China’s Credit Growth Boosted by Government Bonds, High-Tech Sector Steers Economic Future
Three quick highlights from China.
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Government bonds drove February credit growth:
Total social financing (TSF) stock grew steadily in February (9.6% mom annualized), although the absolute amount fell short of market expectations. By component, government bond issuance was the dominant driver of new TSF flows whereas bank loan growth was soft. In year-over-year terms, February TSF stock increased 8.2% yoy, higher than 8.0% yoy in January and last December and 7.8% yoy in last November and October. Taken together, credit growth has shown early signs of bottoming out, but the increase has been entirely driven by government bond issuance.
Sizing China’s high-tech manufacturing:
The policy emphasis on promoting high-tech manufacturing was unmistakable during this year’s Two Sessions. In a recent piece, we examine high-tech manufacturing’s contribution to China’s real GDP growth. Over the past decade, high-tech manufacturing has contributed 1.1pp to annual real GDP growth in China by our estimates, and we expect 1.0pp annual contribution in the next five years. Because the contribution from high-tech manufacturing is likely to remain elevated but stable, the speed of recovery in the property sector still holds the key to the future contour of Chinese real GDP growth.
Marketing feedback suggests better sentiment but plenty of debates:
On the back of the Two Sessions policy announcements, we traveled to Singapore to meet with our equity, commodity and wealth management clients. Recent developments in China, including AI breakthroughs, President Xi’s meeting with private entrepreneurs and the significant equity market rally, have lifted investor sentiment. At the same time, views differ on a number of topics. While some clients think the market is too complacent on further tariff risks, others believe that fears of tariff impact on the Chinese economy are overblown. Although some investors think DeepSeek and China’s rapid AI development are a game changer, more cautious clients believe that AI will not change China’s long-term structural problems. Even though President Xi’s meeting with business leaders is encouraging, the question “how sustainable is the government’s friendlier attitude toward the private sector” came up in almost all of our meetings.
