Credit growth may slow
Tighter monetary conditions and slower credit growth are possible in China next year, given expectations of higher domestic inflation and continual interest rate hikes in the world’s major economies, with liquidity risks becoming the top concern, according to economists.
Zhu Haibin, chief China economist with JPMorgan Chase & Co, expects the Chinese monetary authority to retain a “neutral” monetary policy in 2018, which means benchmark policy rates, or the one-year deposit and lending rates, will stay at the current level, and there will be no change to the cash amount that should be reserved by commercial banks, or the reserve requirement ratio.
Actual total social financing growth, as well as the credit expansion rate, may slow moderately as the policy focus on deleveraging will continue next year, says Zhu.
“Preventing major systemic risks” has recently been listed as the priority for 2018 by the country’s top policymakers, along with poverty reduction and pollution control.
Begining in the first quarter of 2018, a rapidly growing interbank instrument — negotiable credit deposits — will be included into the central bank’s Macro Prudential Assessment framework, meaning it will be more difficult for the banks to expand their assets while avoiding a risky increase of interbank liability through off-balance-sheet business.
In November, financial regulation was strengthened on supervision of asset and wealth management products and lending to nonbank financial institutions.
Economists widely believe that three interest rate increases of 25 basis points each are likely in the United States in 2018, leading the withdrawal of monetary easing among the world’s major economies, which may also increase the possibility of a rate hike in China in response.
The People’s Bank of China, the central bank, raised the rates of seven-day and 28-day reverse repo agreements and the rates of the medium-term lending facility by 5 basis points on Dec 14, after the US Federal Reserve increased the benchmark interest rate by 25 basis points to a target range of 1.25 percent to 1.5 percent — the third rate hike this year.
Instead of adjusting the benchmark interest rates, the PBOC has reiterated that monetary policy in the next year will focus on proactively fine-tuning liquidity conditions and improving communication with the market.
According to economists, some flexible policy tools, including the medium-term lending facility and the reverse repo, are likely to be used more often to stabilize liquidity conditions in the banking system, and to smooth out seasonal, temporary volatility. However, the central bank said this does not mean changes in its monetary policy stance.