Two reasons why China’s latest lending data is not great



China’s new yuan-denominated loans plunged significantly in July 2016 to 464 billion yuan ($70 billion), down 1.01 trillion yuan from a year earlier. This is the lowest level seen in two years. On the other side, outstanding yuan loans in China went up 12.2% year-on-year to 148.38 trillion yuan in July 2016 following a 14.3% rise in June but this was lower than market expectations of a 13.8% rise. New loans handed out by Chinese banks rose to 985.5 billion yuan ($150 billion) in May 2016, rebounding sharply from 555.6 billion yuan ($85 billion) in April, according to statistics released by the People’s Bank of China (PBoC). The increase in funding by Chinese banks clearly showed the willingness of PBoC to support growth and surprised markets. The reading came in higher than expected after a Bloomberg survey of economists estimated new loans to increase to 750 billion yuan. The increase was led by long- term mortgage & infrastructure loans which are backed by the Government and together contributed more than 75 percent of the loans doled out in May. So, the numbers do not look great considering the following:

Total Social Financing (TSF) situation as seen in the last few months: Loans to Private Sector (referred to total social financing) in China fell to 4879 CNY HML in July from 16293 CNY HML in June of 2016. Although the overall numbers for May looked like they encourage near term growth, there was a dramatic slowdown on aggregate financing or total social financing figures, which measures the alternate line of credit in the economy. They declined for the second straight month from 751 billion yuan in April to 659.9 billion yuan in May. By lowering credit on TSF, the Chinese banks are looking to seriously control risks associated with the country’s shadow banking system, which has been subjected to numerous instances of fraudulent practises in the past.


China’s total social financing (Source: Financial Times)

Corporate debt Scenario: Short term bill funding contracted, net issuance of corporate bonds and fx loans declined in May. In addition, Banker’s acceptance bills, which are short- term debt instruments issued by corporations and guaranteed by commercial banks dropped sharply for the second straight month, down by a record 507 billion yuan after sliding 278 billion the previous month. The Corporate bond market too tapered for the first time since 2010 as fears of defaults kept looming. For China, domestic credit is expanding continually at an unsustainable level with corporate debt touching dangerous levels.

Loan Growth in China averaged 17.07% from 2002 until 2016 and it reached the high point of 34.74% in November 2009 while reaching a record low of 10.60% in February of 2002. Thus, to summarize, the lending data could be positive in the near term, but worries over the longer term outlook are evident as the country’s debt keeps on piling and while the Central bank looks to curb risks associated with corporate debt, it also has to ensure a moderately accommodative credit growth for the economy to maintain its growth trajectory.

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