China: RRR cut needed to sustain credit growth – ING

Iris Pang, economist at ING, points out that China’s aggregate financing at CNY2.86 trillion, as a measure of its credit growth, was up 80.28% YoY in March and 1Q19 total credit created was near CNY8.20 trillion, up 40% from 1Q18. 

Key Quotes

“Though it is usual to have high credit growth in the first quarter of the year in China, the growth is surprisingly high and a clear sign to us that this is to support the economy. Another sign that the central bank is supporting the economy is that the interest rate bid has remained low.”

“RMB loans from banks are still the largest contribution of total credit for the economy.”

“The second largest credit creator was the debt market, facilitating fundraising for infrastructure through the issue of local government special bonds.”

“As trade war uncertainties linger on, there is a need to keep the fast yuan loan growth to help small private firms survive. An RRR cut is needed to facilitate fast credit growth.”

“By 17 April a sizeable liquidity injection expire and there will be tax payments around mid-April. Usually, this would create some tightness in the interbank market. This should allow the central bank to cut RRR by 0.5 percentage points to 13.0%.”