China's October new loans seen lower but credit easing on track: Reuters poll

BEIJING (Reuters) - New banks loans in China likely fell in October due to a seasonal lull but were still well ahead of historical trends as policymakers urge lenders to keep cash-starved firms afloat as the economy slows, a Reuters poll showed.

FILE PHOTO: A security guard walks on the bund in front of the financial district of Pudong in Shanghai, China July 27, 2017. REUTERS/Aly Song

Banks likely extended 862 billion yuan ($196.56 billion) in net new yuan loans in October, a traditionally weaker month due to long holidays, according to the poll, which surveyed 32 analysts.

While the figure appears modest compared with the 1.38 trillion yuan increase in new loans in September, it would mark the biggest October gain since Reuters started compiling the data in 1990.

Chinese policymakers have stepped up efforts in recent months to keep credit flowing to struggling smaller firms, especially private companies which account for 60 percent of the economy and 80 percent of urban jobs. But banks prefer dealing with firms which have state banking, considering them lower risk.

Serena Zhou, China economist with Mizuho Securities in Hong Kong, said the drop in loans from September did not suggest a significant change in policy direction.

“The expected dip was mainly due to unfavorable seasonality in October,” said Zhou, referring to the National Day lull.

She estimates the October average for the past three years was even lower, at 663 billion yuan.

The impact on smaller firms has been compounded by mounting U.S. tariffs on Chinese goods and retaliatory measures in kind by Beijing, which is hurting sales and driving up operating costs. But investment and consumption in China had already been showing signs of slowing before the trade dispute flared.

China has released net liquidity worth 2.3 trillion yuan ($332.04 billion) into the market by reducing banks’ reserve requirements this year, after offsetting maturing medium-term lending facility loans, according to central bank chief Yi Gang.

Broad M2 money supply was seen rising 8.4 percent in October from a year earlier, slightly higher than September’s pace of 8.3 percent, according to the poll.

Annual outstanding yuan loan growth was seen at 13.3 percent in October, also reflecting a marginal pick-up from September.

Total new bank loans in January-September jumped 17.7 percent from a year earlier to 13.14 trillion yuan, and are on track for another record year.

But the increased lending has barely compensated for shrinking shadow loans as regulators continued their crackdown on riskier types of financing. The shadow banking sector has been a significant source of funds for private firms.

A shift to more aggressive credit easing at the same time as business is slowing could also risk a flareup in debt in China, undermining a multi-year government campaign to reduce systemic financial risks. Corporate bond defaults are on track to hit a record this year.

“Activity growth is in a tug of war. Administrative policy loosening has stepped up, but local governments still face a dilemma as the central government has also made requests to control local government debt,” analysts from Goldman Sachs wrote this week.

“Weaker sentiment because of the trade dispute has continued to weigh on domestic economic activities such as car sales.”

The People’s Bank of China (PBOC) is due to release the October lending and money supply data sometime during Nov. 10-15.

Reporting by Yawen Chen and Ryan Woo; Additional Reporting by Kevin Yao; Editing by Kim Coghill