China’s credit growth is slowing sharply in early 2021, which will weaken cyclical activity later in the year. Regulatory limits on credit volumes will require the PBOC to maintain an accommodative monetary policy stance to mitigate rising defaults and financial stress, exemplified by Huarong’s recent difficulties.
Supply-related factors and speculation are responsible for recent strength in commodities prices, and the PBOC has already downplayed the possibility of responding to producer price growth by raising rates. As a result, the uncertainty in the rates outlook has narrowed, and government bond yields and interest rates are expected to continue drifting lower, with declines accelerating in the second half of the year.
