The PBoC's Unconventional Approach: A Story of Credit and Recovery

As countries struggle to recover from the economic downturn caused by the spread of Covid-19, the People's Bank of China (PBoC) has taken a unique approach to stimulate the economy, one that differs significantly from the conventional quantitative easing measures employed by the US Federal Reserve (Fed). While the Fed has loaded its balance sheet with bonds and taken on corporate credit risk, the PBoC has resisted traditional quantitative easing, instead leveraging its credit channels to engineer a recovery. Chairman Yi Gang has a range of options at his disposal to address the crisis, including expanding credit through the system, which the PBoC did in 2016 in response to a deflationary scare.

Key Takeaways:

• The PBoC's credit impulse increased to 20% in the wake of the 2008 crisis and rose again during the sovereign debt crisis of 2012, illustrating the bank's ability to stimulate the economy through credit expansion.
• The credit impulse tends to fall in periods of relative calm, as seen in 2011, 2014, and 2018, reflecting the PBoC's efforts to rein in excesses in credit and maintain longer-term systemic stability.
• In response to the Covid-19 outbreak, the PBoC has reverted to its familiar response, leveraging the credit channel to stimulate the economy, with more than three-quarters of its recent policy announcements related to credit.
• The non-bank share of total social financing (TSF) has expanded again, with gains driven mostly by corporate bond issuances and trust and entrusted loans recovering.
• Non-bank financing is on pace to contribute 16% of overall growth in TSF this year, a significant increase from 6% last year and a negative contribution in 2018.

Statistics:

• 20%: The PBoC's credit impulse increased to 20% in the wake of the 2008 crisis.
• 6%: Non-bank financing contributed to TSF growth last year.
• 16%: Non-bank financing is on pace to contribute to TSF growth this year.
• 2018: The PBoC tried to rein in excesses in credit, resulting in a negative contribution from non-bank financing to TSF growth.
• 3/4: More than three-quarters of the PBoC's recent policy announcements relate to credit.
• 30: The number of policies announced by the PBoC over recent months.

Sources:

• "Chairman Yi Gang has more options at his disposal than his US counterpart in the event the crisis worsens" (no date).
• "In 2014-15, there was a deflationary scare in China as falling oil and metals prices cut costs for China's factories" (no date).
• "The credit impulse increased to 20 per cent in the wake of the 2008 crisis and rose again during the sovereign debt crisis of 2012 and the 2015 deflation scare" (no date).
• "The move was largely aimed at the shadow banking sector, which encompasses all loans extended by financial companies that do not typically have a banking licence and do not collect deposits" (no date).
• Ed Cole is an investment strategist at Man GLG.