The State Council’s recent declaration of an explicit goal to reduce government leverage reinforces the message that credit growth will slow in 2021. Historically, slowing credit produces weaker cyclical activity, led by property and infrastructure construction, as developers and local governments are the marginal borrowers in China’s economy. Most of the recent surge in formal lending has been for refinancing purposes rather than funding new spending. Recent high-frequency and official data already point to softening cyclical momentum in the current quarter, but the economic impact of slowing credit growth will only emerge later in the year, most likely starting in Q3.
