China’s new yuan loans and money supply topped estimates in May as the government supports economic growth while reining in shadow banking.
Local-currency loans were 870.8 billion yuan ($140 billion), the People’s Bank of China said on its website yesterday, higher than 42 out of 43 analyst estimates in a Bloomberg News survey. M2, the broadest measure of money supply, rose 13.4 percent, compared with a median projection for 13.1 percent.
China is in danger of missing a 2014 target for economic growth of about 7.5 percent, prompting Premier Li Keqiang to speed up government spending and make limited cuts to lenders’ reserve requirements. The World Bank warned last week that rapid credit growth and debt accumulation by local governments are risks to financial stability.
“May is the first month this year we’ve seen a sizable easing of liquidity as evidenced by the strong new bank loans,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “It suggests that policy makers are turning more serious about the downside risks to the economy and began ramping up pro-growth measures.”
The PBOC’s report was released after the close of China’s stock markets. The benchmark Shanghai Composite Index fell for the first time this week on concern economic data to be released later today for May industrial output and retail sales, and January-May fixed-asset investment, will be weaker than analysts estimate. New yuan lending last month compared with the 750 billion yuan median estimate in a Bloomberg survey and 667.4 billion yuan a year earlier.
Aggregate financing, China’s broadest measure of new credit was 1.4 trillion yuan in May, matching the median analyst estimate in a Bloomberg News survey. The figure, which includes bank lending, corporate bond issuance and shadow-banking products like entrusted loans, compared with 1.55 trillion yuan in April and 1.19 trillion yuan in May last year.
New yuan loans accounted for 62.2 percent of aggregate financing in May, up from 50 percent in April and 56.1 percent a year earlier, central bank data show.
“A lot of off-balance-sheet lending is moving back onto banks’ balance sheets,” said Dong Tao, chief regional economist at Credit Suisse Group AG in Hong Kong. “So you can’t necessarily say that the increase in bank lending is a signal of looser credit. The targeted easing isn’t meant to expand the total amount of credit, but to direct it to the sectors the government wants to see more liquidity in.”
May’s aggregate financing slowed “to a level that makes it challenging to stimulate growth in a conclusive way,” said Dariusz Kowalczyk, senior economist at Credit Agricole SA in Hong Kong. “This may convince the government to cut the reserve requirement ratio if the real-estate market continues to disappoint.”
The government has resisted lowering the reserve ratio for all banks, instead making two targeted cuts. The first, in April, applied to some small rural banks and the second, detailed by the PBOC this week, covered most city commercial banks and non-county-level rural commercial banks and cooperatives.
The PBOC has also added cash into the financial system to keep money-market costs stable.
Almost a year ago, a cash crunch saw China’s seven-day repurchase rate, a gauge of interbank funding availability, jump to a record 10.77 percent. The benchmark will average 3.5 percent this month, 331 basis points lower than a year earlier, according to the median estimate of 21 analysts and traders surveyed by Bloomberg.
The seven-day repo rate rose one basis point to 3.16 percent yesterday, according to a weighted average from the National Interbank Funding Center.
As China’s economic growth model shifts and structural change deepens, the asset quality of the banking industry will face more severe challenges, according to Wei Guoxiong, the chief risk officer of Industrial & Commercial Bank of China Ltd.
The financing costs of 34,000 corporate borrowers monitored by ICBC grew an average of 39.59 percent annually between 2009 and 2013, 20.1 percentage points higher than their revenue growth, Wei said in an article published on June 3 in China Finance, a central bank magazine.