Sluggish Business Credit Demand Hints of Further Slowing of Growth
Chinese banks made significantly less in new yuan loans last month, signaling that demand for business credit remains sluggish amid protracted trade tensions with the U.S. and suggesting room for further monetary easing to support slowing economic growth.
China’s total social financing (TSF), a broad measure of credit and liquidity in the economy, grew by a net 1.01 trillion yuan ($140 billion) in July, significantly less than the net increase of 2.26 trillion yuan the month before and also down 210.3 billion yuan from the year-ago net increase, data from the People’s Bank of China (PBOC) showed Monday.
The decline in TSF growth more than offset a further acceleration in special bond issuance by local governments on the back of fiscal loosening, Julian Evans-Pritchard, senior China economist at Capital Economics, said in a research report.
“The current pace of credit creation hints at a further slowdown in economic growth in the coming quarters,” Evans-Pritchard said, projecting more-aggressive interest-rate cuts if policymakers are to succeed in supporting growth.
China’s economy grew at an annual pace of 6.2% in the second quarter, the lowest figure since records began in 1992.
Economists at Macquarie Group projected that credit growth in coming months will remain constrained by the lack of credit demand unless policymakers stimulate demand by loosening restrictions on shadow banking and property lending.
TSF also includes off-balance sheet forms of financing, or shadow banking, that exist outside the conventional bank lending system. Combined trust loans, entrusted loans and undiscounted bankers’ acceptances, which are common forms of shadow banking finance, fell by 622.6 billion yuan in July, after a 212.4 billion yuan decline in June.
The further decrease in off-balance sheet financing perhaps reflected the recent regulatory crackdown on shadow financing by real estate developers, Capital Economics said.
In July, banks extended 1.06 trillion yuan in net new yuan loans, 600 billion yuan less than the previous month, recording the biggest year-over-year drop since 2018, according to the central bank data.
Of that amount, three-quarters were for medium and long-term loans. The share of medium and long-term loans went up 24 percentage points from June and up 11 percentage points from the year-ago period, showing improved credit structure. But more than half of medium and long-term loans went to the household sector, indicating that credit growth was still supported by mortgage demand.
The central government has set the tone that it will not use the property market as a form of short-term economic stimulus, indicating that financing in the real estate sector will continue to tighten, said Wang Yifeng, chief analyst of the banking industry at Everbright Securities. Even though mortgage demand is still high, growth in mortgage lending will be constrained in the second half under the policy environment, he said.
Business loan demand continued to be weak. In July, banks extended 297.4 billion yuan of new loans to businesses, down 352.7 billion yuan from the year-ago period, data showed.
After banks rushed to meet their half-year goals in June, the growth in both deposits and loans faced seasonal pressure in July, said Wang at Everbright Securities.
In addition, continued trade frictions with the U.S. also hurt business sentiment, making the private sector unwilling to invest, Wang said.
Economists say they don’t expect business credit demand to recover soon as capital expenditures are closely correlated with exports. Capex growth slowed to 3% year over year in the first half of 2019 from 10% in 2018, and it could slow further in the second half, economists at Macquarie Group said.
Broad M2 money supply in July grew 8.1% from a year earlier, down from growth of 8.5% in June, central bank data showed.
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