China Lending Tops Forecasts While Adding to Financial Risks

China’s new yuan loans and money supply exceeded analyst estimates last month, aiding the nation’s recovery from the slowest growth in 13 years while adding to financial risks that may presage tighter credit.

New local-currency lending in March was 1.06 trillion yuan ($171 billion), the People’s Bank of China said today in Beijing. That compares with the 900 billion yuan median estimate in a Bloomberg News survey of 34 economists and 620 billion yuan in February. M2, China’s broadest measure of money supply, rose 15.7 percent, compared with the median forecast for 14.6 percent.

New Premier Li Keqiang is trying to keep credit flowing to sustain an economic rebound without creating asset bubbles or excessive risks in the banking system. While inflation eased more than forecast last month, Fitch Ratings Ltd. cut the nation’s long-term local-currency debt rating this week, citing dangers to financial stability.

“China’s monetary policy makers are in a tough position to balance short-term growth stability, market worries and long-term economic health,” said Lu Ting, Hong Kong-based chief economist for Greater China at Bank of America Corp.

While growth momentum is “not strong” and “external conditions are still volatile,” the data “could once again trigger fears on CPI inflation, property bubbles, government debt, shadow banking and then monetary tightening,” Lu said in a note today, referring to the consumer price index.

Financial Stocks

China’s benchmark Shanghai Composite Index of stocks, which rose as much as 0.4 percent after the data, was 0.1 percent higher at the 11:30 a.m. local-time break. Industrial Bank Co. led a gauge of financial companies to the steepest gain among 10 industry groups in the CSI 300 Index.

Economic growth probably accelerated in the first quarter to 8 percent from a year earlier, according to the median estimate in a Bloomberg News survey of 38 economists before data due April 15. Gross domestic product rose 7.9 percent in the last three months of 2012, the first pickup in two years.

Aggregate financing, a broader measure of credit that includes non-bank lending such as trust loans, bond and stock sales, was 2.54 trillion yuan in March, close to a record, compared with the median analyst estimate of 1.8 trillion yuan.

The increase in China’s reserves, the world’s largest, “will put more upward pressure on the yuan,” said Dariusz Kowalczyk, senior strategist with Credit Agricole CIB in Hong Kong. The currency touched 6.1923 per dollar yesterday, the strongest level since the government unified official and market exchange rates at the end of 1993.

Record Reserves

China’s foreign exchange reserves rose to a record $3.44 trillion at the end of March from $3.31 trillion in December. The median estimate in a Bloomberg survey was for $3.36 trillion.

For the first quarter, aggregate financing surged about 58 percent from a year earlier to 6.16 trillion yuan, according to central bank data. New local-currency loans in the first three months were 2.76 trillion yuan, the most for a first quarter since the global financial crisis, and 12 percent higher than the same period last year. Money-supply growth exceeded the government’s 2013 target of 13 percent.

“Concerns have been growing about China’s credit situation, primarily linked to the shadow-banking system, with Fitch’s recent downgrade of China’s credit rating tying into these fears,” Hu Yifan, chief economist at Haitong Securities Co. in Hong Kong, said in a note today. These concerns “are an impediment to a more proactive monetary policy,” she said.

Total Credit

Fitch on April 9 lowered its assessment of China’s long-term yuan debt by one step to A+, the fifth-highest grade, saying there are increasing financial-stability risks given the lack of transparency in the increased borrowing by local governments. It estimated total credit in the economy, including forms of so-called shadow banking, may have reached 198 percent of GDP at the end of 2012, up from 125 percent four years earlier.

The National Bureau of Statistics is scheduled to publish first-quarter GDP and fixed-asset investment as well as March readings of industrial output and retail sales on April 15. Exports rose less than forecast for the first time in four months, customs data showed yesterday.

There is a “dichotomy between strong credit data and weak demand in the real economy,” said Tao Dong, head of Asia economics excluding Japan at Credit Suisse Group AG in Hong Kong. While credit data accelerated, “economic activities in the real economy were flattish, in some cases moderating,” he said.

Money Inflows

Inflows of so-called hot money may have persisted in February, as the central bank and financial institutions bought a net 295.4 billion yuan of foreign currency after purchasing 683.7 billion yuan in January, PBOC data showed yesterday.

Bank of America’s Lu estimated there could be about $100 billion of “unexplained” foreign-exchange inflows in the first quarter, reversing a capital outflow of $60 billion in the previous period.

“March may mark the peak of easy credit conditions,” said Yao Wei, a China economist at Societe Generale SA in Hong Kong. Various tightening measures on housing and shadow banking will “bite from here onwards,” she said.

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