September 11, 2012 / 9:21 AM / 7 years ago

China's lending surges in August, but M2 disappoints

BEIJING (Reuters) - Chinese banks extended 703.9 billion yuan ($111.07 billion) of new local-currency loans in August, the central bank said on Tuesday, beating market expectations of 600 billion yuan and giving hope that the economy could get a boost from new credit.

The August lending data, which comes after the central bank’s recent interest rate cuts and quickening government approvals for some infrastructure projects, also marked a sharp increase from 540.1 billion yuan in July.

“It’s a pretty strong new loans number and the figure for total social financing is also very encouraging, it’s up year on year and month on month,” said Zhiwei Zhang, chief China economist at Nomura in Hong Kong

“This is consistent with the other data we got, the project approvals and the pick-up of new investment. This is basically consistent that the policy stance is much more proactive and more loose than before, because they saw the risks to the economy.”

Medium- and long-term new loans rose to 165.7 billion yuan in August from 118 billion yuan in July, reinforcing signs that banks are opening up their purse strings to support the government’s move to fast-track infrastructure projects.

However, the M2 money supply grew 13.5 percent in August from a year earlier, undershooting forecasts for a 14.0 percent rise.

Li Wei, China economist at Standard Chartered Bank in Shanghai, said the slowdown in M2 may reflect the impact from capital outflows. Chinese banks have suffered a savings flight in recent months.

“We still think the government should cut the RRR for two or three times and cut the interest rate for one time within this year,” Li said.

The central bank has cut interest rates twice in June and July and also lowered banks’ reserve requirement ratio (RRR) by 150 basis points in three steps since November. But such policy actions have so far failed to halt the slide in economic growth.

Outstanding local-currency loans rose 16.1 percent by the end of August from a year earlier, the central bank said in a statement on its website, slightly better than expected.

Chinese data for August has been mostly disappointing, with weak trade data on Monday reinforcing the case for more policy measures to cushion the world’s second-largest against stiff global headwinds.

That followed data on Sunday that showed industrial output growth hit its weakest annual pace in August in more than three years as companies struggled to cope with falling orders.

The sluggish data has stoked market fears that the current quarter will mark the seventh successive quarter of slowing growth despite the policy “fine-tuning” that began in November 2011.

China may miss its official 7.5 percent growth target for 2012 without more aggressive policy stimulus on top of the monetary and fiscal easing undertaken since last year and the $150 billion-worth of infrastructure projects announced last week.

POLICY EASING AHEAD

Chinese banks grant loans at the central government’s behest, and money and credit numbers have become the most closely watched data as they reveal both policy aims and the state of credit demand.

The quickening approval of infrastructure investment projects in recent weeks by the National Development and Reform Commission, the country’s top planning agencies, may call for the central bank to ease policy further, analysts say.

But it won’t be an easy decision, they say, given the flare-up in property prices and rise in consumer inflation, albeit off a low level.

A number of investment banks have already downgraded their outlook on China’s economic growth for 2012 and 2013.

Barclays Capital, for example, has cut its forecast on China’s 2012 annual economic growth to 7.5 percent from 7.9 percent and cut its 2013 growth forecast to 7.6 percent from 8.4 percent.

China’s total social financing aggregate, a broad measure of liquidity in the economy, rose to 1.24 trillion yuan in August from 1.04 trillion yuan in July, central bank data showed.

The central bank has been in recent weeks leaning more on other policy tools — such as reverse repos in its open market operations and corporate debt financing — to support growth.

Chinese firms raised a net 258.4 billion yuan through bond issuance in August, which was 168.6 billion yuan more than the same people last year, the central bank said.

($1 = 6.3376 Chinese yuan)

Editing by Simon Cameron-Moore

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