Credit expansion bodes well for growth
China's monetary policy is expected to stay accommodative in the coming months and consolidate the recovery of demand in the real economy, after the country's financing activity staged a strong rebound in June, experts said on Tuesday.
However, major easing moves, including a universal interest rate cut, may be unlikely given the constraints of rising inflation and overseas monetary tightening, as well as the need for the country's central bank to shift from an emergency policy mode to combat Omicron outbreaks to a more normalized manner.
Their comments were in response to faster-than-expected credit expansion in June, which indicates recovering demand for financing and bodes well for economic growth.
China's outstanding aggregate social financing — the total amount of financing to the real economy — stood at 334.27 trillion yuan ($49.71 trillion) as of the end of last month, up 10.8 percent year-on-year, the fastest expansion in a year, the People's Bank of China, the country's central bank, said on Monday.
Experts attributed the acceleration to more borrowing by the corporate sector as production resumed and governmental pushes to finance infrastructure investment.
But the foundation of the recovery remains unstable, they said, given that improvements in household credit demand remain lukewarm amid a property downturn while government bond issuance could lose momentum.
"The ultimate reason for the acceleration in financing activity lies in a flurry of policy support. The problem of inadequate demand has persisted in the real economy," said Yang Haiping, a researcher at the Central University of Finance and Economics' Institute of Securities and Futures.
"It is, therefore, too early to talk about whether monetary policy has reached a turning point of withdrawing support for the economy," said Yang, who expects the central bank to retain relatively ample liquidity and leverage structural tools to facilitate economic recovery in the second half of the year.
Wu Chaoming, deputy director of the Chasing International Economic Institute, said monetary policy may focus on boosting credit expansion in the second half, with measures likely to be taken to stabilize financing in the property sector.
In the latest effort to boost credit growth, the China Banking and Insurance Regulatory Commission published a circular on Monday that urged more efforts from financial institutions to help maintain the rapid growth in mid- to long-term loans to the manufacturing sector.
Nevertheless, experts said the central bank may refrain from launching major easing moves as long as economic growth momentum continues, given the growing necessity to keep a lid on inflation.
The country's consumer price index, a main gauge of inflation, rose by 2.5 percent year-on-year in June, the highest level in almost two years. Experts said the CPI could reach 3 percent in the second half due to higher pork prices.
At its second-quarter monetary policy committee meeting, the central bank decided to provide greater support to the real economy, but also underlined its focus on coordinating boosting employment with stabilizing price levels.
Wu said the possibility of a universal interest rate cut has become low considering the need to anchor price levels and stabilize the renminbi's value.
He added that it remains possible to see reductions in the over-five-year loan prime rate, on which lenders base their mortgage rates, and reserve requirement ratio cuts.
Shao Yu, chief economist at Orient Securities, said the central bank may avoid substantial easing in liquidity conditions in the second half as financing activity has started to recover with a relatively healthy structure.
The central bank had maintained the scale of reverse repos — a tool to increase liquidity in the market — at 3 billion yuan for seven consecutive days as of Tuesday, down from the 10 billion or more, which was seen in the first half of the year.
