China’s central bank said it will focus on controlling risks in the financial system and seek “stable and appropriate” growth in aggregate financing, a measure of funding that includes loans and stock and bond sales.
The People’s Bank of China also said it will stick to a prudent monetary policy next year and try to stabilize growth, rebalance the economy and contain inflation. The four-paragraph statement released late Dec. 28 after a quarterly meeting of the monetary policy committee, mostly reiterated the stance set out at a government work conference earlier this month.
The PBOC’s addition of “controlling risks” as a policy objective may signal growing concern that a surge in non-bank lending over the past two years will lead to defaults that could trigger social unrest. Citic Trust Co., a unit of China’s biggest state-owned investment company, said on Dec. 21 that it missed a bi-annual payment to investors in one of its wealth management products after a steel company didn’t make interest payments on the underlying loan.
Regulators “may tighten control on the quality and quantity of credit supply, particularly through non-bank channels such as trust loans” in the first half of 2013, Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said in a note after the central bank report. A slowdown in credit growth would feed through to a moderation in economic expansion, he said.
The central bank in 2011 introduced aggregate financing as an indicator designed to capture broader funding sources in the economy, such money raised through trust investment products and bond and stock sales.
The wording of “stable and appropriate growth” of aggregate financing in the PBOC statement differed from previous statements that referred to a “reasonable scale” of financing.
Loans made outside the formal banking system, including funds raised through wealth management vehicles that offer higher interest rates than bank deposits, expanded at a faster pace than bank credit this year.
Local currency bank loans accounted for 45.8 percent of aggregate financing in November, down from 58.8 percent in the same month last year, according to data compiled by Bloomberg. At the same time, the share of trust loans rose to 17.5 percent from 7.5 percent.
“China’s central bank is in a very delicate situation,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “It wants more bank loans and greater financial support for economic growth next year, but it also has to keep a close eye on risks in the shadow banking system.”
Shadow banking in China refers to lending that isn’t subject to the same regulation as bank loans and includes banks’ off-balance-sheet vehicles, such as commercial bills and entrusted loans, and wealth management products as well as underground lending by individuals.
In its Dec. 28 statement, the central bank said it will use various tools to ensure steady and appropriate growth in credit and money supply and reiterated that it will push ahead with overhauling interest rates and the yuan’s exchange-rate system while keeping the currency basically stable.
It omitted comments made in previous statements that it would increase the currency’s “two-way movement.”
“Whether the PBOC explicitly said it or not, the trend toward a freer yuan exchange rate won’t change,” said Shen, who previously worked for the International Monetary Fund.
The central bank said China’s economy is “stable” and prices are “basically stable,” while the global economy remains “relatively weak” with lingering uncertainties.
The statement is a summary of a meeting of the central bank’s monetary policy committee, an advisory body that includes academics and officials from ministries and government agencies.
--Zhou Xin. With assistance from Zheng Lifei in Beijing and Helen Yuan in Shanghai. Editors: Nerys Avery, Paul Panckhurst
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