Time to rein in credit growth

Real GDP growth held steady in the third quarter, while the nominal GDP growth rose and investment momentum improved. However, industrial production slowed in September, underscoring that downward pressures on growth remain.

The big question for 2017 and beyond is whether the authorities will continue to aim for overly ambitious GDP growth targets or start to rein in credit growth to put growth on a more sustainable footing.

In September, new bank lending surged and total social financing increased, with trust loans and equity financing particularly buoyant. While China is not at the cusp of a financial crisis, its pace of credit growth is clearly unsustainable.

So far there have been no signs the government intends to start reining in credit growth. However, it is increasingly likely that in the coming years China's leadership will change course and start to reduce credit expansion.

If credit growth is gradually reined in over the coming five years and the credit to GDP ratio peaks in 2022, this would mean GDP growth in the coming years would be about 1 percentage point lower. However, this growth would be more sustainable.

Louis Kuijs, head of Asia economics at Oxford Economics