Slump in China credit in October highlight growth challenges

Vehicles drive on the Guomao Bridge through Beijing's central business district
Vehicles drive on the Guomao Bridge through Beijing's central business district, June 11, 2015. REUTERS/Jason Lee

November 12, 2015

By Winni Zhou and Kevin Yao

BEIJING/HONG KONG (Reuters) – Credit activity in China’s financial system dropped to its lowest level in 15 months in October, highlighting the challenges the country faces as it seeks to juice investment to reinvigorate growth.

China’s total social financing (TSF), a broad measure of overall credit in the economy, fell 63 percent to 476.7 billion yuan in October from 1.3 trillion yuan in September, the lowest level since July 2014, data from the People’s Bank of China showed Thursday.

The data follows a string of below-expectation economic releases in recent weeks and will likely add to the case for authorities to introduce more accommodative policies to shore up slowing demand in the world’s second largest economy.

Chinese banks extended 513.6 billion yuan ($80.66 billion) in net new yuan loans in October, disappointing analyst expectations and down 51 percent on the previous month’s 1.05 trillion yuan.

“In general liquidity continues to be quite tight despite many rounds of easing,” said Kevin Lai, economist at Daiwa Capital Markets in Hong Kong.

“There’s very little demand for investment so it’s basically weak on both demand and supply sides.”

The biggest drop was seen in undiscounted bank’s acceptance notes, which fell 369.4 billion from September.

Broad M2 money supply grew 13.5 percent from a year earlier, slightly better than the poll forecast of 13.2 percent.

The central bank has embarked on its most aggressive policy easing campaign since the global financial crisis, as annual economic growth looks set to slip to a 25-year-low of under 7 percent.

Economists polled by Reuters had expected new yuan loans would fall to 798.2 billion yuan in October.

While the numbers show a collapse in financing, Julian Evans-Pritchard, an economist at Capital Economics in Singapore, cautions that technical factors such as seasonal effects and measurement changes play some part in the reading.

Notably, the TSF number does not reflect debt issued by local governments through the recently established municipal bond market, as opposed to debt issued by third-party local government financing vehicles in the past, a heavy contributor to TSF, he said.

SLOW GROWTH

China’s economy grew 6.9 percent in the third quarter from a year earlier, the weakest pace since the global crisis, hurt partly by cooling investment and prompting the central bank to cut interest rates for the sixth time in less than a year.

Some analysts and market participants expect additional cuts in interest rates and bank reserve requirements to encourage bank lending.

However, the cuts have mostly been defensive in nature, holding down real interest rates for heavily indebted Chinese firms but doing little to juice fresh investment.

For that economists are looking more to fiscal stimulus, which regulators are trying to deliver.

“As monetary policy easing has limited impact to help revive the momentum, China appears to allow fiscal policy to play a bigger role, in order to stimulate the demand,” wrote Zhou Hao, economist at Commerzbank in Singapore in a research note reacting to the data.

In order to cushion a slowing economy, the National Development and Reform Commission, the top economic planner, has approved billions of dollars in infrastructure projects in recent months; it said it will accelerate approvals during a press conference Thursday morning.

Premier Li Keqiang said in an editorial in a state paper last week that China would continue to pursue effective investment, and plans are afoot to increase spending in the west of the country.

($1 = 6.3675 Chinese yuan)

(Additional reporting by the Beijing Newsroom and Nathaniel Taplin in SHANGHAI; Writing by Pete Sweeney; Editing by Richard Borsuk and Sam Holmes)