(Bloomberg) -- China’s credit growth in October was the lowest since 2019 and bank loans expanded by the smallest amount in almost five years, suggesting a further slowdown in the world’s second largest economy due to wider coronavirus curbs and a housing slump.
Aggregate financing, the broadest measure of credit in China’s economy, was 908 billion yuan last month according to the People’s Bank of China. That was the lowest amount for an October since 2019 and well below the 1.6 trillion yuan recorded in the same month last year.
“It looks quite worrying for private sector demand, and that the tell-tale signs of a liquidity trap persist,” said Duncan Wrigley, China economist at Pantheon Macroeconomics, referring to a situation in which interbank liquidity is ample but the private sector is reluctant to borrow.
The data reflect curbed domestic demand due to stricter coronavirus lockdowns imposed by local governments during the month of China’s twice-a-decade Communist Party congress, as well as households’ remaining caution on the housing market, he added.
Financial institutions made 615 billion yuan ($84.8 billion) in new loans in the month, according to the central bank’s data. That’s down from 775 billion in the same month last year, and was the lowest for any month since December 2017. New medium and long-term loans to companies slowed sharply from September, indicating weak demand for investment.
“This set of data for October is just too soft,” Iris Pang, chief China economist at ING Groep NV said in a note. “This indicates that demand for loans was weak in October. Together with PMI and trade data, we believe that there could be a deeper-than-expected slowdown during the month”.
Authorities may need to step up efforts to repair the credit appetite. That means a 25-basis point cut in the reserve requirement ratio, or the amount of cash banks must hold in reserves, is still possible before the end of the year, according to Citigroup Inc. economists led by Yu Xiangrong. A reduction in banks’ loan prime rate later this month is also more likely, they said in a note.
A total of 2.2 trillion yuan of central bank funds in the form of medium-term lending facility will mature between November and January, and the PBOC could choose to cut the RRR to replace the maturing MLF funds during that time period, according to Everbright Securities Co analyst Zhang Xu.
Weakening domestic demand still remains a more fundamental and long-term problem, Shenwan Hongyuan Group analysts including Qin Tai wrote in a report. A greater fiscal deficit and more government spending to improve household income will be crucial, they added.
Credit growth is usually weaker in October as banks tend to lend less at the beginning of the quarter, and government bond issuance which is included in the aggregate financing data was also weak as many local authorities have exhausted their bond issuance limits for the year.
“The credit cycle is likely to pause for the next few months. Much of the rise in the credit impulse earlier this year was due to the accelerated schedule for local government bond issuance, and now we’re on the other side of that,” said Adam Wolfe, China economist at Absolute Strategy Research.
The economic recovery faltered last month, with local governments stepping up Covid controls ahead of a twice-a-decade party congress, followed by worsening outbreaks toward the end of the month. Factory and services activity contracted, while exports and imports both unexpectedly fell for the first time in more than two years.
The continuing problems in China’s vast property sector are reflected in another sharp drop in new medium and long-term loans to households. The proxy for mortgages plunged to 33 billion yuan from 347 billion yuan in September. Short-term household loans, usually taken out for large-ticket consumption such as cars, shrank 51 billion yuan, reversing from expansion in the previous two months.
“Shadow” banking, much of which flows to the property sector, contracted in October. The broad M2 measure of money supply rose 11.8% in October from a year earlier, decelerating from September’s 12.1% growth. The fact that M1 growth fell more than M2 is suggestive of precautionary saving behavior among households, Wrigley added.
The government has stepped up measures to encourage lending and financing in recent months, including allowing local governments to sell more bonds and ordering less profit-oriented “policy” banks to invest in infrastructure projects. The PBOC injected funds in the policy banks through a program called Pledged Supplemental Lending for a second month in October, after a suspension of that scheme for more than two years.
Beijing and local governments also extended steps to help the struggling property sector, with the latest help coming from the expansion of a key financing support program designed to help private firms including developers sell more bonds by providing them with a government guarantee.
(Updates with analyst comments.)
©2022 Bloomberg L.P.
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