PBoC: Tightening policy bias may be here to stay – Standard Chartered

The research team at Standard Chartered expects the tightening bias of PBoC to stay as long as GDP growth target is within reach.

Key Quotes

“Monetary policy has turned tighter since last year. M2 growth has been below 12% since last May, low by historical standards. In March, M2 growth fell further to 10.6% y/y. Growth in total social financing (TSF) outstanding – broadly defined credit – decelerated to 12.5% y/y in March from 13.3% y/y last November, which puts it on track to approach the annual target of 12%. The PBoC also already raised de facto policy rates (on reverse repos, the standing lending facility and the medium-term lending facility, for example) by 20bps in Q1.”

“We think tighter monetary policy is intended to slow the pace of leveraging and, to a lesser extent, mitigate CNY depreciation pressure. We do not think inflation is the main consideration behind the shift in the monetary policy stance: CPI inflation (1.4% y/y in Q1) has been muted so far this year and PPI inflation may have peaked. Meanwhile, China’s corporate leverage (137% of GDP by our estimate) is among the highest in the world, posing a risk to the financial system. We estimate that China’s total debt-to-GDP ratio reached 264% at end-2016, compared with 248% at end-2015, an increase of more than 10ppt within a year. With growth risks easing, deleveraging has become one of the top priorities in the government’s work agenda.”

• “The PBoC may keep M2 growth below the targeted level of 12% and continue to guide TSF growth toward the targeted level of 12%.
• The de facto policy rates are likely to be raised by another 20bps in response to US Fed rate hikes (we expect one hike in June and another hike in December).
• Benchmark deposit and lending rate hikes are quite unlikely due to subdued CPI inflation and declining PPI inflation. In addition, these are administrative policy tools that will likely gradually be phased out.
• The PBoC may put reserve requirement ratio (RRR) cuts on hold until CNY depreciation expectations recede. While we think RRR cuts are a more desirable way of replenishing liquidity than PBoC lending operations, we do not think they are likely in the near term given their strong signalling effect.”

“The debt-to-GDP ratio is likely to rise further, but at a slower pace. With credit growth decelerating and nominal GDP growth accelerating, the gap between credit and nominal GDP growth will likely narrow to 2-3ppt in 2017, indicating tighter monetary conditions. As a result, the total debt-to-GDP ratio (based on our definition) may increase less to around 270% by end-2017 from 264% at end-2016.”

“We maintain our 2017 growth forecast of 6.6%. Our assessment is that the headwinds discussed above outweigh the positive factors for the rest of the year. In particular, expansionary fiscal policy can only partially offset the effect of monetary tightening. Growth may have peaked in Q1, and real activity will likely soften for the rest of 2017. We forecast that growth will decelerate to 6.5% y/y in H2.”