Higher interest rates an effort to curb China’s credit driven growth
Real GDP growth reportedly accelerated to 6.8% y/y in the fourth quarter. The result was consistent with the credit-backed, pro-growth stimulus seen throughout 2016. Chinese banks extended a record US$1.8t of loans last year—roughly equal to the size of the Brazilian economy. Despite policymakers pledging to contain asset bubbles, credit growth has as yet shown no signs of abating. Yet China’s central bank surprised markets by lifting its key policy interest rate this month—the first rise in six years. The adjustment was modest, but finally shows commitment to contain unsustainable credit growth in order to avoid a ‘disorderly deleveraging’ repeatedly warned of by the IMF. It also suggests that the central government is preparing for lower growth. This will possibly stem upward price pressure on Australia’s key commodity exports, but reduce the risk of China facing a hard landing.