Beijing is ready to act on weaker demand for credit

There is still room for China’s central bank to take steps to support the economy, but efforts are needed to prevent cash from sloshing around the banking system as real credit demand weakens, senior officials at the bank said on Thursday.

The world’s second-biggest economy grew faster than expected in the first quarter, but several March indicators — such as property investment, retail sales and industrial output — showed that domestic demand remains frail, weighing down momentum.

The People’s Bank of China (PBOC) has pledged to step up policy support for the economy in 2024 and promote a rebound in prices.

“A series of monetary policy measures introduced earlier is gradually taking effect, and the economy continues to rebound with a good start,” Zhu Hexin, a deputy governor of the PBOC, said at a news conference on Thursday.

‘IDLE FUNDS’

“There is still room for monetary policy going forward, and we will closely watch the policy effectiveness, economic recovery, and achievement of goals, and make good use of reserve tools at the appropriate time.”

China’s central bank cautioned on Thursday against a “one-sided” pursuit of credit expansion, after figures showed a slowdown in bank lending, vowing to prioritise the quality of credit over size and move to revitalising existing loans.

Zou Lan, head of the PBOC’s monetary policy department, said at the briefing that efforts should be made to prevent the accumulation of “idle funds” as some banks extend more loans than actually needed and some companies use low-cost loans to buy wealth management products or lend to other firms.

“Credit demand has weakened compared with previous years, and the credit structure is also being optimised and upgraded,” said Zou.

China’s money supply growth could slow down and people should not simply look at year-on-year growth. Zou said.

The central bank has in recent weeks delivered modest cuts in banks’ reserve requirement ratio and interest rates as part of broad measures to support the economy, with more policy easing expected in the coming months.

Real interest rates, when adjusted for producer prices, remain elevated for some industries — including ferrous metal producers, but high borrowing costs will help promote capacity control and inventory reduction among firms, said Zou.

“We should avoid weakening the driving force of structural adjustments and prevent excessively low interest rates,” he said.

New bank lending in China rose less than expected in March from February, while broad credit growth hit a record low, boosting the case for the central bank to roll out more stimulus steps to help achieve an ambitious growth target.

China has set an economic growth target for 2024 of about 5%, which many analysts say will be a challenge to achieve without much more stimulus.

The central bank said 2024 growth of money supply and total social financing — a broad measure of credit and liquidity in the economy — would match expected goals for economic growth and inflation.

Analysts polled by Reuters expected the central bank to cut the banks’ reserve requirement ratios by 25 basis points (bps) in the third quarter after the 50basis point cut earlier in 2024, which was the biggest in two years.

China’s central bank might include the buying and selling of treasury bonds in its policy tool reserve in future, Financial News, a publication backed by the PBOC, quoted various experts as saying.

China has the conditions to keep its foreign exchange market stable, said Zhu. China’s “goal and determination in keeping the yuan exchange rate basically stable will not change”, he added.