China plans to target broad money supply growth of about 12 percent this year, slightly lower than last year’s goal, policy sources said, signaling a bid to contain debt risks while keeping growth on track.
Under its new “prudent and neutral” policy, the People’s Bank of China has adopted a modest tightening bias in a bid to cool torrid credit expansion, although it is treading cautiously to avoid hurting the economy.
The M2 growth target was endorsed by leaders at the closed-door Chinese Central Economic Work Conference in December last year, according to sources with knowledge of the meeting outcome.
“It’s not necessary to maintain last year’s high money supply growth,” said a source, who advises the government. “A money supply rise of 11 percent should be enough for supporting growth, but we probably need to have some extra space, considering risks in the process of deleveraging.”
The Chinese State Council Information Office, the government’s public relations arm, has yet to respond to a request for comment.
Last year, the money supply target was about 13 percent, although it ultimately grew just 11.3 percent due to the effects of the central bank’s intervention to support the yuan, which effectively drained yuan liquidity from the economy.
Still, the central bank injected more cash through its open-market operations, medium-term lending facility and standing lending facility, underpinning record lending of 12.65 trillion yuan (US$1.84 trillion) last year.
Last year’s M2 target reflected Beijing’s focus on meeting its economic growth targets, but top leaders have pledged to this year shift the emphasis to addressing financial risks and asset bubbles.
China will reportedly lower its economic growth target for this year to about 6.5 percent from last year’s 6.5 percent to 7 percent.
The economy expanded 6.7 percent last year.
Last week, state media cited a party statement issued after a meeting of the politburo that China must maintain stable economic development and social harmony ahead of the 19th Chinese Communist Party Congress in the autumn.
Key economic targets are to be announced at the opening of the annual parliament meeting on Sunday.
There have already been some substantive indicators of tighter monetary policy this year.
The central bank raised interest rates on its reverse repurchase agreements and the standing lending facility on Feb. 3, following a rise in rates on the medium-term lending facility in late January.
“The central bank could raise such policy rates further, but we cannot see any possibility of raising benchmark interest rates in the near term,” one of the sources said.
New yuan loans hit 2.03 trillion yuan in January, the second-highest on record, due to a rush among lenders to maintain market share, while M2 rose an annual 11.3 percent in January.
The central bank said in a working paper published on Feb. 15 that the debt deleveraging process should be managed prudently to help avoid a liquidity crisis and asset bubbles.
China’s debt-to-GDP ratio rose to 277 percent at the end of last year, from 254 percent in 2015, with an increasing share of new credit being used to pay debt servicing costs, UBS analysts said in a recent note.
“A decline in driving force from capital investment on economic growth is behind the rapid rise in leverage,” People’s Bank of China Survey and Statistics Department head Ruan Jianhong (阮健弘) said in remarks published on Friday last week.
In 2011, capital investment of 1 yuan could yield an increase of 0.32 yuan in GDP, but that fell to 0.16 yuan in 2015, Ruan told the official China Financial News in an interview.
“We need to maintain appropriate economic growth. If growth slows sharply, various risks may be exposed,” one of the sources said.
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