Tighter monetary conditions with slower credit growth are possible in China next year, given expectations of higher domestic inflation and continual interest rate hikes in the world's major economies, when liquidity risks become the top concern, according to economists.
Zhu Haibin, chief China economist with JPMorgan Chase & Co, expects the Chinese monetary authority to retain a "neutral" monetary policy in 2018, which means benchmark policy rates, or the one-year deposit and lending rates, will stay at the current level, and there will be no change to the cash amount that should be reserved by commercial banks, or the reserve requirement ratio.
Actual total social financing growth, as well as the credit expansion rate, may slow moderately as the policy focus on deleveraging will continue next year, said Zhu.
"Preventing major systemic risks" has recently been listed as the priority for 2018 by the country's top policymakers, along with poverty reduction and pollution control.
Since the first quarter of 2018, a rapidly growing interbank instrument－negotiable credit deposits, will be included into the central bank's Macro Prudential Assessment framework, meaning it will be more difficult for the banks to expand their assets while avoiding a risky increase of interbank liability through off-balance sheet business.
In November, financial regulation has been strengthened on supervision of asset and wealth management products and lending to nonbank financial institutions.
Economists widely believed that three interest rates hikes of 25 basis points each are likely in the United States in 2018, leading the withdrawing of monetary easing among the world's major economies, which may also add rate-hike possibility in China as response.
The People's Bank of China, the central bank, raised the rates of seven-day and 28-day reverse repo agreements and the rates of the medium-term lending facility by 5 basis points on Thursday, after the US Federal Reserve hiked the benchmark interest rate by 25 basis points to a target range of 1.25 percent to 1.5 percent, the third rate hike this year.
Instead of adjusting the benchmark interest rates, the PBOC has reiterated that monetary policy for the next year will focus on proactively fine-tuning liquidity conditions and improving communication with the market.
According to economists, some flexible policy tools, including the medium-term lending facility and the reverse-repo, are likely to be used more often to stabilize liquidity conditions in the banking system, and to smooth out seasonal, temporary volatility, although the central bank denied that it means changes in its monetary policy stance.