China keeps credit flowing as low inflation increases scope for easing
China loosened monetary conditions at the fastest pace in almost two years in the three months to the end of June, testing the waning effectiveness of credit in supporting economic growth.
Bloomberg's new China Monetary Conditions Index - a weighted average of loan growth, real interest rates and China's real effective exchange rate - rose 6.71 points to 82.81 in the second quarter from the previous three months. That's the biggest jump since the July-September period of 2012.
The May and June numbers are the first back-to-back readings above 80 since January 2012.
New yuan denominated loans in July will be a record high for that month, according to a Bloomberg survey of analysts, suggesting officials are keeping the credit taps open even as debt risks mount.
Consumer inflation levels are running below the government's goal, allowing room for more credit easing. Economic data will determine how far policymakers go.
"The central bank worries more about inflation and financial risks, but the government is worried more about growth and employment," said Ding Shuang, senior China economist at Citigroup in Hong Kong. "Growth will rebound in the second half, so that will give the central bank some support in not expanding credit and liquidity further."
Chinese Premier Li Keqiang saying he wants financing charges cut for some sectors to support growth.
"The central bank will still be under pressure, not necessarily to expand credit, but to lower lending costs," Mr Ding said.
Each €1 in new credit added the equivalent of an extra 20 cents in gross domestic product GDP in the first half of 2014. That compares with 29 cents in full-year 2012 and 2013 and 83 cents in 2007, when global money markets began to freeze.
Inflation figures released on August 9 suggest monetary easing has yet to trigger price gains in the broader economy.
The consumer price index rose 2.3pc in July from a year earlier, the same pace as in June and below the government's 3.5pc target. The producer price index fell for a 29th month of straight decline.
Bloomberg's monetary index was introduced in July, with the data series compiled back to 2003. The gauge peaked at 148.02 in November 2009 amid China's 4 trillion-yuan (438bn at the time) stimulus plan during the global financial crisis.
"This index gives you a handy one-shot explanation of what China's doing on its monetary policy and its relationship with growth," said Fielding Chen, a Bloomberg economist in Hong Kong. "It's showing us that the current pick-up in growth momentum, which is likely to be a little stronger in the coming few months, is underpinned by accommodative monetary conditions."
China's monetary loosening in the second half may not be as strong as in the first half, while liquidity may remain "relatively loose," according to the state-run China Securities Journal.
Premier Li ordered targeted easing measures to help areas of the economy including agriculture, low-income housing and small businesses, following a first-quarter growth slowdown.
"The government is generally trying to walk a fine line between loosening credit enough to get the economy going, but not to allow there to be another credit boom," said Stephen Green, head of Standard Chartered in Hong Kong.
"But growth over the next two, three and four years is going to depend on reforms, so we need to get some of those feeding through."