China Record Credit Growth Boosts Outlook for Economy

Record new credit in China in January will help the economy maintain momentum while highlighting challenges for officials trying to limit the risk of financial turbulence from defaults and bad loans.

Aggregate financing, the broadest measure of credit, was 2.58 trillion yuan ($425 billion), the People’s Bank of China said in a Feb. 15 statement. New local-currency lending was 1.32 trillion yuan, the highest level since 2010. Trust loans, under scrutiny because of default risks, were about half the level of a year earlier.

The data add to better-than-forecast trade numbers, suggesting that China can limit the scale of any slowdown from last year’s 7.7 percent expansion in gross domestic product. At the same time, the figures contrast with a central bank call in mid-January for lenders to control surging loans and highlight diminishing economic returns from credit growth.

“These numbers show that the firming up of the central bank’s monetary stance is going to be a gradual, balanced exercise, not an aggressive one,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Plc in Hong Kong. “The authorities want to slow down the pace of credit growth and contain financial risks but they also want to ensure that sufficient credit continues to come online to support economic growth.”

The benchmark Shanghai Composite Index rose 0.9 percent, extending gains after the biggest weekly increase since September.

Annual Meeting

Aggregate financing exceeded the 1.9 trillion yuan median estimate in a Bloomberg News survey and the previous high of 2.54 trillion yuan in January 2013. Credit growth slowed for a 10th month to a 17-month low of 17.5 percent from a year earlier, according to Societe Generale SA.

As China’s Communist Party leaders prepare for next month’s annual meeting of the legislature, the National People’s Congress, officials are grappling with swelling local-government debt, volatility in money markets and risks from shadow banking, highlighted by a bailout that last month averted the nation’s first trust default in at least a decade.

A 10.6 percent jump in exports in January may help Premier Li Keqiang achieve annual economic growth of at least 7.2 percent, the level that he says is needed to protect jobs. The premier usually presents the government’s expansion target for the year in his annual work report to the NPC. The goal was 7.5 percent for 2013.

GDP may increase 7.4 percent this year, according to the median estimate in a Bloomberg survey last month. That would be the weakest pace in 24 years.

Credit Warning

“Banks are still extending a lot of credit and this will somewhat cool down fears that China is slowing dramatically,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong. “Liquidity is plentiful and able to support growth.”

The jump in loans contrasts with the central bank’s January warning that bank credit was increasing rapidly and also its statement in November that the economy may face long-term deleveraging. Each $1 of credit added the equivalent of 17 cents in GDP in the first quarter of 2013, down from 29 cents the previous year and 83 cents in 2007, according to data compiled by Bloomberg.

Economists’ estimates for aggregate financing, which includes bank lending, corporate bond issuance and shadow-banking products like entrusted loans, ranged from 1.5 trillion yuan to 2.39 trillion yuan. January’s figure compared with a previously reported 1.23 trillion yuan in December.

Worries Exaggerated

New local-currency loans compared with the median economist estimate for 1.1 trillion yuan and 1.07 trillion yuan a year earlier. New loans were 482.5 billion yuan in December.

“Worries about policy being too tight or that rate increases are hurting credit and economic growth are exaggerated,” said Wang Tao, chief China economist at UBS AG in Hong Kong.

The weighted average lending rate in China was 7.2 percent in December, up from 6.22 percent a year earlier, PBOC data released earlier this month show. In December, 63.4 percent of loans had interest rates above benchmarks, up from 59.7 percent a year earlier, according to the central bank.

Money-market rates have also increased. The benchmark seven-day repurchase rate, a gauge of interbank funding availability, averaged 4.7 percent in January, up from 3.08 percent a year earlier.

Bond Issuance

“High interest rates prompted companies to reduce bond issuance and turn to bank loans,” Peng Wensheng and Zhao Yang, economists with China International Capital Corp. in Beijing, wrote in a note today. With financial risks rising, officials are unlikely to loosen monetary policy in the short term and “pressure to tighten regulation is increasing.”

Bank lending usually surges in January as financial institutions receive new quotas and offer credit at the start of the year to earn more interest, according to economists at ANZ, Citigroup Inc. and Mizuho Securities Asia Ltd. Last month’s figure may also have been boosted as loans postponed from December were handed out.

Banks may have pushed out credit even more aggressively in January than usual because of the timing of the Lunar New Year holiday, said RBS’s Kuijs. The week-long festival started on Jan. 31 this year and Feb. 9 last year. That could mean “substantially more modest credit numbers in February,” he said.

Money Supply

M2, China’s broadest measure of money supply, rose 13.2 percent from a year earlier in January, the Beijing-based central bank said. That matched the median economist estimate and compared with 13.6 percent in December. The growth in outstanding local-currency loans slowed to 14.3 percent in January from 15.4 percent a year earlier.

New trust loans issued in January were 106.8 billion yuan, the PBOC said, down from 210.8 billion yuan a year ago.

“There could be a demand issue here,” said ANZ’s Liu. “Investors have been hearing scary stories about trust loans so maybe they are finally starting to realize the risks in this sector.”

— With assistance by Nerys Avery

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