China Credit Expansion Moderates Amid Warning on Debt Binge

  • Slowdown in lending followed a record jump in first quarter
  • Officials have publicly highlighted need for deleveraging

China’s broadest measure of new credit rose less than expected last month, suggesting that the central bank is starting to temper a flood of borrowing amid warnings from officials about potential side effects of the debt binge.

Aggregate financing was 751 billion yuan ($115 billion) in April, the People’s Bank of China said, below all 26 analyst forecasts in a Bloomberg survey. New yuan loans were 555.6 billion yuan, compared with the median estimate for 800 billion yuan.

After a record flow of credit in the first quarter, policy makers are now shying away from boosting growth at all costs. The Communist Party’s People’s Daily published an interview Monday with an unnamed “authoritative person” who said the world’s second-largest economy must face up to its nonperforming loans and other risks associated with soaring debt levels. 

"Policy makers have started to think again and are holding back after injecting too much liquidity in the first quarter," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, referring to the People’s Daily article. "I expected a switch in policy, but didn’t expect it to come so soon. "

Money Supply

China’s M2 money supply increased 12.8 percent from a year earlier, the PBOC said, compared with a 13.5 percent gain economists projected and a 13.4 percent rise in March.

Commercial banks may be becoming more reluctant to lend after soured loans rose to the highest level in 11 years, with defaults spreading from small private firms to large state-owned enterprises. Nonperforming loans rose 9 percent to 1.39 trillion yuan in March from December, the fastest increase in three quarters, data from the China Banking Regulatory Commission showed this week.

If companies reliant on new credit to repay existing obligations can’t repay their debts, "the credit link in the financial system will be broken, then there will be a domino effect," said Iris Pang, Hong Kong-based senior economist for greater China at Natixis Asia Ltd. "A credit problem may then become a liquidity problem. The central bank and those overly leveraged corporates are walking on thin ice."

Foreign Loans

Foreign currency loans fell as companies continued to pay back overseas loans, while corporate bond issuance moderated, the central bank data show.

Following the Friday lending data, indicators for release on Saturday will be closely scrutinized for whether the economy maintained momentum in April -- even without the sugar hit of surging credit -- or whether a March pick up fizzled as new loans dried up.

Industrial output is forecast to rise 6.5 percent in April from a year earlier, according to a Bloomberg survey of economists as of late Friday. That would mark a moderation from March, when factories benefited from a post-Chinese new year holiday bounce, though it would still be stronger than most 2015 readings.

Retail sales are seen increasing 10.6 percent in April from a year earlier. That would add to evidence -- including a 39 percent surge in revenue for Alibaba Group Holding Ltd. in the March quarter -- that Chinese shoppers remain a pillar of strength for the economy.

Fixed-asset investment is seen climbing 11 percent in the January-April period from a year earlier as stimulus continues to filter through the economy.

Any stronger-than-forecast figures Saturday would reinforce economists’ expectations that Chinese policy makers will refrain from additional monetary easing. Weaker readings would do the reverse, suggesting March’s rebound was a temporary pick-up after the nation got back to work following February’s week-long lunar new year holiday.

"The first quarter has been abnormally expansionary for monetary policy and it’s now back to a more normal pace," said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong. "There have been a lot of external and internal warnings about the pace of credit growth, and these appear to have been heeded."

— With assistance by Xiaoqing Pi

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