China New Loans Rise More Than Expected in Loosening

China New Lending Is More-Than-Estimated 586.8 Billion Yuan
Pedestrians walk past the People's Bank of China in Beijing, China. Photographer: Sim Chi Yin/Bloomberg

China’s lending jumped by more than analysts forecast in October, signaling that the government may be loosening loan quotas to support growth in the world’s second-biggest economy.

Local-currency lending was 586.8 billion yuan ($92.5 billion), the People’s Bank of China said in a statement on its website today. That was the highest since June and exceeded all 18 estimates in a Bloomberg News survey that had a median forecast of 500 billion yuan. M2, a measure of money supply, rose 12.9 percent.

Chinese officials aim to sustain the nation’s expansion as the property market cools and Europe’s debt crisis hits exports. Mizuho Securities Asia Ltd. and Capital Economics Ltd. predict a rebound in lending this quarter after Premier Wen Jiabao said economic policies will be “fine-tuned” as needed and pledged more funding for smaller companies.

“This is a meaningful pickup in new loans which suggests selective easing has already started,” said Qu Hongbin, a Hong Kong-based economist with HSBC Holdings Plc. “This should help stabilize growth with small and medium-sized enterprises and increase credit support for ongoing infrastructure projects. China has no risk of a hard landing.”

The government aims to sustain the momentum of an economy that grew 9.1 percent in the third quarter after reports this week showed exports increased at the slowest pace in two years and industrial output rose the least in a year. October home sales fell 25 percent from September, government data showed.

Biggest Banks

The nation’s four biggest state-owned banks including China Construction Bank Corp. and Bank of China Ltd. extended more than a third of their 240 billion yuan of October loans in the last two days of the month, indicating credit curbs may have been relaxed, the 21st Century Business Herald reported today. It cited an unidentified person familiar with the situation.

“Lending needs to be eased in the fourth quarter after the over-tightening of credit conditions in the third quarter,” said Wang Tao, a Hong Kong-based economist with UBS AG. She estimates new loans in each of the next two months of 500 billion yuan to 550 billion yuan.

That would bring the total to about 7.3 trillion yuan this year, Wang said, compared with 7.95 trillion yuan last year.

“Premier Wen’s fine-tuning announcement was the signal that the balance of risks had shifted from inflation to growth,” said Tim Condon, Singapore-based head of Asian research at ING Groep NV. “We expect more fine-tuning and a cut in the required reserve ratio within three months.”

Loan Forecast

If the loosening continues, monthly new loans for the rest of the year should be around 650 billion yuan, bringing full-year growth of new credit to more than 7.5 trillion yuan, said Sun Mingchun, head of China research at Daiwa Capital Markets in Hong Kong. “This will significantly reduce the risk of a hard landing in the fourth quarter,” he said.

The central bank may first cut reserve requirements for smaller lenders to free up credit for small companies that have been hit hardest by the government’s credit squeeze, economists say. Mizuho expects a reduction for them as early as this month while Societe Generale SA sees a move by the end of the year.

The expansion in M2 in October compared with a 13 percent median estimate in a Bloomberg News survey and a 13 percent gain the previous month. The central bank set a target of 16 percent growth this year.

Higher Returns

Economists at Capital Economics Ltd. and Standard Chartered Plc say money-supply growth may be distorted as savers, suffering from negative real interest rates, shift funds out of deposit accounts into wealth management products to earn higher returns. These products aren’t included in M2.

Savings rates have lagged behind the inflation rate for 21 months. Consumer prices rose 5.5 percent last month while the benchmark one-year savings rate is 3.5 percent.

Household deposits declined, today’s PBOC data indicate, with outstanding deposits falling by 727.2 billion yuan in October.

“This may be related to new rules that forbid wealth management products from being classified as regular deposits,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA. “It also suggests that banks’ capacity to lend is deteriorating.”

Negative interest rates run the risk of undermining the deposit bases banks use to fund themselves, Thomas Byrne, a senior vice president at Moody’s Investors Service said in a Nov. 9 interview.

‘Rigid’ Controls

More than 80 percent of bankers said that their biggest challenge in 2011 was “increasing pressure for deposit-taking,” according to a survey issued last week by the China Banking Association and accounting firm PricewaterhouseCoopers LLP. Competition among lenders to attract deposits amid “rigid” central bank controls on interest rates is becoming “more intensive,” according to the survey.

Inflation has exceeded the government’s 2011 target of 4 percent every month, and the gap with the savings rate may limit the central bank’s ability to cut interest rates if the government needs to undertake more monetary policy loosening.

A Bloomberg News survey this week showed five of 13 forecasts predict no change in the one-year deposit rate before the end of 2012 and five see an increase.

(Corrects to remove reference to second straight month of decline in household deposits in 15th paragraph of story published Nov. 11)
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