Why the PBOC is keeping an eye on asset price inflation in China

A warning of the risk of asset bubbles and Beijing’s recent net liquidity withdrawal are signals to the market that, while the authorities won’t make a sudden U-turn on pledged policy support, they also won’t tolerate unchecked credit growth

Hao Zhou

Published: 4:45pm, 2 Feb 2021

Why you can trust SCMP

As a distinguished scholar and adviser to the People’s Bank of China, Ma Jun’s comments on the Chinese economy and monetary policy are usually very eye-catching. His recent speech has caught the attention of the market, even rattled it. The question is whether China has entered a new tightening cycle.

For the time being, the market still expects a gradual policy normalisation in the coming year, as the Chinese authorities have said there would be “no sudden turns” in overall policy at the Central Economic Work Conference in December.

Given the coronavirus pandemic and geopolitical uncertainties, it makes sense to maintain a generally supportive policy to help the economy navigate the headwinds. In fact, the most recent statements from PBOC governor Yi Gang, which he made on a panel hosted by the World Economic Forum, suggest authorities will continue to use monetary policy to prop up the economy. He said China won’t “prematurely” end its supportive policy measures but will keep debt risks under control.

Compared to Yi’s moderate statements, Dr Ma sounded more hawkish as he warned of the risk of asset bubbles, including in the equity and property markets, due to aggressive monetary easing amid the pandemic. As a result, he is concerned that financial risks would further accumulate if there is no appropriate policy adjustment in the coming year.

Moreover, Ma suggested that China should scrap the annual gross domestic product growth target permanently, to shift the focus to employment and other economic indicators. The financial media recently reported that Beijing is seriously considering dropping the growth target again this year to prevent local governments from borrowing massively from commercial banks.

Taking the comments from Yi and Ma as a whole, while there exists some contradiction, the policy tone is clear. Beijing needs healthy economic growth, which requires proper risk controls to ensure financial stability.

Some data looks alarming. China’s debt soared again last year amid the pandemic. The latest data compiled by the Bank for International Settlements clearly illustrates a debt surge in all sectors, including non-financial corporations, households and government. Among the sectors, non-financial corporations saw the biggest jump, which points to further deterioration of the corporate sector’s balance sheet.

The debt-to-GDP ratio for the corporate sector climbed by 13.1 percentage points in the first half of 2020, compared with 5.8 percentage points for government and 3.9 percentage points for households. As a result, in only two quarters, China’s debt has risen from 257 per cent of GDP at the end of 2019 to 280 per cent in June 2020.

How big is China’s debt, who owns it and what is next?

Beijing has already vowed to stabilise the overall leverage ratio in the economy, as various sources suggest that China wants to maintain credit growth at a similar pace to nominal GDP growth to contain debt accumulation. From this perspective, aggregate financing growth is likely to slow significantly in the coming year, pointing to a targeted tightening in certain sectors.

Clearly, in the housing sector, policy tones have become harsher. For cities where housing prices are skyrocketing, local authorities have further tightened measures to cool the market.

For instance, in Shanghai, homes for court auctions are now included in purchase restriction policies, and bidders are expected to ensure they are qualified to buy homes in the city. Moreover, in several cities, including Guangzhou and Shenzhen, commercial banks have slowed the loan approval process for mortgages.

Residential buildings are seen in Shanghai in August last year. Shanghai authorities have recently introduced a raft of policies to curb speculation in residential real estate. Photo: Reuters

Meanwhile, enthusiasm in the equity markets should have caught policymakers’ attention as well. 2020 was a great year for China’s onshore stock market – the benchmark CSI 300 index, which tracks the biggest firms listed on the mainland, was among the region’s top performers, rising 27.21 per cent for the year.

Amid such strong market sentiment, Chinese investors have turned their eyes to the H-share market – there have been strong inflows from the mainland to the Hong Kong stock market over the past months, boosting the benchmark Hang Seng Index by almost 4 per cent in the first month of 2021. By comparison, the S&P 500 index declined by 1 per cent during the same period.

China’s stock market shows cracks as bulls hope for earnings salvation

While it is hard to define an equity bubble, Chinese policymakers should have very deep memories of recent stock routs. The lessons from these “boom and bust” cycles suggest that regulators need to take pre-emptive action to prevent market turmoil.

Therefore, the PBOC’s net liquidity withdrawal from the open market in the last week, which was not expected, seems to be the first warning signal to the market. While it is too early to make a call on whether further policy tightening is around the corner, the market is aware the PBOC has already taken some countercyclical measures, and that further measures will depend on market and economic dynamics.

By and large, what happened over the past weeks seems to suggest that Beijing is mulling some adjustments to its economic and financial policies. The bottom line is clear: Beijing intends to maintain reasonable economic growth while keeping credit growth in check. As asset price inflation is likely to attract more money chasing the boom, crowding out credit demand in the real sector, the Chinese authorities have again paid special attention to asset price dynamics.

Hao Zhou is senior emerging markets economist at Commerzbank

Post