Rising debt to stay within risk-free band

Central bank officials say expanding credit to support economic recovery

China will see faster debt growth this year as credit is expanding aggressively to support economic recovery, but the overall leverage ratio will likely be within a certain range to prevent long-term systemic risks, officials from the People's Bank of China, the central bank, said on Friday.

The country's new yuan loans surged to 7.1 trillion yuan ($988 billion) during the first quarter of this year, up 1.29 trillion yuan on a yearly basis, said the PBOC. The broad money supply, or M2, growth rate stood at 10.1 percent by the end of March, compared with 8.8 percent in February and 8.6 percent a year earlier, the official data indicated.

The rise in credit and money supply was mainly because of the countercyclical monetary policy measures to encourage lending by commercial banks and to offset the economic slowdown risks, said Ruan Jianhong, head of the PBOC's statistics and analysis department.

She said that an increase in the macro leverage level, or the total debt-to-GDP ratio, is for sure, given the faster increase in loans to the corporate sector. "But the financial risks should be controlled."

Aggregate financing reached 262.24 trillion yuan by the end of March, up 11.5 percent year-on-year, while yuan-denominated loans stood at 158.82 trillion yuan, the PBOC said.

"Existing liquidity levels in the financial sector are ample, and the growth in credit and money supply was mainly to support the novel coronavirus epidemic control work and stabilize economic growth," said Ruan.

Sun Guofeng, head of the PBOC's monetary policy department, said that the central bank has injected about 2 trillion yuan of liquidity in the first quarter.

"The monetary policy transmission system has been improved, as a liquidity injection of 1 yuan resulted in lending of 3.5 yuan", an efficient level compared with that in some major economies, said Sun.

Liu Guoqiang, vice-governor of China's central bank, said earlier this week that in the next stage, China will continue to pursue its prudent monetary policy with more moderate flexibility and a focus on supporting the recovery of the real economy.

The central bank will maintain sufficient market liquidity to meet practical demands and avoid cash shortages or soaring inflation. The increase in M2 money supply and aggregate financing should match or be slightly higher than the nominal GDP growth, said Liu.