Efforts to rein in credit growth is largely unsuccessful
Containing financial risk remains important to Chinese policy makers. If left unaddressed, China’s alarming levels of debt could cause financial breakdown. The growing awareness of this risk has caused the government to act by discouraging risky lending, improving oversight, and attempts to bringing shadow banking products back onto banks’ balance sheets. Regulators have also cracked down on online lending and fundraising.
The problem is that the largely regulation-driven campaign has enjoyed little success: credit is still growing at a faster pace than the economy. Corporate bond issuance has slowed, but this has not been enough to offset the growth of shadow banking and households’ borrowing. Households’ consumer loans are especially concerning. In part these loans have been misused to purchase property in the overheated real estate markets. Despite a recent slowdown, consumer loans are still growing at high speeds: these loans grew 29.1 percent year on year in September.
Perhaps fearing that constricting liquidity too much would eventually hurt growth, policy makers have left their most effective deleveraging tool, tighter monetary policy, in the box. Following two incremental increases of the People’s Bank of China’s reverse repo rate, economy-wide interest rates increased at the beginning of the year but have since stabilized close to 2014 levels. Open market operations have been relatively balanced. Citing a need for improving financial inclusion, the central bank lowered reserve requirements for banks which lend to private SMEs by as much as 1.5 percent. Almost 90 percent of banks are expected to qualify for the reduction. The lowered reserve requirements will thus free up a large amount of liquidity.
The stock markets appear to have dismissed the concerns in the capital markets. Strong growth of 8 percent since the beginning of the year has allowed the Shanghai Composite Stock Index to reach a two-year high. The Shenzhen index has grown at the much slower pace of 2 percent. The big winners in the stock markets have been large financial firms and SOEs. Financial firms have benefitted from higher interest rates: the financial index, a sub-index of the Shanghai stock exchange, has grown 18 percent since the beginning of the year.