China’s plunge in credit expansion last month and unexpected slowdown in investment spending flashed warnings on growth that investors and economists bet will spur policy makers to expand stimulus.
Barclays Plc is forecasting two second-half interest-rate cuts, while Australia & New Zealand Banking Group Ltd. said a reduction in banks’ reserve requirements is imminent. China will keep “reasonable and appropriate” growth in money supply and credit while maintaining a “prudent” monetary policy stance, the State Council said in a statement published today.
A property slump and dangers from rising bad loans are making it tougher for Premier Li Keqiang to sustain the fastest growth in the Group of 20 nations. Any stimulus would build on measures this year to expedite railway spending, free up money for loans for small businesses and channel funds toward building low-income housing.
“The top concern right now is to make sure the economy can be reasonably smooth in its growth, rather than controlling the risks,” said Li Daokui, a former PBOC academic adviser who’s a professor at Tsinghua University in Beijing.
The benchmark Shanghai Composite Index of stocks closed 0.7 percent lower, while the Hang Seng China Enterprises Index lost 1.1 percent.
“China’s economic situation in general is improving, but there are still many uncertain factors and the downward pressure is relatively large,” the cabinet said in its statement that was dated Aug. 5 and posted on the government’s website today. More credit should be directed to shantytown development, railways, services, energy-saving industries as well as agriculture and small businesses, it added.
Banks will be encouraged to roll over loans to small companies based on their assessment of the risks, according to the statement. The State Council also reiterated that the central bank will use various monetary policy tools including relending and rediscounting to lower financing costs for companies.
“While the State Council re-committed itself to prudent monetary policy, we expect further targeted monetary easing measures,” said Dariusz Kowalczyk, a Credit Agricole CIB strategist in Hong Kong. The likelihood of a benchmark interest-rate cut or system-wide reduction in banks’ reserve requirement ratio in the second half has increased to 35 percent from 25 percent, he said.
Aggregate financing was 273.1 billion yuan ($44.4 billion) in July, the central bank said yesterday, contrasting with a Bloomberg LP gauge that showed China loosened monetary conditions last quarter at the fastest pace in almost two years. The PBOC measure includes bank loans, corporate bonds and shadow-finance categories such as entrusted loans.
The credit number compared with the 1.5 trillion yuan median estimate of economists, while new local-currency loans of 385.2 billion yuan were half of projections. M2 money supply grew a less-than-anticipated 13.5 percent from a year earlier.
“It is important for both monetary and fiscal policy easing to continue in the coming months,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said in an e-mail.
Tools include programs such as pledged supplementary lending that can direct credit to the economy, cuts in reserve requirements or interest rates, and fiscal spending on railways and affordable housing, Shen said.
Fixed-asset investment excluding rural households expanded 17 percent in the January-July period from a year earlier, the statistics bureau said yesterday, compared with a median estimate for 17.4 percent expansion. Industrial production rose 9 percent in July from a year earlier, slowing from a 9.2 percent pace in June and also missing projections, while a decline in property sales accelerated in July.
Other pressures on growth mean the government and the central bank “are unwilling to allow a full credit unwind now,” George Magnus, a senior independent economic adviser to UBS AG in London, said in an e-mail. “The property market is in a structural fade, and the anti-corruption campaign is in full swing with no signs of an end.”
Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong, said July’s credit number is “just a single-month blip, not a fundamental change in direction.” The increase in money supply is outpacing nominal gross domestic product growth by four or five percentage points, helping to support the economy, Ding said.
New yuan loans have been running at 30 billion yuan to 50 billion yuan a day in the first 10 days of August, the PBOC said in a statement on its website. The direction of monetary policy isn’t changing and major financial indicators in July remained in a reasonable range, the central bank said.
“Money supply, credit and aggregate financing are expected to maintain stable growth in the future,” the PBOC said.
The PBOC’s decision to issue a statement suggested that it was concerned the data would spark a “market panic,” Liu Li-Gang, ANZ’s chief Greater China economist in Hong Kong, said yesterday.
Without a quick policy response, “probably all economic indicators will deteriorate, the property sector will face more downward pressure, investment will drop further and third-quarter GDP could fall to probably around 5 percent,” he said.
The PBOC is sending a message of “don’t freak out” as credit is already rebounding in August, Steve Wang, chief China economist at investment bank Reorient Financial Markets Ltd. in Hong Kong, wrote in a note. At the same time, the central bank is set to continue “targeted RRR cuts” and may cut interest rate and system-wide required reserve ratio, Wang wrote.
Chinese publications reported last month that the PBOC extended a 1 trillion yuan, three-year loan to a state development bank under the pledged supplementary lending program to support government-backed housing projects.
“The softer July activity and credit data suggests that mini-stimulus measures will remain in place,” Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. in Sydney, said in an e-mail. “We may even see more growth-boosting measures in the months ahead.”