but to foster a healthier, more sustainable growth model built on a robust and transparent financial system. His mention of "opening-up" also hints at further liberalization of China’s financial sector, which could introduce both new opportunities and new regulatory challenges.
A Chronology of Deleveraging and Regulatory Tightening
The emphasis on financial risk prevention and deleveraging is not new; it represents a significant policy shift that gained momentum in late 2016 and intensified throughout 2017. The roots of this campaign lie in the rapid accumulation of debt, particularly corporate and local government debt, following the massive stimulus package implemented in response to the 2008 global financial crisis. This period saw an explosion of credit, much of it channeled through less regulated "shadow banking" vehicles, leading to concerns about asset bubbles, moral hazard, and potential systemic instability.
Key Milestones in China’s Deleveraging Campaign:
- Late 2016: Top policymakers began to explicitly flag financial risk as a major concern, shifting the narrative from solely growth-focused to one balancing growth with stability. The Central Economic Work Conference in December 2016 specifically identified "preventing and controlling financial risk" as a top priority for 2017.
- Early 2017: Regulatory bodies, including the China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC), and China Insurance Regulatory Commission (CIRC), began issuing a flurry of new rules. These measures targeted high-risk lending practices, interbank activities, wealth management products (WMPs), and trust products, which were often used to circumvent lending quotas and channel funds into riskier investments like property or speculative projects.
- April 2017: President Xi Jinping presided over a meeting of the Politburo, which reiterated the commitment to maintaining financial stability and preventing systemic risks. This high-level endorsement solidified the deleveraging campaign as a top national priority.
- May 2017: The establishment of the Financial Stability and Development Committee (FSDC) under the State Council was announced, signaling a move towards stronger coordination among various financial regulators to address cross-market risks. This was a crucial step towards creating a more unified regulatory framework.
- October 2017: The 19th National Congress of the Communist Party of China further entrenched the policy direction. President Xi Jinping emphasized a shift towards "high-quality development" over mere speed, reinforcing the idea that sustainable growth requires robust financial health and controlled risk. This high-level directive provided a long-term strategic underpinning for the ongoing deleveraging efforts.
- November 2017: New guidelines were issued to regulate asset management products (AMPs), a major component of shadow banking. These guidelines aimed to unify regulatory standards, curb implicit guarantees, prohibit multi-layered investments, and reduce leverage, marking a comprehensive assault on one of the riskiest segments of the financial system.
The Shadow Banking Conundrum
A significant portion of the risk prevention efforts has been directed at China’s shadow banking sector. Shadow banking, in the Chinese context, refers to a diverse range of financial activities that operate outside the traditional banking system’s direct regulatory oversight. This includes various forms of lending by non-bank institutions, wealth management products (WMPs) issued by banks but often invested in riskier, less transparent assets, trust products, and peer-to-peer (P2P) lending platforms.
The appeal of shadow banking for both borrowers and lenders lay in its ability to circumvent strict credit controls and interest rate caps imposed on traditional banks. However, this flexibility came at the cost of transparency and robust risk management. Many shadow banking products involved complex, multi-layered structures that obscured the ultimate borrowers and underlying assets, making it difficult to assess true risk exposure. The rapid growth of this sector, coupled with implicit guarantees from state-backed entities, fueled moral hazard and amplified systemic vulnerabilities. The crackdown on shadow banking aims to bring these activities under greater scrutiny, reduce their interconnectedness with the formal banking system, and ultimately channel credit through more transparent and regulated channels.
Broader Implications and Outlook for 2018
The November data, showing an increase in both M2 and loan growth, suggests that while the deleveraging campaign is ongoing, policymakers are exercising flexibility to prevent an overly abrupt slowdown in economic activity. This "balancing act" is crucial for maintaining social stability and achieving development goals. The targeted credit expansion could be aimed at supporting strategic industries, addressing funding gaps for legitimate businesses, or ensuring adequate liquidity during periods of seasonal demand.
Looking ahead, analysts widely anticipate a continuation of the deleveraging and risk prevention campaign into 2018, albeit with a degree of pragmatism. Louis Kuijs, head of Asia Economics at Oxford Economics, articulated this perspective, stating, "In 2018, we expect policymakers to remain focused on reducing financial risks and deleveraging parts of the financial system deemed particularly risky, foreseeing regulatory tightening with respect to interbank market activity and shadow banking." His analysis underscores that the core policy direction remains unchanged, with a continued emphasis on structural reforms rather than a return to indiscriminate credit stimulus.
Kuijs also projects a gradual slowdown of credit growth next year. "After probably slightly exceeding the 13.8 percent target for 2017, we project credit growth to ease further, to around 13 percent in 2018." This forecast implies a controlled deceleration, indicating that policymakers are aiming for a soft landing for credit expansion, preventing a sharp contraction that could jeopardize economic stability. A more moderate credit growth rate, even if lower than in previous years, is considered healthier in the long run, as it reduces the accumulation of new debt and allows the economy to digest existing leverage.
The implications of this policy trajectory are far-reaching. For the Chinese economy, it means a continued shift towards higher-quality, more sustainable growth, driven by innovation and domestic consumption rather than debt-fueled investment. For the financial sector, it promises a more resilient and transparent system, albeit one that may face periods of adjustment as riskier assets are unwound and regulatory compliance costs increase. Globally, China’s efforts to manage its financial risks are crucial, given its immense economic size and interconnectedness with global markets. A stable and healthy Chinese financial system is vital for global economic stability.
However, challenges remain. The deleveraging process must be carefully managed to avoid inadvertently triggering financial instability or significantly dampening legitimate economic activity. Ensuring that small and medium-sized enterprises (SMEs) have access to funding, even as overall credit growth slows, will be critical. The transition away from implicit guarantees towards market-based pricing of risk will also require careful guidance to prevent shocks.
In conclusion, November’s credit data presents a nuanced picture of China’s financial policy: a strategic injection of liquidity to support economic growth, carefully calibrated within the overarching framework of financial risk prevention. The central bank’s commitment to deleveraging and regulatory tightening remains firm, signaling a determined path towards a more stable, resilient, and high-quality financial future for the world’s second-largest economy. The coming year will undoubtedly test the agility and resolve of China’s financial regulators as they continue to navigate this complex balancing act.
Lina Irawan
Sagoh
