Will China’s latest monetary policy easing reinvigorate the economy? Markets remain wary

While January data suggests policy easing has prompted a rise in bank lending, the figures are distorted by a tendency to issue loans at the start of the year
As for the rest of 2022, concerns remain about the overall policy direction following last year’s regulatory crackdown

Hao Zhou

Published: 3:30am, 17 Feb 2022

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Since December, the Chinese central bank has introduced a slew of policy-easing measures. Following a cut to the reserve requirement ratio in early December, the People’s Bank of China (PBOC) twice lowered the one-year loan prime rate, the benchmark lending rate, in December and January respectively.

However, there has been little positive response from the stock market to the monetary policy easing; in the year to date, the benchmark CSI 300 index has lost more than 7 per cent.

Such weak market sentiment clearly suggests that the easing efforts have failed to support the capital market, a view further substantiated by the newly released January credit data. While the headline figures were above expectations, the structure of the credit reveals that the economy is still on a soft footing.

To minimise the distorting effects of the Lunar New Year, most of China’s economic data is released on a combined January-February basis. Hence, the market only receives this data in mid-March. In contrast, the credit data is released on a monthly basis, making the January figures a timely indicator for markets to gauge policy and economic dynamics.

The PBOC’s January report carries other important information. As China’s commercial banks report their financial performance by calendar year, lenders have strong incentives to extend as much credit as possible at the beginning of the year.

Obviously, the earlier the loans can be drawn down, the more profits the banks can make. To ensure a good start to the year, Chinese banks normally commit facilities at the end of a financial year and issue the loans when the next financial year starts.

Notably, most of these facilities are medium- to long-term borrowing. Hence, the January credit figures not only indicate the monetary policy stance of and risk behaviour among commercial banks, but also provide a gauge of the underlying credit demand, illustrated by the medium- to long-term loans.

Over the past few years, with non-loan financing flourishing in China, the PBOC has also introduced “aggregate financing”, which expands to bond, equity and shadow banking financing, to provide a broader picture of the nation’s credit dynamics.

With all this in mind, a deep analysis of China’s credit data for January can prove highly revealing. At first glance, there is cause for celebration as both new loans and aggregate financing beat market expectations. The PBOC also stated that both new loans and aggregate financing hit record highs, suggesting that policy easing is working.

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A dive into aggregate financing data reveals a significant increase in new loans and bond financing in January. Specifically, compared with January 2021, new loans to corporations and households increased by 381 billion yuan (US$60 billion) and net bond issuance by government and companies rose by 359 billion yuan (US$57 billion) and 188 billion yuan (US$30 billion) respectively.

However, the demand from households does not look as strong, with the total value of household credit decreasing by about 430 billion yuan (US$68 billion) compared to January 2021. More importantly, the medium- to long-tenor (more than one year) loans to households were about 200 billion yuan lower in value than during the same period of 2021.

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As these loans are mostly used for mortgage financing, the relatively soft reading seems to indicate that the property market has yet to bottom out.

As household credit demand remains weak and commercial banks are reportedly concerned about the credit risks involved in lending to private firms, the best guess is that the government and state-owned enterprises have significantly increased their borrowing.

Of course, this also suggests that the authorities have intensified their countercyclical measures to stabilise the economy.

While more proactive measures can be expected from Beijing, the cautionary mood in the market also makes sense when underlying demand from the private sector remains subdued.

On one hand, domestic consumption, which has been significantly affected by China’s zero-Covid strategy, is unlikely to recover soon. On the other hand, property softness persists, as evidenced not only by the credit data but also by the sluggish sales revealed in the high-frequency data. Hence, there is no sign yet that growth momentum is being rebuilt.

Frankly speaking, this is also a confidence game. On the policy front, China is attempting to introduce measures that will prevent a slump in both the economy and market sentiment.

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However, after a slew of setbacks over the past year, including the crackdown on property and private education, the market has gone into “wait and see” mode. Clearly, it will take some time to restore confidence.

It therefore remains uncertain whether the new round of supportive measures from Beijing will reinvigorate the economy. The hesitation among investors reflects not only short-term worries over the economic slowdown, but also concerns about the overall policy direction in the medium to long term. Therefore, further chaos in the markets cannot be ruled out just yet.

Hao Zhou is senior emerging markets economist at Commerzbank