The government’s annual work report published on Friday made clear that policymakers will engineer an acceleration in credit growth this year. The report didn’t offer an explicit target for aggregate financing (AFRE), the official measure of broad credit, but did say it would “grow at notably higher rates than last year”, when it rose 10.7%. Meanwhile, even with the ramp up in policy support, nominal GDP is likely to barely rise this year. This combination of rapid borrowing and weak output already pushed up the debt-to-GDP by 14%-pts in Q1, the largest quarterly increase on record. And by end-2020 we think the ratio could be almost 40%-pts higher than when the year started, even bigger than the 32%-pts jump in 2009. This probably won’t pose an immediate threat to financial stability given the government’s support for the banking system, which keeps the regional banks with weak balance sheets afloat. But it will make it even more difficult for this state backstop to be withdrawn in an orderly fashion in future.
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