Credit creation in China had slowed down significantly in October. This is a clear sign that the Chinese central bank had undertaken a tighter stance on monetary policy in order to rein in lending and inflation under control.
Banks in China reported RMB506.1 billion or USD83billion of new local currency loans in October, down from RMB787 billion in September which is the lowest monthly figures for 2013. The broader measure of credit creation, called total social financing, includes bond issuance and other forms of credit had declined to RMB865.4 billion in October from RMB1.4 trillion in the previous month.
The country's economy had picked up in the third quarter, with gross domestic product growth increasing to nearly 8% from 2012. Some analysts fear though the expansion was fueled by a rapid run-up of debt which would endanger the country's financial system. The lending figures would suggest a turnaround has begun.
Aside from financial stability, the increasing inflation provides further reason to turn off the supply. The consumer price index increased to 3.2% from October 2012. This is the highest rate of increase since February earlier this year.
In its third quarter monetary policy report, the People's Bank of China said the economy was due for a period of 'deleveraging' and it expects prices to increase in the fourth quarter of 2013. One of the first moves of the People's Bank of China would be tightening access to funding, as it removed RMB128 billion from the banking system between September 30 to November 1, through its regular open market operations. The central bank alternates between the influx and removal of cash in the money supply depending on existing market conditions as a net lowering of money supply would mean more difficult financing conditions for banks.
In contrast, the decrease in lending growth though may be feared as detrimental to the growth of construction and infrastructure projects, leading to a further slowdown in the Chinese economy.
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