Sluggish Business Credit Demand Signals Need for Further Easing

Chinese banks made more loans in May to counter slowing economic growth, but demand for business credit remained sluggish and suggested the need for further policy easing, analysts said.

China’s total social financing (TSF), a broad measure of credit and liquidity in the economy, grew by a net 1.4 trillion yuan ($202 billion) in May, slightly higher than a net increase of 1.36 trillion yuan the month before and up 10.6% from a year earlier, data from the People’s Bank of China (PBOC) showed Wednesday. TSF includes financing outside the conventional bank lending system such as initial public offerings and bond sales.

In May, banks made 1.18 trillion yuan in net new yuan loans, up from 1.02 trillion yuan in the previous month, according to the data. Of that amount, 56.1% went to the household sector, up from April’s 51.5%, showing that credit growth was supported more by demand from consumers than from businesses.

“Credit growth remained broadly stable in May,” said Franziska Palmas, an economist at research firm Capital Economics, in a note. “Policy easing has not yet been effective in generating a sustained pick-up in credit growth and is one of the reasons why we don’t expect a strong recovery in economic growth in the coming months.”

The central bank has rolled out a series of measures to encourage lending to small and private businesses, including cutting the reserve-requirement ratio five times since January 2018 and providing lower-cost liquidity to banks through targeted policy tools. Despite a flurry of stimulus measures since last year, China’s first-quarter economic growth slowed to its weakest pace in 27 years. Recent data on factory activities and imports indicate a rebound is not yet in sight.

China’s outstanding M2, a broader measure of the money supply that covers all cash in circulation plus deposits, grew 8.5% year-on-year at the end of May, unchanged from a month earlier, the central bank reported.

Among business loans, short-term loans rebounded, but new medium- to long-term loans fell from the previous month, the data show.

With local governments likely to be constrained in their borrowing for the rest of this year, additional monetary easing will be needed to sustain credit growth and shore up economic growth, Palmas said in the note.

The central bank remains reluctant to cut benchmark interest rates, but recent comments from PBOC Governor Yi Gang have raised expectations for further policy easing.

Last week Yi said there was “tremendous” room for policy adjustments if the China-U.S. trade war worsens, including rate cuts, further lowering of the required reserve ratio and fiscal and monetary policy tools.

With a slowing growth and a rapid escalation of U.S.-China trade tensions, Beijing needs to fine-tune its stance towards easing, said Lu Ting, chief China economist at Nomura International.

Beijing’s new policy of relaxing restrictions on local governments’ borrowing for major infrastructure investments is strong evidence of a renewed easing posture, Lu said.

Local governments will be allowed to use proceeds from special-purpose bond issuance as project capital for certain infrastructure investments, according to a document issued Monday by the central government.

But room for monetary easing is limited, as Beijing is seriously concerned about rapid debt accumulation, Lu said.

Contact editor Han Wei (weihan@caixin.com)