Tighter Liquidity Seen in China Amid Rising Cost of Funds

Liquidity could become even tighter in China as many corporate bonds and local government debt will be required to meet repayment obligations in 2014, according to Coface.

 

The weighted-average lending rate in China picked up slowly in 2013, and this trend should continue into 2014, given market conditions. This should be particularly worrying for small and medium enterprises (SMEs) that, traditionally, have not received abundant credit facilities from banks.

 

Real GDP growth in China in 2014 will remain stable but slow slightly to 7.2% YoY, partly due to higher inflation. The lower government GDP growth target for 2014 is representative of the government’s intention to accelerate reform efforts. Export and investment are expected to improve in light of the global recovery.

 

Acceleration of urbanisation and better local government debt (LGD) management were two key themes highlighted in communication on the Central Economic Work Conference. It is expected that the government will continue to encourage private sector infrastructure investment – particularly in building “networks of cities” in the mid-western and north-eastern regions.

 

Since the government has already indicated that fiscal policy will remain stable, the private sector is expected to fund these projects.

 

The rising cost of funds will be a key indicator to follow in 2014. With lending rate liberalisation introduced in July 2013, banks’ lending may become more market-based and tightness in the interbank market could translate into higher lending rates.

 

Liquidity could become even tighter as many corporate bonds and local government debt will be required to meet repayment obligations in 2014.

 

The weighted-average lending rate in China picked up slowly in 2013, and this trend should continue into 2014, given market conditions. This should be particularly worrying for small and medium enterprises (SMEs) that, traditionally, have not received abundant credit facilities from banks.

 

Coface notes that 2014 is a year of divergence for the Chinese economy, representing the diverging trends of macro and micro environments.

 

Coface says that while expectations are that there will be many reforms following the Third Plenary Session of the 18th Communist Party of China Central Committee (CPCCC), attention must be paid to the potential negative impacts on the real economy as a result of the reform efforts as well as the credit risks associated with the rising cost of funds.

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