China Lending, Money Supply Growth Exceed Economist Estimates in December

China’s December lending and money supply growth exceeded economists’ estimates, signaling monetary conditions may be easing as the nation’s central bank said it must be prepared for possible shocks from the U.S. and Europe.

New loans (CNLNNEW) totaled 640.5 billion yuan ($101 billion) for the month, exceeding the estimates of all 18 economists surveyed by Bloomberg. M2, a measure of money supply (CNMS2YOY), rose 13.6 percent, compared with the 12.9 percent median of 18 estimates.

People’s Bank of China Governor Zhou Xiaochuan said yesterday the nation must be ready to combat possible shocks from Europe’s debt crisis and an uncertain U.S. economic outlook, echoing comments by Premier Wen Jiabao. The central bank will “very likely” follow up last month’s reduction in lenders’ reserve requirements with another cut this week, JPMorgan Chase & Co. said today.

“This is better-than-expected monetary data, suggesting monetary conditions have started to ease,” said Liu Li-Gang, a Hong Kong-based economist with Australia & New Zealand Banking Group Ltd., who previously worked at the World Bank. Liu said he expects that the central bank may cut the reserve requirement again before the Lunar New Year on Jan. 23. “Such easing will help ensure a soft landing for the Chinese economy,” he said.

The statement posted to the central bank’s website yesterday didn’t contain a figure for China’s foreign-exchange reserves, which are usually released with lending and money supply data issued at the end of each quarter.

External Shocks

Stocks in China rose. The Shanghai Composite Index (SHCOMP) was 1.5 percent higher at 10:53 a.m. local time. The measure lost 1.6 percent last week.

The benchmark money-market rate had the biggest weekly decline (CNRR007) since November last week as the central bank refrained from selling bills to help ease a cash shortage ahead of the week-long New Year public holiday. The seven-day repo rate rose 19 basis points to 4.50 percent as of 10 a.m. in Shanghai.

The PBOC said Jan. 6 it will suspend debt sales ahead of the festival and buy securities from the market or financial institutions to boost liquidity if needed.

Zhou yesterday said in an interview with the official Xinhua News Agency that the global economy will face “a string” of difficulties in 2012 as a result of the European debt crisis, uncertainties in the U.S. and slowing growth in emerging markets. China must be ready to pick appropriate policy instruments to combat external shocks, Zhou was cited as saying.

‘Relatively Difficult’

Fighting inflation (CNCPIYOY) is not as urgent now as it was in early 2011, Xinhua cited Zhou as saying after a two-day meeting of financial regulators in Beijing. The National Financial Work meeting, which was attended by senior officials including Premier Wen, is held every five years to form development plans for the financial sector, Xinhua reported.

Wen last week pledged to fine tune monetary policy to preserve growth as business conditions in the first quarter may be “relatively difficult.” The nation’s export growth slowed in November to the weakest pace since 2009.

China is scheduled to release data for December exports, imports and trade balance tomorrow. It’s also due to issue December inflation figures on Jan. 12 and data for annual 2011 and fourth-quarter economic growth on Jan. 17, according to the statistics bureau.

The central bank’s data yesterday showed that December money supply grew at the fastest pace since July. The 12.7 percent pace reported for November was the weakest since 2001.

Ease Liquidity

Lending in December was the highest monthly figure since April (CNLNNEW). The median estimate of 18 economists surveyed by Bloomberg was for 575 billion yuan of loans in the month.

For the year, lending totaled 7.47 trillion yuan, according to the statement. The central bank may target lending in 2012 of 9 trillion yuan to 9.5 trillion yuan, said Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong.

The central bank still needs to ease liquidity in the money market to achieve more lending this year, Kowalczyk said. He said there is likely to be a cut of 250 basis points this year in the amount banks have to hold as reserves, with the first cut before the Lunar New Year holiday. The PBOC’s previous reduction, announced Nov. 30, was the first since 2008.

JPMorgan expects three reductions in the reserve ratio in the first half of this year and a 15 percent increase in new lending to 8.2 trillion yuan for the full year, Hong Kong-based economists led by Zhu Haibin said in a note today.

Reduced Possibility

In contrast, Societe Generale says the central bank’s Jan. 6 announcement “significantly reduced” the probability of a cut in reserve requirements ahead of the New Year holiday and has pushed back its call for a reduction to later in the first quarter. The bank is sticking to its call for four cuts totaling 200 basis points this year, Hong Kong-based economist Yao Wei said in a note today.

Easing in monetary conditions as indicated by the December data could reduce the urgency for further policy easing, said Ken Peng, a Beijing-based economist at BNP Paribas SA.

In addition to lending and money supply, the December data showed Chinese banks added 1.43 trillion yuan of deposits in the month. These funds largely came from the release of fiscal deposits into the commercial banking system as government agencies conducted concentrated spending at the end of the year, Peng said.

A “tepid” M1 money supply growth of 7.9 percent in December suggests that the increased bank deposits may have a “lifting impact” on January money supply, Peng said.

In a separate statement yesterday, the central bank said it will continue to implement prudent monetary policy this year while maintaining policy continuity and controlling inflation expectations (CNCPIYOY). It will also make adjustments more targeted, flexible and forward looking, the central bank said.

--Henry Sanderson. With assistance from Victoria Ruan in Beijing, Fion Li in Hong Kong. Editors: John Liu, Nerys Avery.

To contact Bloomberg News staff on this story: Henry Sanderson in Beijing at hsanderson@bloomberg.net

To contact the editor responsible for this story: John Liu at jliu42@bloomberg.net

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