Time to reign in credit growth

China's GDP growth picked up further to 6.9 percent year-on-year in the first quarter as the industrial sector was boosted by better exports and strong real estate activity.

We expect the external situation to remain conducive for the rest of 2017. Recent indicators show continued improvement in the global demand momentum. While downside risks remain, we think the risk of drastic trade tension with the United States has declined after the recent meeting between President Xi Jinping and US President Donald Trump. In all the prospects for exports are reasonable.

Nonetheless, we expect domestic momentum to ease later in 2017 as the tightening of housing purchasing restrictions in many large cities will start to weigh on real estate investment. More generally, as underlined by the recent rise in short term interest rates, the macro policy stance will this year be somewhat less accommodative than in 2016.

Looking ahead, we estimate that the overall credit growth target for this year is 14.8 percent, a modest slowdown from 16.1 percent in 2016. With nominal GDP growth picking up, the addition to the credit-to-GDP ratio should moderate, from 15 percentage points in 2016 to 9.4 percentage points this year. But, on current trends, China is still far away from stabilizing the credit-to-GDP ratio. The big question going forward is when the leadership will start to move towards significantly reining in credit growth, accepting a slowdown in GDP growth that is necessary to put the growth trajectory on a more sustainable footing.

Louis Kuijs, head of Asia economics for Oxford Economics