China's April loans growth highlights debt challenge

BEIJING (Reuters) - China’s banks unexpectedly extended more credit in April than in the previous month, though household loans fell in a sign authorities are walking a tight rope as they try to tamp down debt risks without throttling the economy.

Chinese 100 yuan banknotes are seen in this picture illustration taken in Beijing July 11, 2013. REUTERS/Jason Lee/File Photo

While economic growth quickened modestly in the first quarter, Beijing is worried excessive credit may undo hard won gains as risky forms of financing has boomed since the 2008-9 global financial crisis.

The People’s Bank of China (PBOC) has increased its checks on banks’ off-balance sheet wealth management products - the key component of shadow banking credit, while the banking regulator has stepped up a crackdown on risky lending behaviors.

Chinese banks extended 1.1 trillion yuan ($159.4 billion) in net new yuan loans in April, central bank data showed on Friday, rising from 1.02 trillion yuan in March, and above the 714 billion yuan predicted by analysts in a Reuters poll.

“April’s credit expansion could have been due to front-load funding demand ahead of regulatory tightening, and the risk tilts to the downside in the coming months,” said ANZ’s China economists David Qu and Betty Wang in client note.

Analysts say Beijing is keen to ensure steady economic growth ahead of the 19th Communist Party Congress later in the year. Chinese leaders have pledged to shift the emphasis to addressing financial risks and asset bubbles which analysts say may pose a threat to the world’s second-largest economy if not handed well.

Indeed, China’s central bank has been guiding short-term interest rates higher to help contain debt perils, though it is treading cautiously to avoid hurting economic growth.

On Friday, the PBOC injected fresh funds while keeping a tight rein on short-term funding in what appeared to be a further effort to dampen speculative investment.

China’s banks extended a record 12.65 trillion yuan in loans in 2016 as the government encouraged credit-fueled stimulus to meet its economic growth target.

The credit explosion stoked worries about financial risks from a rapid build-up in debt, which authorities have pledged to contain this year.

The effects of the crackdown are starting to show up in weakened off-balance sheet financing, or shadow banking activity, and falling household loans.

Trust loans, entrusted loans and undiscounted banker’s acceptances, which are common forms of shadow banking activity in China, totaled 177 billion yuan in April, down from 753.8 billion yuan in March, according to Reuters calculations based on the central bank’s data.


Household loans, mostly mortgages, fell to 571 billion yuan in April from 797.7 billion yuan in March, the data showed.

Household loans accounted for 52 percent of total new loans last month, down from 78 percent in March.

Cities across China have been rolling out much tougher real estate restrictions this year in an effort to contain resurgent demand from home buyers and property speculators.

“The upshot is that the deceleration in credit growth which began last summer continued uninterrupted last month with a pick-up in loan growth more than offset by a decline in bond issuance,” Julian Evans-Pritchard, China economist at Capital Economics, wrote in a note to clients.

Total new credit to the economy, which includes bank lending as well as other forms of credit, increased by a record 6.93 trillion yuan ($1.01 trillion) in the first quarter - roughly equivalent to the size of Mexico’s GDP.

Broad M2 money supply (M2) grew 10.5 percent from a year earlier, the central bank data showed, slowing from March’s 10.6 percent increase and missing forecasts for an expansion of 10.8 percent.

Outstanding yuan loans grew at 12.9 percent by month-end on an annual basis versus expectations for a 12.5 percent rise.

The economy grew a stronger-than-expected 6.9 percent in the first quarter from a year earlier, giving it a solid tailwind to once again hit the government’s full-year growth target of around 6.5 percent.

Evans-Pritchard expects the crackdown on debt risks will temper growth in the year ahead.

“This will feed through into weaker economic growth in the coming quarters but the slowdown should be gradual.”

Reporting by Beijing Monitoring Desk and Kevin Yao; Editing by Shri Navaratnam