China’s Banks Boost Lending As Demand Returns

(Beijing) — China’s broadest measure of new credit jumped by more than analysts expected in August, driven by bank lending as companies turned back to the formal banking system for money amid a government squeeze on informal and more risky debt.

Chinese commercial lenders extended 1.09 trillion yuan ($170 billion) in net new yuan loans in August, the central bank said Friday. The number exceeded analysts’ expectations of 950 billion yuan, and was up from 825 billion in July and 948.7 billion yuan in August 2016.

Total social financing, the broadest measure of credit, which includes bond and equity issuance, trust loans and entrusted loans, stood at 1.48 trillion yuan in August, the People’s Bank of China (PBOC) said. The number, which also beat analysts’ expectations, was up from 1.22 trillion yuan in July but only marginally higher than the 1.46 trillion yuan a year earlier.

The PBOC and financial regulators have been pushing to bring down leverage in the financial system amid intensified warnings from President Xi Jinping about the need to contain financial risks. The campaign has led to a cooling in some parts of the shadow banking industry, such as trust loans, as the squeeze on liquidity has pushed interest rates higher and driven many borrowers back into the formal banking sector.

It has also helped channel credit away from financial speculation and into the so-called real economy, or sectors that produce actual goods and services.

New loans to companies amounted to 483 billion yuan in August, up from 353.5 billion yuan in July, and quadruple the 120.9 billion yuan reported in the same period last year.

However, net new entrusted loans, which are used by banks to get around loan quotas and capital requirements imposed by the PBOC, were a negative 8.2 billion yuan last month, which means more loans were repaid than taken out. That was the fourth monthly drop in five, suggesting that borrowers are turning away from this source of financing.

However, net new financing via undiscounted bankers’ acceptances, a kind of IOU backed by a bank that’s also considered a form of shadow lending, turned positive in August after declines in July, June and May.

Although the PBOC has not followed the U.S. Federal Reserve in raising benchmark interest rates, it has pushed borrowing costs higher in the interbank market, the main funding source for financial institutions. That has also meant that companies have to pay higher interest rates on the bonds they issue and has led to a slump in issuance in the first half of the year.

After a low issuance in the first half, the net issuance of corporate bonds surged to 284 billion yuan in July, but fell back to 106.3 billion yuan in August, the PBOC data show.

The government’s campaign to cool the housing market through the imposition of administrative controls and higher mortgage interest rates appears to be taking effect. Long-term household loans, mostly mortgages, were 447 billion yuan in August, down from 454.4 billion yuan in July and 528.6 billion yuan in the same period last year.

The crackdown on shadow banking has led to a steep decline in the rate of expansion in M2, China’s broadest measurement of money supply, due to a drop in the growth rate of money held by the financial sector. M2 rose by 8.9% in August from a year earlier, the weakest increase on record and down from 9.2% in July and 11.4% a year earlier. The PBOC has described the slowdown as a “new normal,” reflecting its progress in cutting financial leverage.

“As long as the real economy is sufficiently financed, slower M2 growth actually means a more efficient use of money in the economy,” Ruan Jianhong, head of the PBOC’s statistics department, said at a press conference in July.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)