Credit levels in China appeared to improve in August after an alarming drop in July, but remained below average, adding pressure on policymakers to offer more stimulus measures to meet their 7.5 percent economic growth target for the year. Premier Li Keqiang said on Monday that China cannot rely on loose credit to lift its economy, and reassured a business forum that Beijing would continue to roll out modest "targeted" measures as policymakers look to avert a sharper slowdown.
China's total social financing aggregate, a broad measure of liquidity in the economy, was 957.4 billion yuan (US $156.1 billion in August, versus 273.1 billion yuan in July, which was the lowest in nearly six years, data showed on Friday. But it was still well below the monthly average of 1.75 trillion yuan in the first half of this year and 1.57 trillion yuan in August 2013.
"Slower credit growth is welcome since it is necessary to put China's growth on a more sustainable long-run trajectory," said Julian Evans-Pritchard at Capital Economics in Singapore, referring to Beijing's concern that pumping too much money into the system could fuel speculation instead of real economic activity. "We don't expect policymakers to launch significant monetary easing in order to offset the ongoing credit slowdown (but) they are likely to adopt some targeted measures in the months ahead to ensure that borrowing costs don't rise too sharply for small and private firms."
Smaller companies are particularly vulnerable to a crackdown by China's regulators on trust loans and short-term bills on which they often rely for financing, he noted. Such firms are often starved for capital as many banks prefer to lend to larger, state-owned enterprises. Chinese banks made 702.5 billion yuan ($114.6 billion) of new loans in August, data showed on Friday, also picking up from an abrupt drop the previous month but in line with expectations.
Outstanding yuan loans grew 13.3 percent from a year ago, slightly above a predicted 13.2 percent rise, though money supply grew at its slowest pace in five months. Total financing and new lending unexpectedly plunged in July, raising fears that banks were suddenly clamping down on credit in response to a surge in bad loans and growing risks from a cooling property market.
Loan officers at several banks told Reuters earlier this month that they were no longer working on more vulnerable sectors such as shipping and steel, focusing instead on areas which were still seeing high growth such as health and technology. "The August monetary data suggest that China's credit extension has improved somewhat after the sharp decline in July, which could ease concerns about a hard (economic) landing," Liu Li-Gang and Zhou Hao at ANZ wrote in a note.
"However, the rising market volatility and uncertainty could result in a disorderly de-leveraging in Chinese economy and increase systematic risks." After a weak start to the year for the economy, policymakers have unveiled a raft of stimulus steps since April, including faster spending on infrastructure work and cuts in reserve requirements for small banks. The steps helped lift annual economic growth to 7.5 percent in the second quarter from an 18-month low of 7.4 percent for January-March, though some economists say more may be needed to offset the growing drag from the slowing housing market.
Broad M2 money supply rose 12.8 percent in August from a year earlier, the People's Bank of China said in a statement on its website, below the 13.4 percent expected by economists and the slowest pace since March. But a central bank official, who declined to be identified, told Reuters that M2 growth remained within a reasonable range and still was on track to grow 13 percent this year - in line with the official target.
"We think the central bank will keep its relatively loose monetary policy in the coming months due to the weak recovery momentum of the economy," said Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai. The room for further policy easing remains limited. China's M2 money supply is already twice the size of gross domestic product, partly due to a lending spree to support the government's 4 trillion yuan stimulus package implemented during the height of the global financial crisis.
Still, many analysts believe the door remains open to more aggressive measures such as cutting interest rates or reserve requirements for all banks if conditions deteriorate further. While loan demand has softened along with the economy, recently erratic loan and financing data could also be due in part to seasonal factors and an increasing crackdown by Beijing on the shadow banking sector, some economists say.
Officials blame off-balance-sheet financing - such as trust and bank bills - for pushing up borrowing costs. That may have forced banks to shift more loans back onto their books. New bank loans made up for 73 percent of the total social financing in August, up from 51 percent in 2013, according to central bank data. Trust loans fell 51.5 billion yuan in August and undiscounted bank bills were down 111.9 bln yuan. Banking sources in Shanghai told Reuters this week they had seen no spike in credit demand last month and had received no government instructions to ramp up lending.