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China Money November 2021

China: Credit growth broadly stable in November; Central Bank cuts reserve requirement ratio

In November, Chinese banks distributed CNY 1.3 trillion (roughly USD 200 billion) in new yuan loans, up from October’s 0.8 trillion figure, which had been dampened by the national holiday period in the month. Annual growth in M2 money supply edged down from 8.7% in October to 8.5% in November, while annual growth in the stock of total social financing (TSF)—a broader measure of credit and liquidity in the economy that includes loans, bonds and other non-traditional instruments—inched up from 10.0% to 10.1%.

In early December, the PBOC cut the reserve requirement ratio (RRR) for most banks by 0.5 basis points, taking the ratio for large banks down to 11.5%. The move came after November’s announcement of cheap green loans, and was aimed at buttressing the stuttering economy. Also in December, the bank hiked the RRR on foreign exchange deposits in a bid to tame the value of the yuan.

Looking forward, further RRR cuts are a distinct possibility next year, in order to support the property sector and the economy more broadly. However, elevated producer price pressures and likely tighter monetary policy abroad limit the scope for cuts in the Central Bank’s key policy interest rates, which are seen remaining broadly unchanged through to end-2022.

On the monetary policy outlook, Samuel Tse, economist at DBS Bank, commented:

“We expect another 50bps of RRR cut to be announced in 1Q22 due to ongoing bond defaults of property sector. While stressed developers are struggling with repayments, some property developers defaulted despite not breaching the three red lines. […] Yet, we are not convinced that the authority will flood the market with liquidity by cutting the Loan Prime Rate as this would derail the new Common Propensity policy design, which aims at removing moral hazard.”

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