Chinese Credit Data Give Room for PBOC to be Proactive in Q3

Yesterday, PBOC released data which show a credit slowdown in June. Aggregate financing, the PBOC’s broadest measure of credit that includes bond sales, entrusted loans and bankers’ acceptance bills, was CNY1.04 trillion in June (the lowest figure since 14 months). That was down from CNY1.19 trillion in May and CNY1.78 trillion a year earlier.


The decline was matched by slower growth in money supply. M2 money supply rose 14% YoY (the slowest pace in six months) and was below forecasts of 15.2% YoY. Yet, it still exceeded the government’s 2013 target of 13%.


Even if Premier Li Keqiang has indicated he won’t boost credit to support the economy even as the pace of expansion slows, these figures give more room for PBOC to intervene in the money market and avoid another significant rise of short term interest rates.


As a reminder, short-term interest rates briefly shot as high as 30 per cent late last month after the central bank declined to add cash to an interbank market gripped by tight liquidity conditions, which were caused in part by a seasonal rise in demand for cash. At least five companies canceled or delayed scheduled bond sales of some CNY32.1 billion last month amid the cash squeeze.


Moreover, if PBOC manages to limit M2 growth in the coming months and push it below the threshold of 13% YoY, PBOC could adopt a more accommodative stance in a context where inflation remains contained (2.7% YoY in June against a target of 3.5% YoY).


As a consequence, at the end of Q3, coupled with more public investment (railways, public housing…) and a recovery of global demand (US, UK, Eurozone), Chinese growth could accelerate.