China Credit Decline Signals Economy at Risk of Slowdown

China’s broadest measure of new credit fell 19 percent from a year earlier and money supply grew at the slowest pace on record, underscoring risks of a deeper slowdown as the government tries to curb financial dangers.

Aggregate financing was 2.07 trillion yuan ($333 billion) in March, the People’s Bank of China said in Beijing today, down from 2.55 trillion yuan a year ago. M2, China’s broadest gauge of money supply, rose 12.1 percent from a year earlier, compared with the 13 percent median estimate of analysts in a Bloomberg News survey and 13.3 percent in February.

Policy makers are trying to rein in a credit binge and prevent defaults from spurring broader financial turmoil, while meeting a target for economic expansion of about 7.5 percent this year. The State Council earlier this month outlined what some analysts have dubbed a “mini-stimulus” package of railway spending and tax relief, with first-quarter growth projected to be the slowest since 2009 in a report due tomorrow.

“Deleveraging will for sure help China’s long-term growth, but the pressing issue for now is to handle the deceleration in economic growth,” said Li Wei, a Shanghai-based economist at Standard Chartered Plc. “That’s why monetary policy has to be more flexible.” Authorities may lower banks’ reserve requirements in May to send a clearer signal that they will ensure expansion, he said.

Stock Market

The benchmark Shanghai Composite Index of stocks extended losses after the report, falling 1.4 percent. The yuan weakened 0.06 percent to 6.2228 per dollar at 3:26 p.m. in Shanghai and is down about 2.7 percent this year, the most among 11 Asian currencies tracked by Bloomberg.

China’s foreign-exchange reserves, the world’s largest, rose to $3.95 trillion at the end of March from $3.82 trillion at the end of December, according to the PBOC report. The increase shows the yuan’s weakening is a result of “heavy intervention” by the central bank, Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, said in an e-mail.

Aggregate financing compared with the 1.85 trillion yuan median projection in a Bloomberg News survey. New yuan loans were 1.05 trillion yuan, compared with the 1 trillion yuan median estimate of economists.

Deposit Growth

Yuan deposits rose 3.67 trillion yuan in March from the previous month, slower than last year’s increase, the PBOC said today.

“Very weak deposit growth reinforces our view” that the central bank needs to cut banks’ reserve requirements in the second quarter, said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. “Otherwise monetary growth will continue to slow and GDP growth will drop below 7 percent” in the second or third quarters, he said in an e-mail.

The central bank has shown little intent to relax monetary policy. A day after the cabinet announced the pro-growth measures, the PBOC said in a statement after a quarterly monetary-policy meeting that it will maintain “moderate liquidity” and “realize reasonable growth in loans and social financing,” reiterating language from a previous statement.

Zhou Xiaochuan, the central bank governor, said last week that the nation needs only minor policy adjustments when growth is within a normal range, adding to signals that the government will avoid taking broader action for now to counter the slowdown. Premier Li Keqiang said last week that the government won’t adopt “short-term and strong stimulus policies in response to temporary fluctuations in the economy.”

Unlike 2009

Standard Chartered’s Li contrasted this year’s situation with 2009, when “there were plenty of projects and plenty of money. Now there are some projects but insufficient money.”

“Without support from the financial system, plans for investment and infrastructure projects can’t materialize,” Li said.

Dariusz Kowalczyk, senior economist at Credit Agricole SA in Hong Kong, took a positive view of today’s data, noting that new aggregate financing more than doubled from February and saying it’s the “clearest indication of success of initial efforts by the government to stimulate growth.”

The National Bureau of Statistics reports tomorrow on first-quarter gross domestic product and fixed-asset investment, along with March industrial production and retail sales. The world’s second-largest economy probably expanded 7.3 percent from a year earlier, decelerating from 7.7 percent in the previous period, based on the median estimate in a Bloomberg News survey of analysts.

— With assistance by Xin Zhou

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