Analysis: Behind China’s Divergence of Soaring Money and Slowing Loans

Summary:

In July, China's money supply measures M1 and M2 increased more than expected, despite new loans and total social financing (TSF) coming in below market forecasts. This divergence is attributed to various factors, including structural changes in financing, seasonal trends, the impact of debt-swap bond issuance, and evolving household wealth-management behaviors. Specifically, TSF for July was 1.16 trillion yuan ($161.1 billion) and new yuan loans contracted by 50 billion yuan, both under Bloomberg's consensus forecasts (1.63 trillion yuan and 300 billion yuan, respectively). Conversely, M2 year-on-year growth reached 8.8% (vs. consensus 8.3%) and M1 grew by 5.6% (vs. consensus 5.2%), both showing acceleration compared to June. The year-on-year growth rate for outstanding TSF rose to 9%, and the seasonally adjusted monthly growth of TSF increased to 9.6% from 8.4%.[para. 1][para. 2]

Important insights from July's monetary and credit data include: (1) A low base effect from last year, when the central bank started cracking down on “financial data padding” and local government deleveraging, contributed to a rebound in current year-over-year growth rates for TSF, M1, and M2; (2) Ongoing fiscal activity, especially robust government bond issuance, supported TSF growth. In July, net government bond issuance was 1.24 trillion yuan, up 555.9 billion yuan from a year earlier, now contributing about 4.1 percentage points to TSF growth; (3) The contraction in new yuan loans mainly reflects local debt swaps, seasonal trends, and weak private loan demand, especially as property transactions remained soft. Even after accounting for debt swaps, medium- and long-term corporate loans were not strong, and household loans dropped significantly—overall new household loans were down by 287.1 billion yuan year-on-year, driven by weakened property market demand. (4) The above-consensus growth in M2 and M1 likely reflects a shift of household wealth management funds into stock markets, increasing on-balance-sheet demand deposits and nonbank deposits.[para. 3][para. 4]

Although new TSF was below expectations, strong year-over-year government bond issuance boosted the seasonally adjusted TSF growth rate, indicating that fiscal stimulus remains a key support for the credit cycle. Proactive fiscal policy, front-loaded this year, stabilized credit growth amid global demand fluctuations. Notably, in the first seven months of 2024, net government bond issuance reached 8.9 trillion yuan, 4.9 trillion yuan more than last year. Combined with the central bank’s rate cuts, liquidity expansion measures, and targeted refinancing, this lifted TSF growth from 8.0% in April to 9.6% in July, signaling short-term economic stability. However, as government bond issuance slows going forward, fiscal support may also subside. Net government bond issuance from August to December is expected to fall by 2.3 trillion yuan year-on-year, introducing uncertainty for fiscal policy sustainability.[para. 5][para. 6]

External demand also faces headwinds as the U.S. imposed new tariffs in early August, potentially curtailing Chinese export growth and exerting further pressure on global trade. The need for renewed fiscal measures and possible new financial policy tools will depend on evolving domestic and international conditions. The trajectory of exports and the potential for more fiscal stimulus remain areas to watch in the coming months.[para. 7]