HONG KONG (Reuters Breakingviews) - China is starting to trade debt for growth. Credit and capital investment are expanding more slowly, as risky behaviour is reined in. For now, Beijing’s economic goals looks safe. But officials will be thinking about creative ways to keep the money taps open.
Central bank data released on Tuesday showed that outstanding total social financing, a broad measure of credit, rose 10.3 percent year on year as of end-May, its slowest pace since the series began. The cooldown has been concentrated in the so-called shadow banking sector, meaning instruments such as trust loans and bankers’ acceptances – reflecting President Xi Jinping’s “deleveraging” campaign to make China’s economy safer and less debt-dependent.
Bureaucrats have been pushing companies and cities away from risky off-balance sheet borrowing and towards better-regulated bank lending. So far, they have avoided a hard landing: in the first quarter, gross domestic product rose 6.8 percent compared to a year earlier, comfortably above the annual target of around 6.5 percent.
The latest figures, however, reveal the squeeze is on. Take investment in fixed assets, such as roads and factories - a key contributor to growth. That slowed to 6.1 percent in the year to May, well below consensus forecast of 7 percent. Retail sales and industrial output also undershot expectations.
Officials seem twitchy. In recent weeks, the People’s Bank of China has cut the mandatory reserves it requires from banks, said it would lend against a wider range of collateral and periodically injected large sums into the financial system. On Thursday, it surprised investors by declining to follow the U.S. Federal Reserve’s interest rate hike.
No single move marks a policy shift. But together, they suggest the technocrats are pulling levers to keep credit flowing, even as they bear down on shadow banking. It is less likely, though, that Beijing will be able to hold its nerve and continue the clean-up if growth cools so fast that it threatens to sink below the 6.5 percent target, potentially stoking unemployment and social unrest. Thus far, this has been a commendably smooth transition. But the difficult trade-offs lie ahead.
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