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China’s Loans Unexpectedly Fall as Money Supply Misses

Yuan Rises Most in Six Weeks on Exports, Stronger PBOC Fixing
The yuan strengthened 0.26 percent to 6.2291 per dollar as of 10:43 a.m. in Shanghai, the biggest gain since Sept. 28, according to the China Foreign Exchange Trade System. Photographer: Andrew Harrer/Bloomberg

China’s new yuan loans unexpectedly fell in October from a year earlier and money supply rose less than forecast, damping signs the world’s second-biggest economy is recovering after a seven-quarter slowdown.

Banks extended 505.2 billion yuan ($81.1 billion) of local-currency loans, down 14 percent from a year earlier, data from the Beijing-based People’s Bank of China showed today. The median estimate was 590 billion yuan in a Bloomberg News survey. M2, the broadest measure of money supply, increased 14.1 percent, compared with a median forecast of 14.5 percent.

Today’s reports show weaker-than-forecast credit expansion may limit a rebound in economic growth as the ruling Communist Party holds a congress in Beijing to anoint new leaders. Central bank Governor Zhou Xiaochuan said yesterday the nation is still dealing with the effects of five years of financial crisis abroad, adding to official cautions on the outlook even after gains in exports and industrial output.

“The data support the view that the economic rebound will be mild this quarter,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong, who formerly worked at the Bank for International Settlements. At the same time, the “current relatively accommodative monetary policy stance is unlikely to be loosened further,” Zhu said.

Credit and money supply also have a “pattern of slower growth in the final quarter,” said Zhu, whose estimates for lending and M2 were among the lowest in Bloomberg News surveys.

Stocks Gain

The Shanghai Composite Index rose 0.5 percent today, snapping five days of losses, after a Nov. 10 report showed export growth exceeded forecasts and regulators announced steps to boost investment into equities. The yuan was set for the biggest gain in six weeks, climbing to a 19-year high against the dollar. It was up 0.3 percent to 6.2292 at 4:14 p.m. in Shanghai.

Aggregate financing, an indicator designed to capture additional funding sources, including trust loans and bond and stock issuance, was 1.29 trillion yuan in October, up 63 percent from a year earlier and down from 1.65 trillion yuan in September. In the first 10 months of 2012, the gauge rose about 23 percent to 13 trillion yuan, today’s data showed.

Corporate bond financing was 299.2 billion yuan in October, up 83 percent from a year earlier.

Banks’ Caution

“Weaker lending suggests banks’ caution in providing financing” amid “uncertain” circumstances outside China and lower corporate profitability, said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.

The year-over-year increase in aggregate financing suggests that “there will be enough funds to ensure implementation of stimulus measures and that growth acceleration will continue,” Kowalczyk said.

Analysts’ estimates for new loans ranged from 550 billion yuan to 801.6 billion yuan. Lending totaled 623.2 billion yuan in September. Forecasts for M2 ranged from an increase of 13.9 percent to 17.4 percent. M2 rose 14.8 percent in September and 12.9 percent in October 2011; the government’s target for the year is 14 percent.

“The activity bounce in China is coming from external demand while domestic spending remains weak,” said Tim Condon, chief Asia economist at ING Financial Markets in Singapore, who previously worked for the World Bank, citing the lending data and weaker-than-forecast imports. The loan report “also points to a weak rebound,” Condon said.

‘Reasonable’ Growth

Expansion in new loans was at a “reasonable scale” in September and October, indicating that the practice of injecting funds into the market through reverse-repurchase agreements has ensured that the banking system has abundant liquidity to meet needs in the economy, Financial News, a PBOC publication, said in a commentary today.

Bank of China Ltd., the nation’s fourth-largest lender by market value, forecasts that loan quality will improve next year as the economy stabilizes, President Li Lihui said. While facing “some volatility,” measures of soured loans will stay in an “excellent range” at the Beijing-based lender, Li said in an interview last week during the party congress, without providing figures.

The PBOC cut interest rates in June and July to boost lending and allowed banks to offer bigger discounts on loans to reduce the repayment burden on companies already hurt by rising costs and cooling sales amid the economic slowdown.

Reserve Ratios

The central bank also lowered reserve requirement ratios three times from November to May to free up funds for lending. It has refrained from further cuts, preferring to manage the amount of cash in the financial system using reverse repurchase agreements and other instruments to keep money-market interest rates steady.

Reverse-repurchase agreements have replaced the deposit reserve requirements as the central bank’s top monetary-policy tool, the Financial News, said in the commentary.

China needs to prepare for prolonged challenges including the debt turmoil in some countries and sluggish global growth, Zhang Ping, head of the National Development and Reform Commission, said Nov. 10.

Zhou said Nov. 8 that central bank policy next year should be targeted and flexible while also maintaining room for adjustment, as the economy faces potential risks including the so-called U.S. fiscal cliff. That refers to $607 billion in federal spending cuts and tax increases scheduled to take effect in January unless the nation’s legislature acts.

A growth slowdown in China is “a good thing,” Yu Yongding, a former adviser to the People’s Bank of China, said at a conference in Hong Kong today. Expansion won’t slow far below 8 percent, Yu said. Gross domestic product rose 7.4 percent in the third quarter, according to government data.

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