PBOC expected to maintain monetary stance

BEIJING - Higher-than-expected growth in China's new RMB lending and total social financing in November indicates that China's liquidity conditions remain favorable for 7.5 percent or higher GDP growth, and the central bank is likely to maintain its monetary stance, economists said.

Market participants had been worried over possible credit tightening measures by the central bank, the People's Bank of China (PBOC), due to a jump in yields on Chinese government bonds (CGB) in mid-November.

Last month, CGB yields soared, with the 10-year CGB yield jumping to 4.7 percent on Nov 20 -- the highest level in nine years -- from a mere 3.23 percent in mid-June.

The 10-year CGB yield retreated to 4.43 percent on Nov 27. At the time, markets worried that the rise in bond yields was engineered by the PBOC to reduce leverage and slow credit growth.

Beating expectations

The PBOC on Wednesday released figures on November's money supply, new loans and total social financing (TSF), which is a broader measure of liquidity in the world's second-largest economy.

New bank loans and TSF rebounded notably to 624.6 billion yuan ($102 billion) and 1,230 billion yuan in November, PBOC data revealed.

November's new loans represented an increase of 118.6 billion yuan, or 23.4 percent, from the previous month. The figure was also well beyond the market forecast of 580 billion yuan.

TSF in November was 43.7 percent higher than in October, a 374 billion yuan month-on-month increase. It also beat market expectations of 920 billion yuan.

Broad money supply (M2), which covers cash in circulation and all deposits, rose 14.2 percent year on year in November, down from the 14.3-percent growth rate in October, which was in line with market expectations.

"Growth in both M2 money supply and bank loans, the more reliable indicators for the liquidity available for the real economy, cooled only marginally to 14.2 percent year on year last month, [which] suggested that 'liquidity tightening' talks are exaggerated," an HSBC research team led by chief China economist Qu Hongbin said in a note.

A research team with the Bank of America Merrill Lynch led by chief China economist Lu Ting attributed robust credit demand to three reasons.

Lu's team said the rebound of GDP growth to 7.8 percent in the third quarter from 7.5 percent in the second quarter boosted confidence.

Another factor is that messages from the Third Plenum of the 18th CPC Central Committee last month were overall positive for confidence.

Finally, external demand seems to have improved thanks to the recovery in the US and euro zone, as evidenced by the better-than-expected 12.7 percent export growth in November.

Lu Ting said he believes that the recent rise in bond yields and average interbank rates was mainly due to the bottom-up interest rate liberalization by banks and other financial institutions in China.

Unchanged monetary stance

Qu, of HSBC, said he expects China's overall liquidity conditions to remain relatively accommodating, despite the relatively high interbank lending rates, which may stay higher for longer according to HSBC's research.

The current relatively accommodating monetary conditions should be sufficient to support real GDP growth rates of above 7.5 percent while keeping headline inflation around 3 percent in the coming quarters, he said.

In early 2013, the Chinese government set its economic work targets, with GDP growth targeted around 7.5 percent and the consumer price index (CPI), a main gauge of inflation, capped at around 3.5 percent.

"We see little need for [the] central bank [to] change its monetary stance in the near term," Qu added.

Lu Ting agreed, saying that he believes China's monetary policy could remain neutral in December 2013 and 2014, even though money market rates and bond yields could rise a bit further.

Bank loan growth could remain around 14 percent in 2014, while TSF growth could moderate to around 16 to 17 percent as the problem of double counting is lessened.

"We expect the government to maintain neutral monetary and fiscal policies in the next couple of quarters while increasing their efforts on drafting and carrying out structural reforms," Lu said.

Wang Tao, chief China economist at UBS, also said the Chinese government would likely follow a relatively prudent monetary and credit policy stance.

She said she expects TSF growth to slow to about 16 percent in 2014.

"Given the ongoing interest rate liberalization and financial deregulation processes, credit growth could again exceed the government's desired pace in 2014," she added.