China’s Credit Contraction Adds Pressure to Bond Sale, RRR Move

China’s Credit Contraction Adds Pressure to Bond Sale, RRR Move

China released a slew of disappointing economic data over the weekend, headlined by a surprise contraction in credit that adds pressure for authorities to speed up bond sales.

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(Bloomberg) — China released a slew of disappointing economic data over the weekend, headlined by a surprise contraction in credit that adds pressure for authorities to speed up bond sales.

The broadest measure of credit, aggregate financing, shrank for the first time since October 2005. That reflected slower-than-expected government bond issuance as well as officials’ efforts to clamp down on financial arbitrage. Overall, borrowing demand remained weak, contributing to the drop.

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The data has added to expectations the government will ramp up bond issuance, including the sale of 1 trillion yuan ($138 billion) of ultra-long special central government bonds. China’s Finance Ministry is meeting Monday to discuss those sales, with the first batch expected to come Friday, Bloomberg reported.  

The People’s Bank of China may help free up cash for banks to buy the bonds by cutting the amount of money they have to keep in reserve, analysts said.

“We expect the issuance of local government special bonds and ultra-long special sovereign bonds will speed up,” Everbright Securities Co. analysts including Gao Ruidong wrote in a report Monday. “The second quarter is still a potential window for cuts to the reserve requirement ratio and interest rates.” 

The poor credit data came on the heels of a drop in factory-gate prices and weak consumer inflation, as well as a 56% plunge in foreign businesses’ direct investment into China last quarter. President Xi Jinping’s government is relying on manufacturing to achieve its ambitious official annual growth target of around 5%.

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The Communist Party’s 24-man Politburo at a meeting last month called for “flexible use” of policy tools including interest rates and the RRR to lower funding costs, boosting expectations for more monetary support to meet the GDP goal. The PBOC is still facing constraints from downward pressure on the yuan, as the Federal Reserve keeps rates high, constricting its room to move. 

That’s led to divergent forecasts on rate cuts. Citigroup Inc. economists expect a 50-basis point reduction in the RRR, or a 10-basis point interest rate cut around mid-year from the PBOC.

Zheshang Securities Co.’s fixed-income analysts think a RRR trim is most likely in the near-term, as currency pressure and the slight improvement in April inflation may crimp the impulse for a rate move, according to a Sunday report. Goldman Sachs Group Inc. forecasts a 25-basis point RRR cut in the second quarter.

The credit numbers came hours after the People’s Bank of China said slower credit growth was sufficient to support the economy, in its latest monetary policy report. Officials have stepped up efforts to rein in arbitrage  — companies taking out loans and channeling them into deposits — which analysts said also contributed to the decline.

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The slowdown in credit growth “does not mean a decrease in the strength of financial support for the real economy,” the central bank said in the Friday report. An improvement in the structure of credit will allow more efficient companies that have real demand for funding to access financing, it added. 

Some analysts also noted a change in statistical methods that may have reduced incentives for banks to push for stronger loan and deposit growth. The National Bureau of Statistics and the PBOC revised their estimates for the financial sector’s value added to include indicators such as banks’ net interest income starting from the first quarter of this year, according to local media reports.

Apart from the disappointing credit data, industrial prices extended a long decline on Saturday. While the consumer price index inched up 0.3% from a year earlier, factory-gate prices remained stuck in deflation, where they’ve been since late 2022. 

While the April credit data was disappointing, it didn’t reflect a “sharp deterioration in the underlying demand” in the economy, according to Larry Hu, an economist at Macquarie Group, who pointed to strong trade data and auto sales.

“Policymakers would continue to rely on exports as well as new energy-related investment to drive growth, at least in the near future,” he added.

—With assistance from Tian Ying, James Mayger and Alice Huang.

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