Over the past year, China’s economy has been “a bastion of stability,” Nomura said in a note on Wednesday, but the bank expected a growth slowdown could be “imminent.”
Nomura cited three main drivers of an expected economic deceleration on the mainland:
Crackdown raises credit costs
”The unrelenting crackdown on shadow financing, market speculation and corruption has steadily raised the cost of funding and tightened overall financial conditions,” Nomura said.
It noted that the rising in borrowing costs in local debt markets has been widely reported, but it also pointed to lenders in the traditional banking sector, which have been focusing more on credit risks.
While the one-year benchmark lending rate hasn’t changed, banks have been pricing more than 60 percent of new loans above the benchmark rate, Nomura said.
Crackdown to continue
The second reason that China’s economy may slow is that the financial regulatory crackdown is “far from over,” and now, there is a rising risk that regulators will overshoot, Nomura said.
“In our view, the mindset of local government officials is fundamentally changing,” it said.
Instead newly appointed local officials pushing new pet projects to beat the growth target at the beginning of the five-year government term, “we now expected the opposite: a doubling down on austerity, pollution controls and quality of growth to please the top leadership,” Nomura said.
Policy less accomodative
The third reason was that the combined fiscal and monetary policy stance is now less accomodative, Nomura said.
The net increase in aggregate financing, the mainland’s economy-wide credit measure, climbed in January, but that’s less important than the growth of stock of credit outstanding, Nomura said, noting that has slowed sharply in recent months.
“Crucially, this has coincided with diminishing fiscal stimulus,” Nomura said.
Difficult to read China’s ‘pulse’
This is occurring as the Lunar New Year holiday distortions make it difficult to read China’s economic pulse, Nomura said, noting some government data have been delayed due to the holidays.
Typically, the Lunar New Year holiday, the timing of which varies from year to year, also distorts year-to-year data comparisons.
“Although we have to wait a few more weeks for confirmation, on the indicators we do track, the drum roll for a slowdown of China growth seems to be getting stronger,” Nomura said.