How China engineered a credit spike with monetary and fiscal coordination
Beijing still bucks the global trend when it comes to central bank independence.
Beijing drove a sharp acceleration in credit growth over the past three quarters, via the coordination of monetary and fiscal policy in a way which is currently verboten in the world’s other major economies.
The policy decisions from Beijing's economic helmsmen arrive in response to concerns over enervated domestic demand, as well as the ongoing headwinds generated by Trump’s mercurial trade war.
The episode provides a telling case study of how China’s State Council exercises unified control of monetary and fiscal policy, in order to achieve its desired macroeconomic outcomes.
In this briefing:
China’s credit growth accelerates since September.
Beijing bucks the trend of monetary and fiscal segregation.
How China’s central bank paved the way for the credit surge.
Fiscal stimulus the essential driver of China’s credit growth.
Chinese central bank unlikely to loosen further until Q4.
Credit optimisation via structured monetary policy.
A new liquidity management toolkit.
China's credit growth accelerates since September
Zhang Tao (张涛), financial markets economist at big state-owned lender China Construction Bank (CCB), highlights a sharp acceleration in credit growth over the past three quarters, as a result of a monetary loosening cycle that kicked off in September ("张涛：复盘“适度宽松货币政策”).
Monthly growth in aggregate social financing - a broad measure of credit in the Chinese economy, has risen from an annualised rate of 31.9 trillion yuan in September 2024 to 36.99 trillion yuan in June 2025 - a increase of nearly six trillion yuan.
China also saw accelerated growth in credit and money supply metrics in June, after the central bank unveiled a slew of loosening measures at the beginning of May to further reinforce the measures from September.
As of the end of June, China's broad M2 money supply balance had risen 8.3% in year-on-year (YoY) terms.
The increase marks an acceleration of 0.4 percentage points compared to the end of the previous month, and 2.1 percentage points compared to the same period last year.
The M1 money supply balance rose 4.6% YoY, accelerating 2.3 percentage points compared to the end of the previous month, and 6.3 percentage points compared to the same period last year.
Aggregate social financing for June was 4.2 trillion yuan, for an expansion of 900.8 billion yuan compared to the same period last year, as well as growth of 8.9%, accelerating 0.2 and 0.8 percentage points on month and YoY.
Beijing bucks the trend of monetary and fiscal segregation
China achieved this sharp growth in credit via the coordinated use of both monetary and fiscal policy.
This is a practice which is currently out of fashion in the world’s other major economies, where monetary and fiscal policy are supposed to be siloed off from each other.
Monetary policy is placed under the control of an independent central bank, to prevent its use by political leaders to prime the economy in the run up to elections.
Elected leaders only retain direct sway over fiscal policy, in the form of decisions concerning taxation and government expenditures.
In China, however, the domination of the political system by a single party means there is no need for concern over elected officials abusing monetary policy to perpetuate their time in office, by priming economic activity at the cost of future inflation.
Both the People Bank of China (the Chinese central bank) and the Ministry of Finance are jointly under the control of the State Council, which is equivalent to the Chinese cabinet.
How China's central bank paved the way for the credit surge
Zhang Tao notes that the Chinese central bank first launched a cycle of monetary policy loosening towards the end of September, at the behest of the Communist Party’s top leadership.
This provided the necessary conditions for subsequent credit growth, whether it be driven by demand for funds from household and businesses, or via fiscal expenditures made by government.
The loosening measures were ostensibly intended to support the Chinese economy in the face of major challenges for growth.
These included enervated domestic demand - especially household consumption, as well the headwinds to exports that a Trump presidential victory could unleash.
On 27 September, the central bank reduced the rate for its seven-day reverse repo operations - China's short-term policy rate, by 0.2 percentage points, from 1.7% to 1.5%.
Its goal was to trigger reductions in interest rates across the rest of the Chinese financial system, to support borrowing for consumption and investment purposes.
The central bank also reduced the required reserve ratio by 0.5 percentage points, bringing the weighted average for Chinese financial institutions to 6.6%.
The goal here was to unleash long-term liquidity by giving Chinese banks greater capacity to lend.
The central bank's actions arrived the day after calls for these specific measures from the Communist Party's Politburo, at a meeting it held on 26 September ("中国人民银行9月27日同步实施降准降息——货币政策发力支持稳增长强信心").
Follow up measures in May
The Chinese central bank further stepped up monetary policy loosening at the start of May this year, a month after Trump roiled global markets with the launch of his Liberation Day tariffs.
The move arrived after China's Central Economic Work Conference held in December flagged the implementation of "moderately loose monetary policy" (适度宽松的货币政策) in 2025 - the first time the term had been used since the years immediately following the Global Financial Crisis.
Central bank chief Pan Gongsheng unveiled a total of ten monetary policy on 7 May, providing the first concrete elaboration on what "moderately loose monetary policy" would actually mean this year.
These measures included:
Cuts to the required reserve ratio in May that unleashed around 1 trillion yuan in long-term liquidity.
A 10 basis point reduction in China's policy rate and the benchmark loan prime rate in May.
Reduction in the rates for the central bank's structured monetary policy instruments that direct credit towards specific parts of the economy.
Reduction in the rates on loans offered by China's housing provident funds.
