Economic Update


Conservative Monetary Policy to Remain in the Mainland despite Low Inflation


Although inflationary pressure was modest in the Mainland during the first half of 2017, policymakers will likely keep the monetary policy stance relatively tight to contain the highly leveraged state of the Mainland Chinese economy.

Tamed inflation

Headline CPI rose by 1.5% YoY in June and averaged a +1.4% YoY growth in the first half of 2017, as food prices dropped 1.2% YoY during the month and averaged a 2.1% YoY decline during the first half (see Chart 1). In the first 26 weeks of the year, retail food prices only increased in six of them on a week-on-week basis, largely reflecting the abundant supply situation (e.g. pork, fruits, and vegetables). Nevertheless, given a lower comparable base in 2H2016, a slight uptake of food price-driven inflation could be seen in the second half.


Meanwhile, amongst various major components in the CPI basket, the cost of services saw the largest year-on-year increase in June (+3% YoY) and averaged 2.9% YoY growth during the first half. As the key growth driver of the economy, the growth of the service industries (e.g. education, healthcare and medical services) should continue and may have relatively stronger pricing power. As a result, this trend (i.e. the cost of services to increase faster than the cost of goods) should be expected to prevail in the near term.

Slowing credit growth

Turning to the credit market conditions, we maintain our view from 2H2016 that policymakers should work toward containing credit expansion in the Mainland. As of May, the neutralisation effects of such monetary policies were reflected in the M2 supply – which only grew 9.6% YoY in May, representing the lowest growth rate on record – and M1 – which only expanded 18.7% YoY in the same month, versus the average growth rate of 22.4% in the previous three months (see Chart 2).


Indeed, as a result of some hawkish PBoC rhetoric and guideline for the banks,[1] the introduction of measures limiting interbank transactions and investment in wealth management products has, in our view, slowed the velocity of money. During the first five months of 2017, new aggregate financing has jumped 15.1% YoY, but new bank loans only grew 9.7%, suggesting that banks have become even more conservative in extending loans than other lenders.

Notwithstanding the overall sluggishness, banks’ lending to the corporate sector has stabilised somewhat as its share of total bank loans increased for the first time since 4Q2015 as at the end of 1Q2017 (see Chart 3). Such a development, if continued, could reflect the corporate sector’s improved access to low-cost financing,[2] which should translate into improved profitability even though the overall bank lending rate could be on the rise (see the Economic Update on 1 March).



Looking ahead, CPI should display a moderate uptick in 2H2017 as a result of a slightly lower base effect (i.e. CPI averaged 2.1% YoY in 1H2016 vs 1.9% in 2H2016). More importantly, as property prices have remained strong, policymakers will unlikely reverse the stance (see Chart 4). Therefore, the neutral-to-slightly tightening monetary stance will be justified and continue to be in effect in the near term.


Since a broader set of economic indicators will be announced on 17 July, we shall provide an update on the overall Chinese economy in the August issue of the Bulletin.



[2] As of 6 July, the private lending rate was 15.6% p.a., significantly higher than the overall bank lending rate of 5.53% p.a. in 1Q2017


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