WRAPUP 1-Slump in China bank loans raises more worries about recovery, adds pressure on c.bank

Reuters · 05/11/2023 06:41
WRAPUP 1-Slump in China bank loans raises more worries about recovery, adds pressure on c.bank

Latest data fuels worries economic recovery is losing steam

April loans slump far more than expected

Deflationary pressures rising amid weak demand

Market bets on rate cut, other stimulus are building

Adds analyst comment

By Qiaoyi Li and Kevin Yao

- New Chinese bank loans tumbled far more sharply than expected in April, adding to worries that the economy's post-pandemic recovery is losing steam and putting pressure on the central bank to ease policy.

While some moderation in lending had been expected after a record first quarter, the weak readings came hours after data showed deflationary pressures were deepening in China, and days after that imports had contracted sharply, suggesting domestic demand is still frail and more stimulus may be .

Chinese banks extended 718.8 billion yuan ($103.99 billion) in yuan loans in April, less than a fifth of March's tally and just over half of the amount expected by analysts, data from the People's Bank of China (PBOC) showed on Thursday.

Analysts polled by Reuters had forecast yuan loans would fall to 1.4 trillion yuan in April, versus 3.89 trillion yuan in March, though the total was higher than 645.4 billion yuan a year earlier when the economy was rocked by COVID lockdowns.

"China's credit data came in well below estimates, reinforcing the concerns over the sustainability of a post-COVID recovery," said Zhou Hao, economist at Guotai Junan International.

"Both aggregate financing and loans were only half of the market expectations, suggesting that the first wave of post-COVID recovery has more or less faded."

Dashing investors' hopes for a robust and sustained rebound, a recovery in the world's second-largest economy from three years of pandemic lockdowns has been gradual and uneven, with consumption, especially services spending, faring better than the factory, property and export-oriented sectors.

China's consumer prices rose at the slowest pace in more than two years in April, while factory gate deflation deepened, separate data showed on Thursday, highlighting the broader economy's struggles to rev-up.

To spur credit growth, the central bank in March cut banks' reserve requirement ratio (RRR) for the first time this year.

The PBOC also has been guiding down bank deposit rates in recent weeks in a move that could ease burdens on banks from a savings glut, and create some room for the central bank to lower lending rates to spur economic growth, analysts say.

The PBOC, caught between an "atypical deflation" cycle and strong credit growth, has limited room to ease policy, even as anticipation over an end to the Federal Reserve's interest rate hikes eases fears about capital outflows.


China has already told its banks to reduce the ceiling on interest rates they pay on certain types of deposits.

"Low inflation and a Fed pivot later are opening the room for further easing. A rate cut also becomes more to support the weak links of recovery and break the 'confidence trap'", analysts at Citi said in a .

"With a more supportive PBoC, we expect a reduction of 20 bps (basis points) to the MLF rate in rest of this year, our proxy of the policy rate," it said, referring to the bank's medium-term loan facility.

The MLF rate is a guide to China's benchmark lending rate, or loan prime rate (LPR), and will be set on Monday.

Reflecting growing market bets on policy easing, the yield on the benchmark 10-year government bonds CN10YT=RR fell below the psychologically important 2.7% level early on Thursday.

But analysts at ING are expecting a cut, saying it "would be perceived by the market that the economy was on the path to recovery", and it would do to revive flagging export demand.

The PBOC has kept the LPR steady since September.


Household loans, mostly mortgages, contracted by 241.1 billion yuan in April, compared with 1.24 trillion yuan in March, while corporate loans slid to 683.9 billion yuan last month from 2.7 trillion yuan in March.

"The weakness of lending to households – primarily mortgages – tallies with daily data suggesting that the recovery in property sales has at least partially reversed," Capital Economics said in a to clients.

"The implication is that credit demand is faltering, which suggests we shouldn’t have high hopes for domestic demand later in the year.

Broad M2 money supply grew 12.4% in April from a year earlier, central bank data showed, falling short of the Reuters poll estimate of 12.5%. M2 rose 12.7% in March.

Outstanding yuan loans grew 11.8% in April from a year earlier compared with 11.8% growth the previous month. Analysts had predicted 12% growth.

Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, was at 10% in April, unchanged from March. TSF includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales.

In April, TSF fell to 1.22 trillion yuan from 5.38 trillion yuan in March. Analysts polled by Reuters had expected March TSF of 2 trillion yuan.

(Reporting by Qiaoyi Li, Judy Hua and Kevin Yao; Editing by Kim Coghill)