China's November lending beats expectations, led by new loans and bonds

BEIJING (Reuters) - New loans and money supply grew faster than expected in China in November as interest rate cuts and higher government spending spurred more demand for credit, a welcome bright spot after a raft of disappointing economic data.

Vehicles travel past the Central Business District (CBD) area on a sunny day December 2, 2015, after a fresh cold front cleared the smog that was blanketing Beijing, China. REUTERS/Jason Lee

Chinese banks extended 708.9 billion yuan ($109.81 billion) of new loans last month, more than the 700 billion yuan economists had expected and up 38 percent from October.

Total social financing, a broader measure of net new credit, more than doubled to 1.02 trillion yuan from the previous month, while broad money supply (M2) rose 13.7 percent year-on-year, its strongest pace since June 2014 and up from 13.5 percent in October.

The stronger showing was led by increases in conventional lending, bond issuance, and corporate fundraising via equity markets, while forms of credit associated with riskier shadow banking products continued to decline, Friday’s date showed.

In addition, the new lending was dominated by the long-term and medium-term loans that Beijing wants. They comprised 65 percent of total new loans, up from 50 percent in the first nine months.

Policymakers have been trying to boost productive investment through monetary easing without stimulating unhealthy speculation, which is often fueled by shorter-term financing.

Beijing has been pushing hard to get bogged-down infrastructure spending back on track to offset slowing economic growth; in October fiscal expenditures rocketed up 36.1 percent, the biggest rise in over 3 years.

Outstanding loans rose by 14.9 percent from a year ago, below expectations of 15.3 percent and October’s 15.4 percent.

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Other data earlier this week showed downward pressure on the world’s second-largest economy persisted in November, worrying those who had expected activity to stabilize in the fourth quarter after a year-long flurry of stimulus measures including both rate cuts and fiscal spending.

“Aside from seasonal factors driving up new loans, the rebound was weaker than expected and lower than the 852.7 billion yuan in November 2014, indicating that domestic demand remained soft and banks were cautious to provide new loans amid rising credit risks,” wrote ANZ economists in a research note, calling for more rate cuts in response.

November exports fell for a fifth consecutive month and imports declined for the 13th month straight, while weak consumer and producer prices raised concerns that the economy could be sucked into a Japan-style deflationary trap.

Activity data for November, including industrial output, investment and retail sales, is due to be released on Saturday.

Credit demand has softened in China along with the economy, while bad loans are on the rise, making banks more risk averse.

Many companies, especially in heavy industry, are saddled with overcapacity and are in no mood to take on new debt, especially given that analysts estimate that inflation-adjusted lending rates are averaging around 10 percent, far higher than returns on investment in many sectors.

China’s central bank has cut interest rates six times since last November and reduced the amount of cash that banks must set aside as reserves. The government has also eased restrictions on home buying to boost the sluggish property market.

More support measures are expected in coming months.

“As deflationary pressure persists and capital outflows continue, we expect the PBOC to cut banks’ reserve requirement ratio (RRR) by 50 basis points (bps) in the remainder of December as well as a total of 200 bps in 2016 to maintain adequate liquidity and support growth,” ANZ economists said.

“Meanwhile, we expect the Standing Lending Facility (SLF) rates to be cut by at least 100bps next year.”

Economic growth dipped to 6.9 percent in the third quarter, according to official statistics, dropping below the 7 percent mark for the first time since the global financial crisis.

Premier Li Keqiang said last week that China was on track to reach its economic growth target of about 7 percent for the full year, though some analysts suspect real growth levels may be much lower than official data suggest.

Other data on Friday showed China attracted 704.33 billion yuan ($114 billion) in foreign direct investment (FDI) in the first 11 months of this year, up 7.9 percent from the same period a year earlier.

Additional reporting by Kevin Yao; Writing by Pete Sweeney; Editing by Kim Coghill