China underlines credit expansions to mitigate fallout from COVID-19

China will rely on credit-supply expansions to mitigate the fallout from the novel coronavirus outbreak and not fall into any liquidity traps, while the rest of the world swings to a debt-driven growth model, analysts said on Monday.

Credit demand will continue to rise in the second quarter of the year as individual consumption and mortgage loans may surge and the government will launch several infrastructure investment programs, according to officials from the People's Bank of China, the central bank.

Allaying apprehensions that the country was on the verge of a liquidity trap, the PBOC officials said that "China is far from that." Usually, a liquidity trap occurs when monetary policy loses its ability to manage economic swings and a looser policy stance fails to stimulate additional spending.

Sun Guofeng, head of the PBOC's monetary policy department, said: "There is ample liquidity in the financial sector and we do not need any aggressive easing. We are far from the liquidity trap, be it the liquidity or the interest rates."

The financial sector's total lending to the real economy, denominated in both Chinese and foreign currencies, rose to 7.44 trillion yuan ($1.06 trillion) during the first three months of the year, the highest level ever. It was 1.13 trillion yuan more than the incremental debt a year ago, according to the PBOC.

China's aggregate financing, including government and corporate bonds, increased by 5.16 trillion yuan in March, notching up a year-on-year growth rate of 11.5 percent compared with 10.7 percent in February. It was the fastest single-month growth in history, mainly due to the growing government and corporate borrowing, the PBOC said.

Monetary policy has been strengthened since last month, focusing on financial relief for small businesses and households and stabilizing economic growth. "A more specific target in the short term is to drive up infrastructure investment, concentrating on the new-type urbanization," said Liang Hong, a senior economist with China International Capital Corp.

Unlocking the pent-up consumer demand for automobiles and property could be one of the priorities for policymakers to stimulate growth and employment, she said.

The comments come at a time when bearish sentiment about the global economy is increasing. The COVID-19 epidemic has severely dented global growth and it may remain in negative territory this year, said Kristalina Georgieva, managing director of the International Monetary Fund. She said that the world is anticipating "the worst economic fallout since the Great Depression" that began in 1929.

The bearishness amid the massive ramp-up in monetary and fiscal support has fostered record issuances in the investment-grade bond market in Asia, the United States and Europe. Global bond issuances in March reached $500 billion－the second-largest monthly volume on record after September 2019($516 billion) and just ahead of January this year ($478 billion), according to data from S&P Global Ratings.

"Bulk of the issuances were investment-grade instruments with renewed appetite for high-quality debt through (some) central banks' quantitative easing programs and other facilities aimed at mitigating dislocation in financial markets," the S&P report said.

Zhang Tao, deputy managing director of the IMF, stressed on the need to keep the liquidity issues under control during a seminar organized by China Finance 40 Forum. "All countries have to prevent liquidity shocks from turning into large-scale long-term solvency crises."

Economists, however, expect additional fiscal and monetary actions in China, especially to rescue small and medium-sized businesses, promote consumption and boost government-led investment.

Since the novel coronavirus outbreak, the central bank has lowered the market interest rates in order to bring down borrowing costs. It has also stepped in to safeguard financial markets in order to provide stability to the financial system and support the flow of credit in the economy.

"The core of the monetary policy is to lower financing costs and coordinate with the fiscal policy," said Ming Ming, a senior analyst at CITIC Securities. Different from some of the overseas central banks that release liquidity by directly purchasing government bonds, China's monetary actions mainly rely on commercial banks－the main purchasers of government bonds.

With the central government contemplating issue of special bonds soon, local governments are expected to aggressively increase debt to spur growth. The PBOC will continually cut interest rates, including the benchmark deposit rate if necessary, to ease the debt burden for both the government and corporates, said Ming.