China’s Economy at a Crossroads: Credit Growth vs. Trade War Concerns

People’s Bank of China Holds Loan Prime Rates Steady

The People’s Bank of China (PBoC) kept the one-year and five-year loan prime rates (LPR) unchanged at 3.1% and 3.6%, respectively, on February 20. The hold aligned with market expectations amid rising fears over a possible US-China trade war.

Meanwhile, China’s latest credit data suggests a potential pickup in economic activity.

In January, new Yuan loans surged to CNY 5,130 billion, up from CNY 990 billion in December, signaling a sharp increase in credit demand. Rising credit demand may indicate a potential increase in domestic consumption, bolstering China’s economy. January’s surge in CNY loans likely enabled the PBoC to maintain LPRs steady.

Mixed Views on China’s Credit and Housing Trends

Despite the surge in credit demand, some economists remain cautious. Research firm East Asia Econ noted that while headline credit figures appeared strong, mortgage lending remained weak. Seasonal factors, including the Lunar New Year and changes in lending definitions, may have distorted the data.

Mortgage lending remains a crucial factor in China’s economic reboot. The housing market impacts business and consumer sentiment, affecting domestic demand and consumption.

The House Price Index declined by 5% year-over-year in January, improving from a 5.3% drop in December.

Brian Tycangco, editor and analyst at Stansberry Research, commented:

“China’s property recovery appears to be on track. First-tier cities leading price recovery.”

According to CN Wire:

• First-tier cities report higher home prices.
• Second and third-tier cities see modest declines in home prices.
• Annual price drop narrows across all city tiers.

However, East Asia Econ remarked on the housing market data and the need for further rate cuts, stating:

“Deflation eased in January, but only slightly. That’s no surprise, given mortgage lending also remained weak last month. The sluggishness is persisting despite low rates, and the failure of rate cuts to revive the quintessentially rate sensitive sector remains a standout feature of this cycle.”

US Tariffs and China’s Shift to Domestic Demand

While rising credit demand and house price trends may provide market relief, domestic consumption remains crucial to China’s economic outlook.

On February 19, Beijing announced plans to boost demand for autos, electronics, and home products.

Brian Tycangco considered consumption upgrades as stimulus, aligning with Beijing’s recent shift toward consumption-driven growth.

In December, Beijing pledged stimulus measures to boost consumption and broader domestic demand. People’s Bank of China Governor Pan Gongsheng reinforced this stance, stating:

“The priority of macroeconomic policy should shift from promoting more investment in the past, to promoting both consumption and investment, with more importance attached to consumption.”

A successful transition to a consumption-driven economy could help mitigate the risks of a prolonged US-China trade war.

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero emphasized the urgent need for a transition, saying:

“The only way out for China is to produce less. It will be very painful. Nobody is going to take your products forever. So it’s just a choice: if you want to create more welfare, more growth, then you need to consume more.”

Still, a breakthrough in trade negotiations could provide an additional boost. On February 19, President Trump suggested that a new US-China trade deal remains possible despite the recent tit-for-tat tariffs maneuvers.

Market Trends: Mainland China Equities in the Red

Amid surging AI-linked stocks, Mainland China’s markets remain under pressure amid tariff uncertainties. While suggesting a US-China trade deal is feasible, Trump announced sweeping tariffs on autos, semiconductor chips, and pharmaceuticals on February 18, effective as early as April 2.

Year-to-date performances of key Mainland China and Hong Kong Indices:

• CSI 300: -0.29%.
• Shanghai Composite Index: -0.19%.
• Hang Seng Index +12.65%.

The Hang Seng Index has outperformed its Mainland peers, driven by strong gains in AI-linked stocks. Alibaba (9988) leads the charge, soaring 45.87% this year.

Trade Talks and Beijing’s Next Moves

US-China trade negotiations remain a crucial factor in China’s economic outlook. A prolonged trade war could counter Beijing’s efforts to boost domestic consumption.

The upcoming National People’s Congress (NPC) Standing Committee Meeting scheduled for February 24-25 in Beijing could provide more insights into plans to boost consumption.

Lawmakers will prepare an agenda for third session of the 14th NPC in March. In March, lawmakers are expected to discuss economic reforms, fiscal policies, and key government initiatives, including the Five-Year Plans. More clarity on government measures to boost consumption and stabilize the economy is expected in the March NPC session.

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