Rising inflation, higher property prices, and policymakers' focus on growth has raised a few questions about Chinese monetary tightening.
But there has been much confusion about what metrics to track. Should we be watching broad money supply, measures of credit like loan growth, total social financing (TSF) and so on, or interest rates.
In a new note, Bank of America's Ting Lu writes that the three best indicators of China's "monetary stance" are seven-day repo rates, revised TSF growth, and loan growth
- Seven-day repo rate "is the most widely used interbank rate which serves as benchmark for many other rates and financial products such as swaps."
- Loan growth since banks continue to be "the main channel for creating money".
- Revised TSF gives us a wide scope of credit growth. Total social financing includes trust loans, entrusted loans, FX loans, bankers’ acceptance bills, corporate bonds, and non-financial stock sales. But BAML's revised TSF only considers bank loans, corporate bonds, and trust and entrusted loans.
Based on these indicators, Lu writes that monetary policy will be 'neutral' in the first half of the year and will be modestly tightened in the second half.
The seven-day repo rate is expected to stay between 3 - 3.5 percent in the first half of the year. Bank loan growth is expected to be around 15 percent and is expected to ease to 14.3 percent by the end of the year. Revised TSF growth is forecast to be between 18 - 20 percent in the first half of the year, before easing to about 16 percent in the second half.
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