New Loans Plunge in October as Economy Cools

* China’s outstanding total social financing and new yuan loans in October fell by half from the previous month

* Analysts suggested broader policy adjustment to avoid more pain from further cooling of the economy

China’s credit growth hit fresh lows in October, showing that a series of credit-relaxing measures to help the cash-starved private sector haven’t taken effect.

Growth in China’s outstanding total social financing and new yuan loans in October fell by half from the previous month, data from the central bank showed Tuesday. The sharp monthly decline was partly seasonal as October had fewer business days because of the National Day holiday, but borrowing was still much lower than expected.

Chinese banks extended 697 billion yuan ($100.23 billion) in net new yuan loans in October, down nearly 50% from September. October new loans increased by 33.8 billion yuan from a year earlier, the fourth consecutive monthly decline in year-over-year growth.

Growth in China’s total social financing (TSF), a broad measure of credit and liquidity in the economy, fell to 728.8 billion yuan in October from the same time last year, down 67% from 2.21 trillion yuan in September. The year-over year growth rate slowed to 10.2%, an all-time low.

The slowdown in credit growth came despite the recent liquidity-boosting measures by the central bank, including four cuts in banks' reserve requirements so far this year. Several branch offices of the People’s Bank of China reported that they are pumping more money into the banking system in support of loans to private enterprise.

Even so, it takes time for supportive policies to show up in credit data, and the market still lacks confidence in the relaxing credit policy, said Ming Ming, an analyst with Citic Securities.

The PBOC added local government special bond issuance into the TSF calculation starting in September. Local government special bond issuance contributed 738.9 billion yuan to the September TSF. But that contribution plummeted to 86.8 billion yuan in October.

The sharp decline was because local governments maxed out their annual bond quotas after an uptick of debt issuance in the third quarter, Capital Economics said in a research note.

The October numbers showed that lower interbank rates and fiscal support have so far been insufficient to drive a sustained turnaround in lending, said Julian Evans-Pritchard, senior China economist at Capital Economics, in a research note.

“With credit growth still cooling, economic activity looks set to come under further pressure in the coming months,” Evans-Pritchard said in the note. “We expect officials to step up policy easing in response, including benchmark lending rate cuts and off-budget fiscal stimulus.”

Analysts with China International Capital Corp. (CICC) also suggested broader policy adjustment is needed “sooner than later” to avoid more pain from further cooling of the economy.

China’s economic growth already slowed to 6.5% in the third quarter year-on-year, its slowest pace since the global economic crisis in 2009.

Without material fiscal stimulus support to boost companies’ profits, just relaxing liquidity may not be enough to maintain credit demand, CICC said in a report Tuesday.

TSF also includes off-balance sheet forms of financing, or shadow banking, that exist outside the conventional bank lending system. Further shrinking off-balance sheet financing was a major drag in the growth of TSF in October, said Jiang Chao, chief economist at Haitong Securities.

Combined trust loans, entrusted loans and undiscounted bankers' acceptances, which are common forms of shadow banking finance, fell by 267.5 billion yuan in October, down 44.7 billion yuan from a year earlier.

With a large amount of off-balance sheet financing due at the year end, and weakening financing demand from real estate developers, off-balance sheet financing is expected to continue to decline, said Zhang Jiqiang, a fixed-income analyst with Huatai Securities.

Broad M2 money supply, another key credit gauge, grew 8% in October from a year earlier, matching a record low in June.

Qi Sheng, chief fixed income analyst at Zhongtai Securities, attributed the slow growth in money supply partly to a personal income tax cut taking effect in October that cut into general fiscal revenue growth.