China's central bank could hold off on monetary loosening thanks to rising consumption

Beijing uses sovereign funds instead of monetary policy to support China's stock market.

In this brief:

• Credit data for March points to rising domestic demand and household consumption - outcomes long desired by Chinese policymakers.

• Zhang Yu from Renmin University says the expanding gap between enterprise and household deposits is a key sign of growth in consumption.

• Despite Beijing giving signals of looser monetary policy at the end of last year, liquidity conditions in China have remained tight well into 2025.

• A rise in consumption expenditures could help to fix this problem, by moving more household deposits onto the balance sheets of Chinese businesses, instead of non-bank financial institutions.

• This could give the Chinese central bank greater breathing space to hold off on the use of monetary policy to deal with Trump’s Liberation Day tariffs.

• The use of sovereign funds to support equity markets also relieves the Chinese central bank of the need to provide a “put” for shares via adjustments to monetary policy.

Leading Chinese economists point to key structural improvements in the latest batch of official credit data, including signs of the rise in household consumption so eagerly desired by Beijing.

The development could mitigate the need for China’s central bank to loosen monetary policy, despite the shadow over growth cast by Trump’s Liberation Day tariffs and ensuing turmoil on the A-share market.

March credit data surprises to the upside

Official Chinese data pointed to growth in credit ahead of expectations in March, as the impacts of the country’s fiscal stimulus drive took effect.

Renminbi loans increased 3.64 trillion yuan in March, 550 billion yuan ahead of the figure for the same month last year, and the highest print since the peak last tapped in 2023.

New social financing was 5.89 trillion yuan, for an expansion of 1.05 trillion yuan compared to the same period in 2024.

Wen Bin (温彬), chief economist at Minsheng Bank, highlighted the positive impacts on credit growth of the large-scale stimulus package that was unveiled at the Central Economic Work Conference in December, and further affirmed in March at the Two Sessions congressional event.

“In March, demand for funds from enterprises and households saw positive changes, and credit and social financing levels surpassed expectations,” he wrote.

“With the positive effects of fiscal stimulus, growth in social financing reached historic highs.“

Wen says active fiscal policies also helped Chinese GDP beat expectations in the first quarter, posting year-on-year growth of 5.4%.

According to Wen, first-quarter GDP growth “mainly received support from the continued strength of exports, the intensification and expansion of government policies, and a rise in market confidence and vitality.”

A positive development highlighted by Wen has been strong borrowing by Chinese households, amidst efforts by Beijing to bolster domestic demand and consumption in anticipation of Trump’s trade aggression.

“The forward leaning effects of government policies and the stabilisation of expectations also contributed to warming up of effective demand from enterprises, and an impressive turn out for household lending,” Wen wrote.

Boosting consumption is one of the key goals for Beijing in 2025, as a means of addressing long-standing structural imbalances in the Chinese economy and reducing its dependence on exports and investment.

Calls from prominent Chinese economists to spur domestic consumption have further intensified in the wake of Trump’s Liberation Day tariffs, given the huge impact this will have on exports to the North American market.

Scissoring deposits imply rising Chinese consumption

Zhang Yu (张瑜), a researcher at the International Monetary Institute of Renmin University in Beijing, argues that March credit data contains more subtle signs of a rise in Chinese consumption.

She and her team are particularly focused on the “Enterprise-Household Deposit Scissor Gap” (企业居民存款剪刀差), which they consider to be an effective measure of household consumption levels.

Their rationale is that a rising disparity between enterprise deposits versus household deposits in favour of the former is a sure sign of an increase in consumer spending.

“Enterprises are the productive sector, and the liquidity they hold is liquidity in the real economy, while households are a surplus sector, and their deposits are the surplus from reductions to their investment and consumer spending,” Zhang wrote.

“This can be interpreted as liquidity which is frozen with respect to the macro-economy.”

Zhang’s reasoning is that if enterprise deposits increase more quickly than household deposits, then this is a sign that households are more willing to invest and consume after receiving their salaries.

Conversely, if enterprise deposits increase more quickly than household deposits, this means that after enterprises issue salaries to households, households are more inclined to retain them in the form of deposits instead of using them for investment and consumption.

Zhang’s tracking of the Scissor Gap points to a sustained recovery since September 2024, which became more pronounced in the first quarter of 2025.

Her data indicates that the Scissor Gap lifted from -14.7% in August 2024 to -8.7% by April 2025, for a rise of six percentage points.

“For this reason, as of the first quarter of 2025, we maintained the assessment that the most pessimistic period for economic expectations had passed,” Zhang wrote.

Chinese policymakers have their heart set on boosting consumption, so that domestic demand can compensate for any shortfall in exports caused by a trade war.

Some commentators - such as Guan Tao (管涛) chief economist at Bank of China’s investment banking wing - point out, however, that an escalating trade war could undermine domestic consumption in China and its ability to counteract a drop in external demand, by putting pressure on the incomes generated by the export sector.

Rising consumption gives China’s central bank breathing space

In addition to re-balancing the Chinese economy and helping to deal with the impacts of Trump’s trade war, Zhang says rising household consumption can also provide liquidity support to the financial system, which could reduce the need for the central bank to cut interest rates or the reserve ratio.

She notes that monetary conditions remain comparatively tight at present, despite Beijing signalling far greater loosening for 2025.

In December, the Central Economic Work Conference called for “moderately loose monetary policy” - a term last used in the aftermath of the Global Financial Crisis.

Since the start of 2025 the Chinese central bank has also repeatedly stated it will cut rates and loosen monetary policy when opportune - even prior to Trump’s launch of Liberation Day tariffs on 2 April.

In spite of these emphatic signals, Zhang notes that the DR007 rate - the rate on the inter-bank market for 7-day repos collateralised with rate securities - has remained well above the Chinese central bank’s policy rate since 2024.

As of October last year, the DR007 hovered around 30 basis points above the policy rate, while since 3 April this year it’s remained at an elevation of roughly 20 basis points.

Zhang argues that this has been the result of households depleting the Chinese banking system of funds due to low deposit rates.

“At present, the tight balance of the central bank’s monetary policy is likely related to households shifting their deposits,” Zhang wrote.

“This is because since 2024, the chain of transmission leading to tightly balanced monetary policy has been as follows: deposit rates fall yet returns on financial investments rise, driving households to shift to non-bank financial institutions.

“Non-bank liquidity becomes more ample, causing concerns at the Chinese central bank about the ‘empty circulation’ of funds.

“This prompts the central bank to reduce the amount of funding it provides to commercial banks - in order to reduce the funds they provide to non-banks, which in turn leads to higher interest rates.”

Zhang argues that a successful increase in consumption could be the fix for this situation, by causing households to spend their deposits.