Four of China's big state-owned banks also completed 520 billion yuan in capital injections via share placements in June, boosting their ability to provide credit support to the real economy.
Fiscal stimulus the essential driver of China's credit growth
Accommodating monetary policy on its own was not enough to drive a growth in credit that could translate into greater economic activity, however, due to weak financial demand from China’s non-government sector.
Beijing needed to step up government borrowing and spending in order to drive the surge in credit needed to help prop up growth. This helped to bring the second quarter GDP to 5.2%, as compared to an annual GDP growth target of 5%.
Wen Bin (温彬), chief researcher at China Minsheng Bank, highlights the pivotal role of Beijing’s fiscal stimulus campaign in driving China's credit surge - a campaign first flagged at the Central Economic Work Conference held in December last year.
“This year, active fiscal policy moved in advance, and the financial system provided strong coordination,” Wen writes. (“温彬：6月信贷“总量增长、结构优化”，后续怎么看”).
“Government bond financing has increased considerably compared to the same period last year.”
In the first quarter, net government financing was in excess of 3.87 trillion yuan, for an expansion of 2.5 trillion yuan compared to the same period last year.
Special local bonds for the refinancing the hidden debts of local government were especially prominent.
The second quarter saw net government financing of 3.79 trillion yuan, as Beijing stepped up the issuance of special treasuries and special local bond issuance accelerated.
Zhang Tao further points to a rise in annualised government financing from 10.83 trillion yuan per month in September 2024 to 15.62 trillion yuan by June 2025.
In sharp contrast, non-government borrowing has consistently hovered at an annualised monthly rate of 20 - 21 trillion yuan during the three quarters from September to June.
Growth in demand from Chinese households and businesses would appear to still be tepid, with the government sector needing to pick up the slack to drive accelerated credit increases.
Chinese central bank unlikely to loosen further until Q4
Zhang expects China's central bank to temporarily lift its foot from the accelerator, given the effectiveness of the September and May monetary policy loosening measures combined with government spending in driving credit growth.
It will instead adopt a wait-and-see approach, based on the lagging impact of monetary policy adjustments upon the performance of the real economy.
"The intensity of aggregate financing in the first half was very large, but it will take some time for policy transmission effects to occur," Zhang writes.
"For this reason, the impacts on the economy are not yet fully apparent, and the multiplier effects are lower than the levels for the past two years."
As a consequence, Zhang does not expect any further loosening in Chinese monetary policy until the final quarter of 2025.
"If a recovery in multiplier effects isn't apparent after the third quarter, then we forecast that [monetary] policy will see further loosening” Zhang writes.
Guan Tao (管涛), chief economist at the investment banking vehicle of big state-owned lender Bank of China, considers unified use of fiscal and monetary policy to be essential moving ahead.
“[China] must use stronger coordination between monetary and fiscal policy,” Guan said via state-owned media on 17 July (“管涛：下半年人民币稳中趋升”).
This means monetary policy will need to follow the lead of fiscal policy in the second half, if more active spending are needed to deal with any economic challenges created by an adverse shift in the winds of Trump’s tariffs.
“Fiscal policy must consider an important factor…to what extent will the variable of foreign disturbance actually influence enterprises and households in future.
“How tariff disruptions evolve in future still requires stronger investigation and research, and the effective development of policy preparations to deal with uncertainties during the process of their evolution.
“It’s then possible to act immediately when necessary.”
Credit optimisation via structured monetary policy
Wen Bin argues that China's recent credit rise has also been accompanied by "structural optimisation," with the central bank adopting forceful policy measures to channel more funds to priority sectors of the economy.
He points in particular to new loans flowing mainly to the manufacturing sector and infrastructure development, as well the "five main chapters of finance" (五篇大文章) currently prioritised by Chinese policymakers.
As of the end of May, green finance, science and technology, financial inclusion, aged care and digital loans saw YoY growth of 27.4%, 12%, 11.2%, 38% and 9.5% respectively.
As of the end of June, outstanding medium and long-term manufacturing sector loans had grown 8.7% YoY, for an increase of 920.7 billion yuan in the first half.
Outstanding medium and long-term infrastructure loans had risen 7.4% YoY for an increase of 2.18 trillion yuan in the first half.
A new liquidity management toolkit
Since May, the Chinese central bank has prioritised the maintenance of "ample" (充裕) levels of liquidity via a diverse range of tools.
It's launched the practice of releasing a monthly "report on the central bank's use of various tools to release liquidity" (中央银行各项工具流动性投放情况).
The central bank now makes use of nine liquidity management tools across three categories, including:
Required reserve ratio adjustments.
Central bank loans - including supplementary lending facilities, medium-term lending facilities, pledged supplementary loans and structured monetary policy tools.
Open market instruments - which include short-term reverse repos, outright reverse repos, treasury transactions and central treasury cash management."
Zhang points out that this form of liquidity management has achieved the feat of keeping borrowing costs for commercial banks low even as their balance sheets have expanded.
The rate for one-year certificates of deposit issued by Chinese banks has fallen from 1.9% since the start of April to 1.6% at present.
This runs contrary to the ongoing expansion in the balance sheets of Chinese banks as they extend more credit. Under normal circumstances, an expansion in the balance sheets of banks should drive a rise in liability costs.
According to Zhang, "the main reason for this recent divergence has been active liquidity management by the central bank."