China's credit engine is running out of gas as debt risk goes up

Beijing

THE People's Bank of China (PBOC) faces a reckoning after revving up its credit engine for years.

Three conditions suggest traditional financing and shadow banking are due to cool: Restrictions on property markets are poised to start weighing on mortgage issuance; bond market turbulence has spurred widespread cancellation of new corporate issues; and banks face more curbs on selling wealth-management products amid a regulatory tightening.

With economic expansion on pace to meet the government's objective and inflation pressure rising, leaders are signalling tighter monetary policy as they seek to reduce risks.

The PBOC also cut language from its last quarterly statement saying it would reduce lending costs. "China's credit engine is running out of gas," said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. "Regulatory tightening, higher interest rates…