China New Yuan Loans Top Forecasts; Forex Reserves Shrink

China’s New Yuan Loans Exceed Forecasts
The PBOC reduced benchmark interest rates in June, then last week cut the one-year lending rate by 31 basis points to 6 percent and the deposit rate by 25 basis points to 3 percent. Photographer: Nelson Ching/Bloomberg

China’s new loans exceeded estimates in June, boosting odds the government will secure an economic rebound after growth probably slowed for a sixth quarter.

Banks extended 919.8 billion yuan ($144.3 billion) of local-currency loans, the People’s Bank of China said yesterday. That compares with the 880 billion yuan median forecast in a Bloomberg News survey. Foreign-exchange reserves fell to $3.24 trillion at the end of June, the central bank said, a record quarter-to-quarter drop.

The pickup in lending bolsters Premier Wen Jiabao’s case that easing policies, including the first interest-rate cuts since 2008, are showing results and that the economy has stabilized. The government will report data today that will probably show second-quarter growth of 7.7 percent, according to analyst estimates, a three-year low that Nomura Holdings Inc. says may mark the bottom of the slowdown.

“The data confirms our view that further rate cuts are not needed and thus are unlikely,” Dariusz Kowalczyk, a Hong Kong-based senior economist and strategist at Credit Agricole CIB, said in a research note yesterday.

At the same time, officials will probably reduce banks’ reserve requirements this month as a “surge of deposits” obliges banks to set aside more funds, Kowalczyk said. The reserve ratio has been cut three times since November. Yuan deposits increased 2.86 trillion yuan in June, 49 percent more than in the same month last year.

Yuan Slides

The yuan weakened after the report to the lowest since December, falling 0.1 percent against the dollar to 6.3733 at 4:30 p.m. in Shanghai yesterday. The Shanghai Composite Index rose 0.5 percent yesterday before the data, extending a rebound after falling to a six-month low on July 10 after data showed imports rose less than anticipated and export growth slowed.

M2, a measure of money supply, rose 13.6 percent, compared with 13.5 percent median estimate in a Bloomberg News survey and a 13.2 percent gain in May. The central bank’s target for this year is 14 percent.

New local-currency loans were 793.2 billion yuan in May and 633.9 billion yuan in June 2011. The share of medium- to long-term loans was 31 percent in June, down from 34 percent in May while up from April’s level of less than 30 percent, according to Nomura.

Foreign-exchange reserves were down from $3.305 trillion at the end of March, the second quarterly decline since 1998. The reserves fell to $3.3 trillion in April and $3.21 trillion in May before rebounding in June.

Euro’s Decline

The drop in foreign-exchange reserves may reflect the “sharp weakening” of euro-denominated assets, Chang Jian, a Hong Kong-based economist at Barclays Plc who formerly worked for the World Bank. The currency slumped 5 percent against the dollar in the second quarter.

Excluding effects of the trade balance and currency fluctuations, there were probably “sizable capital outflows” in the second quarter, said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.

The capital outflows are “proof” that further cuts in the reserve ratio are necessary, according to Shen Jianguang, Hong Kong-based chief Asia economist for Mizuho Securities Asia Ltd., who previously worked for the International Monetary Fund and European Central Bank.

Growth Forecast

The economy probably expanded 7.7 percent in the second quarter from a year earlier, based on the median estimate of 38 analysts surveyed by Bloomberg News ahead of the report scheduled for today. That’s down from an 8.1 percent pace in the previous three months.

The PBOC reduced benchmark interest rates in June, then last week cut the one-year lending rate by 31 basis points to 6 percent and the deposit rate by 25 basis points to 3 percent. The central bank’s latest move preceded data that showed inflation eased to 2.2 percent in June, the least since January 2010, and factory-gate prices that fell for the fourth month.

Earlier yesterday, the Bank of Korea unexpectedly cut borrowing costs for the first time in more than three years, and Japan’s central bank altered its stimulus program without adding extra money.

— With assistance by Lifei Zheng

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