BEIJING: China’s new bank lending unexpectedly increased in May from a month earlier, but broader credit growth continued to decelerate as the central bank seeks to contain rising debt in the world’s second-largest economy.
China’s top leaders have repeatedly pledged to avoid any policy reversal, keeping borrowing costs low and telling banks to maintain support for small businesses, while being more attentive to lending to hot areas of the economy such as the real estate.
“The peak of the credit cycle should be over, but the drop appears to be milder than expected,” said Luo Yunong, fixed income analyst at Industrial Securities.
Chinese banks extended 1.5 trillion yuan (RM966 billion) in new loans in May, up from 1.47 trillion yuan in April and beating analysts’ expectations of 1.41 trillion yuan, according to data released today by Banco Popular of China (PBOC).
The count was also higher than the 1.48 trillion yuan issued in the same month last year, when lawmakers implemented unprecedented measures to deal with the shock of the coronavirus crisis.
Loans to households rose to 623.2 billion yuan in May from 528.3 billion yuan in April, while corporate loans rose to 805.7 billion yuan last month from 755.2 billion yuan in April .
As expected, the growth of outstanding loans in yuan slowed to 12.2% from a year earlier, the slowest pace since February 2020, from 12.3% in April. Excluding that early 2020 period, it marked the slowest growth since 2002, according to Capital Economics.
The broad money supply M2 grew by 8.3% year-over-year, above the 8.1% forecast in the Reuters survey and in line with April’s pace.
In 2020, the central bank encouraged banks to cut rates for companies infected with the virus and extended loan repayments for small businesses, among other measures, to give borrowers breathing room during the coronavirus crisis. But with the economy back to pre-pandemic levels, policymakers are now looking to slowly decelerate emergency measures and cool credit growth to contain debt risks without impeding recovery.
PBOC Governor Yi Gang said today that inflation is “basically under control” and that monetary policy would be kept stable, in comments a day after data showed the fastest rise in factory prices in more than 12 years .
“We must adhere to policy stability as a priority and limit ourselves to implementing normal monetary policy,” he told a financial forum in Shanghai, forecasting this year’s inflation to be below 2%.
“Maintaining interest rates at an adequate level is conducive to the stable and healthy development of markets,” said the governor.
Yi said China’s interest rates, while higher than those in major economies, are still relatively low among developing and emerging economies.
Yi also reiterated that the central bank will keep the yuan exchange rate basically stable, while promising to further improve China’s exchange rate mechanism.
China has taken a number of measures recently to contain the rapid rise of the yuan, which hit a three-year high against the dollar due to the robust economic recovery and attractive yields in China.
Meanwhile, growth in total outstanding social financing (TSF), a broad measure of credit and liquidity in the economy, slowed to 11% in May, the weakest pace since February 2020, and from 11.7% in April.
Analysts attributed the TSF’s weaker growth to a slowdown in corporate and government bond issuance and a contraction in shadow credit, which could hamper economic growth going forward.
“The slowdown in credit growth is happening even faster than we expected a few months ago,” said Julian Evans-Pritchard of Capital Economics in a note.
“Although the economy has resisted the withdrawal of economic policy support very well, the usual lags mean that weaker credit growth will become a growing drag on activity in the coming quarters.”
TSF includes forms of off-balance-sheet financing that exist outside the conventional bank lending system, such as initial public offerings, trust company loans, and bond sales.
TSF rose to 1.92 trillion yuan in May from 1.85 trillion yuan in April, but did not live up to expectations. Analysts polled by Reuters had expected May’s TSF of 2.00 trillion yuan.
Separately, the PBOC said China’s foreign currency deposits reached a record $1.01 trillion (RM4.16 trillion at the end of May, compared with $1 trillion a month earlier.
Foreign currency deposits have grown steadily since last year, driven by China’s huge trade surplus and continued capital inflows into Chinese stocks and bonds. Foreign holdings in Chinese bonds hit a record last month.
The PBOC said demand deposits abroad grew 35.7% from the previous year, and $9.4 billion from the previous month.
A mountain of dollars in deposits in China has grown so much that banks are scrambling to lend the currency. Traders say this poses a risk to official efforts to rein in the rapidly rising yuan. The yuan has gained about 12% against the dollar since May 2020, reaching its strongest levels in more than three years.
The rapid appreciation has prompted policymakers to announce a series of measures recently to contain the rally.
Many policymakers warned market participants against betting on unilateral currency movements, and the PBOC raised the compulsory deposit rate on foreign currency deposits for the first time in 14 years in an attempt to restrict foreign currency liquidity.
Today, the currency regulator said bidirectional volatility in the yuan’s exchange rate would become normal and urged companies to hedge their currency risks. – Reuters