Monday, July 1, 2013

China: towards lower but more sustainable growth?

China’s liquidity squeeze has eased significantly following intervention by the PBoC.  Interbank funding rates surged to over 10% last week, well outside their normal range of 3-4%.  Eventual action from the central bank saw rates back down to around 5%.  The residual tightening in interest rates, along with recent RMB appreciation, represents a tightening in overall monetary conditions that has us knocking back our China calendar 2013 GDP forecast to 7.6%.

The authorities were initially reluctant to intervene, citing seasonal factors as the cause of the credit crunch and that ample liquidity would see those pressures eventually ease.  But what began as a liquidity squeeze to clamp down on China’s shadow banking sector was heading towards a full-scale credit crunch.  They were eventually forced to intervene to soothe market concerns about a sharp slowdown in growth. 

The intention to clamp down on undesirable banking practices is admirable.  It reinforces that the current leadership is more “reform” than “stimulus” focussed.  While that means lower near-term growth, it‘s not inconsistent with our expectation that China is moving to a structurally lower level of growth over time.  But with a strong reform program including capital account and financial sector liberalisation (including interest and exchange rates) that growth should prove to be more sustainable.