China's credit growth expected to continue

Monetary conditions in China have improved recently due to supportive monetary policies and the acceleration in credit growth is set to continue, according to an industry study.

Thanks to lower interest rates, increased liquidity through a lower reserve requirement ratio (RRR) and higher issuance of corporate bonds and loans, the country has seen much credit easing and that will support the post-COVID-19 rebound in growth according to HSBC’s global research team.

The banking giant predicts that headwinds to growth from both domestic and external fronts will prompt China to continue to step up monetary easing in the coming quarters.

Credit growth will continue to expand, particularly growth related to infrastructure investment, and HSBC expects China's central bank to further lower both the loan prime rate and deposit rate by 30 basis points this year.

A 52-basis-point cut to RRR is also expected within this year.

The People's Bank of China has reduced the reserve requirement ratio for financial institutions three times this year, releasing a total of 1.75 trillion yuan (US$245.4 billion) into the banking system.

The bank also expects more targeted support for hard-hit businesses, especially manufacturing firms and small and medium-sized enterprises, to help them remain operating through targeted credit easing and a lower tax burden.

At the ongoing 13th National People's Congress, policymakers indicated their monetary policy goals are for broad money (M2) and total social financing (TSF) growth to be "significantly higher" than in 2019.

March and April have already seen noticeable pick-ups as M2 rose by double digits for the first time in three years (compared with 8.7 percent in 2019) and outstanding TSF rose by 12 percent in April (10.7 percent in 2019).

However, transmission of monetary policy will take time. Specifically, manufacturing investment, which is closely tied to short-term corporate debt issuance, is less likely to see a significant pick-up in the near term, as final demand and other factors such as profits and business confidence remain subdued, the study noted.

On the other hand, infrastructure investment, which is closely linked to long-term corporate debt, may see a boost to growth of over 10 percent year on year in the coming quarters.