China’s Credit Crunch Prompts Urgent Action from Government and Central Bank

Due to a sharp decline in credit, China’s government and central bank are facing mounting pressure to take action. Last month marked the first time in nearly two decades that overall credit growth fell significantly, leaving both the government and central bank with few options. Local governments and private entities are already heavily indebted, leaving the central government to provide a much-needed boost through the sale of ultra-long special bonds worth 1 trillion yuan ($138 billion). However, this move alone may not be enough to address the current economic situation. As a result, some experts predict that the central bank will implement further measures, such as reducing reserve requirements ratios (RRR) and lowering key lending rates. While the central bank has the ability to ease monetary policies, concerns remain regarding the widening interest rate gap with the US if they proceed. This is compounded by the fact that households and businesses are hesitant to take on debt due to ongoing asset price declines. The Chinese government is also exploring alternative methods to stimulate lending, such as altering statistical methods to reduce incentives for banks to push for higher loan and deposit growth. Despite the disappointing April credit figures, some analysts remain optimistic, citing strong trade data and auto sales as evidence of a resilient economy. Regardless, concerns over deflationary pressures persist, with consumer prices increasing by only 0.3% year-on-year and producer prices continuing to fall. With the economy remaining vulnerable to deflationary pressures, policymakers are expected to rely on exports and new energy-related investment to fuel growth. Ultimately, as Bloomberg puts it, “the problem confronting the [central bank] is one other central banks have faced in recent decades, sometimes called ‘pushing on a string.’ Essentially, it’s hard to spur more borrowing via lower rates when households or businesses have been hit by an asset-price slump and simply don’t want to take on debt.”