PBOC plans cautious approach as recovery gathers pace

The People's Bank of China, the central bank, will adopt a more normal policy stance in the second half of the year as credit growth may have peaked even as its timely measures helped sustain China's economic recovery from the novel coronavirus pandemic during the first half, experts said on Monday.

The vast array of measures taken by the PBOC to boost credit and its liquidity infusions have been instrumental in stemming the economic fallout of the epidemic since February, they said.

China's new yuan loans rose to more than 12 trillion yuan ($1.71 trillion) during the first six months of this year, as a result of the PBOC's monetary easing measures. The amount was also about 60 percent of the annual new yuan loan target of 20 trillion yuan announced by PBOC Governor Yi Gang in June.

Aggregate financing, Yi said, will exceed 30 trillion yuan by the end of this year, and has already reached 20.83 trillion yuan or nearly 70 percent by June.

With economic activities gradually returning to normal, credit growth needs to be in tandem with the speed of economic recovery, failing which it may lead to fund sediments in the financial system, officials from the central bank said during a media conference on Friday.

That means the growth of both credit and aggregate financing may be moderated in the July-to-December period, said Ming Ming, a senior analyst with CITIC Securities. "As the special and periodical monetary policy tools may exit when the COVID-19 epidemic is controlled, the credit growth will moderate or slow down."

China expanded the re-lending quota by 300 billion yuan in February to increase production of medical supplies since the COVID-19 outbreak. An additional 500 billion yuan of funds under the re-lending and rediscount schemes were used for smaller business loans and production resumption. These two measures ended as of June 30, because "the mission finished", said Guo Kai, deputy head of the PBOC Monetary Policy Department.

Though many major central banks have speeded up and expanded purchases of government bonds to directly finance a large part of the increase in budget deficits, the PBOC mainly used "conventional "tools, leaving sufficient policy room to address economic shocks, said Guo.

The PBOC has adopted wide array of lending facilities and played its role as "the lender of last resort" to financial institutions. These measures in the first six months unlocked about 9 trillion yuan of funds in total, and the amount has been sufficient so far, Guo added.

Policy watchers have seen the cautious stance of the PBOC's rate policy since May even with the inflation pressure decreasing, triggering sell-offs in the bond market. Some experts were apprehensive that the monetary policy might turn less accommodative later this year.

Compared with the "large steps "of credit and liquidity injections in the first half of this year, the central bank may take a more cautious pace in monetary easing in the subsequent months, but still maintain stable credit growth to sustain economic growth momentum, said analysts.

With the economic recovery gathering pace, monetary authorities are more concerned about financial risks primarily related to leveraging and arbitrage in the financial system, as interest rates in the interbank market declined significantly, according to Li Zhennan, an economist with Goldman Sachs (Asia).

Arbitrage from issuing bonds and then buying structured deposits have started becoming attractive since the second quarter, as the market-oriented bond financing costs have become much lower than those of the banks' financial products, pushing the PBOC to implement targeted measures instead of broadly cutting the policy rates, Li said.