SocGen: China’s Massive Credit Misallocation Will End In A Painful Burst

Despite the seasonal factors behind the recent surge in Chinese interbank rates, experts have argued that it has persisted because of the tough stance taken by Chinese policymakers.


Societe Generale’s Wei Yao expects liquidity conditions to stay tight through the second half of 2013.

Yao sees credit growth falling from 25% year-over-year (YoY) to 16-18% YoY. Meanwhile, she expects non-bank credit growth to slow from 50% YoY, to about 30%.

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“The growth implication of the liquidity squeeze will be undoubtedly negative. Interest rates on bank loans, corporate bonds and shadow banking credit have begun to rise across the board as we speak, further discouraging credit demand. We are concerned whether this approach will really tilt credit distribution more towards the real economy in the short term. Much of the credit misallocation in China stems from the fact that lending is often not based on financial strength but on the implicit guarantee from the state.”

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