Jump in China Loans Helps Wen’s Efforts to End Slowdown

China's Premier Wen Jiabao
Wen Jiabao, China's premier, said the nation should put “stabilizing growth in a more important position” and increase lending to support construction. Photographer: Nelson Ching/Bloomberg

China’s new loans exceeded estimates in May and more money went into longer-term lending, signaling support for investment projects that may help to prevent a deeper economic slowdown.

Local-currency lending was 793.2 billion yuan ($125 billion), the People’s Bank of China said on its website yesterday. That was the most on record for the month of May and more than analysts’ 700 billion yuan median forecast. Loans extended for a year or more accounted for 34 percent of the total, up from 28 percent in April.

Premier Wen Jiabao’s efforts to engineer a resurgence in the world’s second-biggest economy may be aided by the jump in lending and signs of resilience in exports. At the same time, industrial-output growth was close to the lowest since 2009 in May, indicating additional measures will still be needed after last week’s interest-rate cut.

“Over the past several months, investors have been concerned that a large share of loans was for short-term financing, and hence would not help boost growth as much as large investment projects,” said Zhang Zhiwei, the Hong Kong-based chief China economist at Nomura, who previously worked for the International Monetary Fund. “The rising share of medium and long-term loans in May helps address this concern.”

Lingering Crisis

The Shanghai Composite Index fell 0.4 percent as of 9:35 a.m. local time today as surging Spanish bond yields stoked concern that a bailout for that nation’s banks won’t tame the European debt crisis. Chinese stocks rose the most in almost two weeks yesterday on China’s better-than-forecast trade figures and easing inflation that gives more leeway to loosen monetary policy.

HSBC Holdings Plc said new loans may surge to as much as 1 trillion yuan this month. Nomura’s Zhang said the proportion of longer-term lending remains “relatively low” and has room to rise as banks lend more to infrastructure projects.

M2 money supply grew 13.2 percent last month from a year earlier, compared with an estimate of 12.9 percent, yesterday’s report showed. The gain was 12.8 percent in April. New lending was up from 681.8 billion yuan in April.

“The lending figures are all the more impressive because loan growth in the first half of the month was reportedly extremely weak,” said Mark Williams, an economist at Capital Economics Ltd. in London who formerly advised the U.K. Treasury on China. “These figures point to a sharp rebound in lending in late May and suggest that banks and borrowers have responded rapidly to the government’s new emphasis on supporting growth.”

Baosteel Expansion

The nation’s top economic planning agency, the National Development and Reform Commission, is speeding approvals for investment projects. Baosteel Group Corp. and Wuhan Iron & Steel Group last month secured permission to build factories after previous delays caused by overcapacity concerns.

Efforts to bolster growth also include reductions in bank reserve requirements and delays in tightening rules for lenders’ capital. China has no plan to introduce stimulus on the scale unleashed during the global crisis in 2008, according to the state-run Xinhua News Agency.

Exports climbed 15.3 percent in May from a year earlier, the customs bureau said June 10, a gain that exceeded all 29 estimates in a Bloomberg News survey. Industrial output rose by less than 10 percent for a second month and inflation eased to 3 percent, the lowest reading in two years, statistics bureau reports showed June 9.

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

‘Very Weak’ Growth

The economy’s expansion this quarter may be “very weak” at 7 percent to 7.5 percent, Ding said. Better-than-forecast trade growth in May could weaken as the European Union is likely to enter recession, restraining demand, he said.

The yuan was little changed after the loan figures. The currency gained 0.02 percent to close at 6.3694 per dollar in Shanghai, while twelve-month non-deliverable forwards in Hong Kong traded at a 0.7 percent discount to the onshore spot rate.

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.

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 a campaign to cool consumer and property prices damped domestic demand.

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