China: very strong loan growth but uncertainty remains over the economic recovery
By Iris Pan
Guidance to revive bank lending was a success in June
The government had urged banks to lend to businesses. And that focus has paid off, as data shows loan growth has surged in June.
New yuan lending rose to 2.81 trillion yuan in June from 1.89 trillion yuan in May. Long-term corporate loans increased by CNY 1,449 billion, while medium and long-term household loans increased by CNY 421 billion in June.
Significant credit growth also came from government-linked entities – or what we believe are government bonds issued for infrastructure projects. Bond issuers include development banks in China and local government entities.
Breakdown of aggregate finance in China
*Delisting data for June has not yet been released.
But loan growth may not be channeled into economic activity
We wonder if all the loan growth has gone to economic activity.
Mid-term and long-term household loans were likely mortgages as home sales increased during the month.
But in terms of business lending, although the growth was significant, some data suggests that the demand for loans was lower than the supply of loans. The increase in undiscounted bills of 106.5 billion yuan and an increase in M2 on an annual basis to 11.4% year on year in June, against 11.1% year on year a month ago, indicate that some of the business loans may have returned to the banking system in the same month. It would be similar to 2016 when the government urged banks to stimulate loan growth to support the economy.
This could indicate that businesses have not seen such strong demand for loans as the economy has only just begun to recover.
Not a debt story for companies from this data
Corporate loan growth could be at risk if debt ratios rise, but that risk is reduced if companies actually deposited cash in banks, which we believe has happened, as indicated by the faster growth rate of M2. The upside of this data is that lines of credit are ready for businesses when business picks up. If there is no longer a prolonged confinement, we can expect a gradual return to commercial and manufacturing activity, and therefore to demand for corporate loans.
We are not expecting further easing from the PBoC at this time.
We think the People’s Bank of China realizes that demand for loans might not be created simply by lowering interest rates. As such, we don’t expect the PBoC to cut policy rates any further unless there are longer lockdowns. The 1-year Average Lending Facility (MLF) rate is expected to remain at 2.85% for the rest of the year unless we see many Covid clusters in China, which could trigger lengthy lockdowns.
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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.