Article Highlights

  • Era of credit-fueled growth over - PBOC Gov Zhou
  • China making progress in containing debt risks-Zhou
  • Bank lending rises in Jan-Feb but less shadow financing
  • More work still needs to be done on risk, debt front-Zhou
  • PBOC expected to continue with slow, small interbank rate rises
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China is moving beyond its traditional dependence on rapid credit growth and investment and will rely less on stimulus to boost its economy in future, People’s Bank of China Governor Zhou Xiaochuan said on Friday.

Zhou’s comments echoed those of other top officials at parliament this week which suggested China will be more cautious about spending this year while it works to reduce risks from a rapid build-up in debt.

After years of heavy pump-priming, markets worry that less generous stimulus could retard the pace of growth not only in China but globally.

But analysts believe Chinese authorities will continue to keep the system flush with cash in various ways to avoid the risk of a sharp slowdown in the economy, while tightening the screws on the regulatory front.

We now emphasize the new normal of the economy, shifting from the past growth model of quantitative growth to high quality growth,” Zhou said, in what was likely his last news briefing before his expected retirement this month.

As we pursue quality growth, it is possible to reduce this type of growth model that used to rely heavily on financing support,” said Zhou.

Reform-minded Zhou, who took the helm of the PBOC in 2002, is credited with loosening interest rate controls, boosting the yuan’s global clout and developing new policy tools as Beijing seeks to control risks that have been fueled by past stimulus, which swelled debt loads and encouraged inefficient investment in sectors like steel which already had ample capacity.

I feel fortunate to work together with everyone in pushing financial reforms and opening up,” he said.


Credit data released by the PBOC earlier on Friday highlighted the balancing act that Chinese authorities are attempting between supporting real economic activity and reining in risks from an increasingly complex financial system.

New bank lending in February fell sharply from January’s record high, and regulatory clampdowns clearly led to a further slowdown in shadow financing activities. But total new loans so this year have risen 16 percent compared with the same time last year, significantly faster than nominal GDP growth.

Zhou, however, pointed to a moderation in China’s broad M2 money supply growth as evidence that the official “de-risking” and “deleveraging” campaign is working.

Everybody should see that China has entered a stabilizing leverage and is gradually reducing the leverage situation. The trends are clear,” said Zhou, referring to high debt ratios.

However, economists at HSBC note much of regulators’ efforts to reduce leverage so far have been aimed at financial institutions, with significant reductions in China’s overall debt levels still considered too risky to tackle without jeopardizing GDP growth.

We believe the extent and complexity of the administrative fixes undertaken by policymakers is constantly underestimated by both the media and the investment community. (However) structural reforms that fundamentally resolve the debt overhang are still urgently needed,” HSBC said in a recent report.


China also needs to urgently improve its regulatory supervision to ward off potential systemic threats, Zhou said.

He said China is making progress in reducing leverage in the economy but numerous threats remain, such as a lack of transparency at financial holding companies and digital currencies.

Financial risks from private financial conglomerates that used highly leveraged acquisitions to expand rapidly in recent years have come to the forefront with the government seizure of Anbang Insurance Group Co Ltd.

The central bank is drafting rules on financial holding companies, PBOC Vice Governor Pan Gongsheng said at the same news conference.

China also is expected to overhaul its financial regulatory set-up soon, possibly merging different agencies to improve their ability to monitor activity and identify potential trouble-spots, sources familiar with the matter have told Reuters.


As part of the broader crackdown on more speculative financing, the PBOC has gently nudged up interbank market rates over the last year while using stricter financial regulations.

Many analysts have penciled in further gradual tightening by the PBOC this year, with another hike in short-term rates possible as early as this month.

Unlike in the United States, there are no worries about a faster pace of tightening in China this year, even after data on Friday showed an unexpected spike in consumer inflation in February to 2.9 percent, the highest in more than four years and the upper end of the PBOC’s comfort zone.

Most economists dismissed the sharp pick-up in inflation as temporary due to holiday-related jumps in food and transport prices, and see price pressures moderating in coming months.

A more immediate danger would be if the deepening regulatory crackdown inadvertently disrupts normal business activities or triggers financial market turmoil.

Earlier this week, Premier Li Keqiang announced a growth target of around 6.5 percent this year, the same level that it handily beat in 2017 thanks in part to massive government infrastructure spending and record bank lending.

China has rarely missed its official growth target, and analysts suspect it could quickly u-turn on policy and resort to stimulus again if there is a threat of a sharper slowdown. ($1 = 6.3389 Chinese yuan renminbi)