November 12, 2012 / 9:56 AM / 5 years ago

Slower October loans will not derail China recovery

BEIJING (Reuters) - China’s banks lent more slowly than markets expected in October, signaling that private sector credit may be relatively tight despite total financing in the economy being on track to hit a record high in 2012.

New yuan loans, outstanding credit, M2 money supply and total social financing all came in below consensus forecasts in the benchmark Reuters poll, but analysts said aggregate levels of credit were likely adequate to support a rebound in economic growth signaled by a raft of other indicators last week.

“October new yuan lending is weaker than expected. But the overall social financing is on track to exceed 14 trillion yuan this year - a record high. That will provide enough support for the economy,” Zhou Hao, an economist at ANZ Bank in Shanghai, told Reuters.

China’s banks extended 505.2 billion yuan ($81.5 billion) of new local currency loans in October, central bank data showed on Monday, but missing market expectations of 600 billion yuan.

Total social financing, a broad measure of liquidity in the economy, stood at 1.29 trillion yuan, down from 1.65 trillion yuan in September.

The moderating credit data followed a flurry of factory output, investment and trade statistics last week that signaled the world’s second-largest economy was striding further along the road of recovery, and shows that Beijing cannot yet relax efforts to boost growth from its weakest in three years.

Nie Wen, an analyst with Hwabao Trust in Shanghai, said a year-on-year decline of 2.3 percentage points in the rate of growth of M1 in October signaled that liquidity in the real economy was tight.

“That is not good for a recovery in private-sector investment,” Nie said.

But while the data suggested Beijing may need to do more to ensure policy is loose enough to spur growth in the private sector, economists said the uptick in total social financing was the more significant measure, indicating more widespread use of credit beyond bank lending in channels that were likely to be tapped to fund government-mandated infrastructure investments.

“Take trust loans for example. Since August we have seen quick expansion of trust loans,” said Dongming Xie, an economist at OCBC Bank in Singapore.

“This may due to rising investment activities from local government level. But this was not captured in new yuan loan (data).”


Bank lending is a centerpiece of China’s monetary policy, given that it is controlled by Beijing in order to manage inflation and economic growth.

The October new loan data - released on the People’s Bank of China website - implies total lending is on course to exceed 8.5 trillion yuan in 2012.

This is expansionary versus the 7.5 trillion of new loans extended in 2011 and above the 8 trillion yuan that sources told Reuters back in February was the target for 2012.

China’s cabinet said last month it will provide a “reasonable” amount of credit in the fourth quarter to spur activity and speed construction of key projects.

After easing monetary policy earlier in the year, credit supply has increased while inflation has stayed low, allowing Beijing to hold off on additional pro-growth measures.

Some analysts think that may change later this month after the ruling Communist Party’s congress selects a new leadership in a once-in-a-decade handover of power, enabling a new top team to deliver a growth spurt at the start of its time in charge of the world’s second-biggest economy.

China’s central bank chief, Zhou Xiaochuan, cautioned last week that external risks still loomed large and the People’s Bank of China had policy room to respond if necessary.

The PBOC cut interest rates in June and July and has lowered required reserve ratios (RRR) three times since late 2011 to free an estimated 1.2 trillion yuan ($190 billion) for lending as part of a year-long program of policy fine-tuning.

It has since held off on more aggressive easing, opting instead to pump short-term cash into money markets to ease credit strains, a move analysts say reflects Beijing’s concerns about renewed property and inflation risks.

Chinese policymakers are acutely sensitive to inflation risks after massive monetary easing as part of the 4 trillion yuan ($640 billion) stimulus program unveiled by Beijing in 2008 at the depths of the global financial crisis ignited consumer prices and rampant speculation in asset markets.

It took two years to bring CPI back under control. Consumer inflation was 1.7 percent year-on-year in October, safely under the government’s 4 percent target, after hitting a three-year peak of 6.5 percent in July 2011.

“Overall, it’s a tight liquidity condition and I think the PBOC may consider more about the impact on inflation going forward, given the lesson in 2009-10. The PBOC may want to keep (policy) stable. They may continue to be accommodative but not easing too much,” Yao Wei, chief China economist at Societe Generale in Hong Kong, said.

Reporting By Beijing Economics Team; Writing by Nick Edwards; Editing by Kim Coghill

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