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China central bank to watch surging credit growth for signs of overheating

Another strong month of bank lending in China after a record January has revived bets that the authorities may step in to smooth credit to avoid overheating in the economy.

New yuan loans at Chinese banks totaled 1.82 trillion yuan in February, up from 908.4 billion yuan in the prior-year period, according to data released March 10 by the People's Bank of China, or PBOC. Bank lending rose to a record high in January, totaling 4.93 trillion yuan.

"With much stronger new credit growth in the beginning of 2023, the regulators may manage the pace of credit growth in the coming months to ensure a sustainable credit support to the real economy," Tao Wang, head of Asia economics and chief China economist at UBS Investment Research, said in a March 13 note.

China announced a target of about 5% growth in its gross domestic product for 2023 at the recent National People's Congress, commonly known as China's "Two Sessions," after missing the 2022 target of 5.5%. GDP grew 3.0% in 2022, according to Chinese government estimates.

While an increase in lending is essential to kick-start the economy, volatility remains a worry, especially as global financial markets face monetary tightening in most countries across the world.

China's total social financing, or TSF, a broader measure of credit and liquidity that includes equity offerings and bond sales, rose about 1.6x year over year to 3.16 trillion yuan, after a 3.1% contraction in the previous month, according to the PBOC data.

Strong credit growth

USB said in its note it expects overall credit growth in China to remain strong at about 10% year over year in 2023, and that the figure may inch up to 11% if policy support is strengthened. Property-related credit may stabilize gradually even though the pressure of early mortgage repayment still lingers, UBS' Wang said.

The PBOC may be inclined to withdraw extra liquidity from the market through daily operations later in 2023, Iris Pang, chief economist for Greater China at ING told S&P Global Market Intelligence.

"For now, however, the Chinese central bank is likely to tolerate slightly more liquidity in the market to avoid any unexpected volatility from global financial markets," Pang said.

The February jump in TSF and yuan loans was fueled by strong corporate loans, Michael Zeng, a Hong Kong-based banking analyst at Daiwa Capital Markets, said in a March 10 note. Household loans remained weak, likely due to early repayment of mortgages, Zeng added.

"We understand that the government is not hurrying to revitalize the economy with extraordinary measures, except a loose monetary environment," Zeng said. "Thus we may need a few months to see improvement in retail credit demand."

As of March 10, US$1 was equivalent to 6.92 Chinese yuan.