China’s Loans Exceed Estimates in Sign Slowdown May Be Reversed

China’s new lending in May exceeded analysts’ estimates and money-supply growth accelerated, aiding Premier Wen Jiabao’s efforts to reverse a slowdown in the world’s second-biggest economy.

Local-currency loans were 793.2 billion yuan ($125 billion), the People’s Bank of China said on its website today. That compared with the 700 billion yuan median forecast in a Bloomberg News survey of 29 economists and 681.8 billion yuan in April. M2 money supply grew 13.2 percent last month from a year earlier, compared with an estimate of 12.9 percent.

Government efforts to bolster growth span cuts in interest rates and bank reserve requirements and delays in tightening lenders’ capital requirements. Citigroup Inc. said today that the central bank has signaled “aggressive” monetary easing that may include two more interest-rate reductions this year.

China’s economy is still on a downward trend,” Citigroup economist Ding Shuang, who formerly worked for the PBOC, told Bloomberg Television in Hong Kong today ahead of the release. “We do not see a clear turning point yet, and policy support is very much needed in order to stabilize growth.”

The economy’s expansion this quarter may be “very weak” at 7 percent to 7.5 percent, Ding said after the government announced data for industrial production, inflation, fixed-asset investment and exports over the past two days. Better-than- forecast trade growth in May may not be sustained as a likely recession in the European Union restrains demand, he said.

First Since Crisis

The central bank cut borrowing costs for the first time since 2008 last week and loosened controls on banks’ ability to set lending and deposit rates, stepping up efforts to combat a domestic slowdown.

The rate-cut announcement came two days before a government report showed inflation in May eased to 3 percent, the lowest in two years, and industrial output and retail sales growth trailed forecasts, adding to signs of moderating domestic demand.

“The decision to cut interest rates on June 7 indicates that authorities are indeed concerned about the growth slowdown and serious about easing policies,” Zhang Zhiwei, Hong Kong- based chief China economist at Nomura Holdings Inc. said before the release. “The PBOC will cut the reserve requirement ratio in July to further boost liquidity.”

Lower borrowing costs should stimulate demand for loans, Sheng Nan, a Hong Kong-based analyst with CCB International Securities said before the data.

At the same time, banks including Industrial & Commercial Bank of China (601398) Ltd. and Agricultural Bank of China Ltd. (601288) may see their profitability weakened as they are forced to raise deposit rates to compete for savings.

China’s economy expanded 8.1 percent in the first quarter from a year earlier, the slowest pace in almost three years, as Europe’s debt crisis crimped exports and the campaign to cool consumer and property prices damped domestic demand.

To contact Bloomberg News staff for this story: Victoria Ruan in Beijing at vruan1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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