China's Credit Jumps Most Since June on Surging Bond Sales

  • Bond sales surge as monetary easing lowers borrowing costs
  • New yuan loans slowed to 597.8 billion yuan, missing forecasts

China’s broadest measure of new credit surged the most since June as companies increase borrowing on the corporate bond market, underscoring a shift away from reliance on state-backed banks for funding.

Aggregate financing rose to 1.82 trillion yuan ($276 billion) in December, according to a report from the People’s Bank of China on Friday, compared with the median forecast of 1.15 trillion yuan in a Bloomberg survey.

The data shows companies are turning to alternative sources for credit given banks’ reluctance to lend. It also adds to signs the economy is stabilizing, not slumping as its falling currency and plunging stock market seem to suggest.

"The real economy is relatively strong," said Wang Tao, chief China economist at UBS Group AG in Hong Kong. "The credit supply offers strong support and that’s related to the central government’s call for financial institutions to bolster the economy."

The rising bond issuance is due to lower barriers for companies to enter the market and falling interest rates, Wang said. "This helps cut the financing costs for companies," Wang said.

The benchmark Shanghai Composite Index entered bear market after dropping 20 percent from a December high. The gauge fell 3.6 percent on Friday, extending this week’s slump to 9 percent. China’s yuan was little changed in both onshore and offshore markets.

Monetary Easing

The PBOC’s monetary easing has been driving down borrowing costs and spurring bond sales. Chinese corporations sold 8.1 trillion yuan of notes last year, the highest in history and a jump of 34 percent from 2014, according to Bloomberg-compiled data.

Yield spread between five-year top rated corporate bonds and government securities plunged 69 basis points last year, according to ChinaBond, the biggest annual drop in its data going back to 2007.

Chinese property developers, which had been frequent overseas borrowers, are switching to local bonds to avoid rising debt costs as the yuan weakens. The builders sold the equivalent of $72 billion of domestic debentures in 2015 compared with just $11 billion of dollar notes, the first time local sales have overtaken foreign ones, according to Bloomberg Intelligence.

Banks Reluctant

By contrast, banks have been reluctant to dole out more loans, fearful of their souring books. New yuan loans slowed to 597.8 billion yuan in December, trailing the 700 billion yuan median forecast. M2 money supply growth was 13.3 percent from a year earlier, compared to the median estimate for 13.6 percent.

"The lower-than-expected new loans suggest that credit demand remained weak, and commercial banks were still reluctant to lend due to rising credit risks," economists at Australia and New Zealand Banking Group Ltd. led by Liu Li-Gang, head of greater China economics, wrote in a note.

Going by the official numbers, which are widely regarded as understated, bad loans rose to a seven-year high of 1.2 trillion yuan as of the end of September. In a sign of write-offs to come, policy makers are aiming for a clean-up of “zombie companies” that rely on government subsidies and bank loans to keep operating.

"For the whole year of 2015, the biggest increment in aggregate financing came from the corporate financing via bond and stock markets," said Zhou Hao, an economist at Commerzbank AG in Singapore. "It appears to us commercial banks have few incentives to provide loans directly to corporates, especially due to credit concerns over SMEs, but turn to capital markets to finance the corporate indirectly. This hints an ongoing structural change in China’s financing system."

— With assistance by Xiaoqing Pi, and Enda Curran

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