China Money Supply Growth Slips Again as Shadow Banks Curtailed

Growth in China’s broad money supply slipped to a fresh record low, signaling authorities aren’t letting up in their drive to curb excess borrowing and safeguard the financial system.

Key Points

  • Aggregate financing stood at 1.22 trillion yuan ($182.7 billion) in July, the People’s Bank of China said on Tuesday, compared with an estimated 1 trillion yuan in a Bloomberg survey
  • New yuan loans stood at 825.5 billion yuan, versus an projected 800 billion yuan
  • Broad M2 money supply increased 9.2 percent, while economists forecast a 9.5 percent increase 

Big Picture

Authorities pushing to cut excess leverage have squeezed the massive shadow bank sector, which shrank for the first time in nine months. Yet with aggregate financing remaining robust and bond issuance rebounding, the central bank is still providing ample support for businesses to avoid derailing growth ahead of a key Communist Party congress this fall.

Slower M2 growth will become a "new normal," the PBOC said Friday in its quarterly monetary policy report. "The relevance of M2 growth to the economy and its predictability has reduced, and its changes should not be over-interpreted."

Economist Takeaways

“The deleveraging campaign is still focused on the financial sector, which leads to the slowdown in M2 growth," said Yao Shaohua, an economist at ABCI Securities Co. in Hong Kong. "Bank support for the real economy remains solid."

"The easing in credit conditions in July was probably part of the concerted stability play ahead of the Party Congress, thus more likely to be temporary," said Yao Wei, chief China economist at Societe Generale SA in Paris. "We’re still looking for more deleveraging measures and tougher regulations afterwards."

"The divergence between M2 growth and aggregate financing reflects that the PBOC is trying to balance cutting leverage while ensuring enough funds to support the real economy," said Wen Bin, a researcher at China Minsheng Banking Corp. in Beijing. "Single-digit M2 growth is likely to stretch until year-end. And with ample support from the central bank’s credit supply, the drag effect of financial deleveraging on the economic expansion will be limited."

"Banks are still creating credit, and this credit is important to support economic growth," said Iris Pang, an analyst at ING Groep NV in Hong Kong. "If liquidity is too tight, or credit growth shrinks, the whole deleveraging reform will run into the risk that there will be too many defaults and the whole banking system will be shaken up."

Bloomberg Intelligence

July’s credit expansion was positive for short-term growth but a step backward for deleveraging, which signals that the central bank isn’t planning a significant tightening of monetary policy before the leadership transition at the Communist Party Congress later this year, according to Bloomberg Intelligence economists Tom Orlik and Fielding Chen.

"The overall impression is somewhere between steady and slightly accelerating credit growth," they wrote in a report Tuesday. "Taken together with low and stable money market rates, that supports the view that the PBOC is planning to hold monetary conditions stable heading toward the end of the year."

The Details

  • The shadow banking sector shrank for the first time since October 2016
  • Undiscounted bankers’ acceptances -- short-term credit issued by a company and guaranteed by a bank that’s part of shadow banking -- fell for a third straight month
  • New loans to medium and long-term loans to households, mostly mortgages, remained largely stable at 454.4 billion yuan
  • Corporate bond issuance rebounded to an eight-month high of 284 billion yuan

— With assistance by Yinan Zhao, Xiaoqing Pi, and Miao Han

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