A jump in government bond issuance helped push credit growth to a 21-month high in May. The
acceleration in credit growth has further to run and will add fuel to the economic recovery.
Credit growth continues to accelerate
- A jump in government bond issuance helped push credit growth to a 21-month high in May. The acceleration in credit growth has further to run and will add fuel to the economic recovery.
- Chinese banks extended RMB1,480bn in net new local currency loans in May, down from RMB1,700bn in April (the Bloomberg median was RMB1,515bn, our forecast was RMB1,900bn). The PBOC’s measure of aggregate financing to the real economy (AFRE) saw a net increase of RMB3,190bn, up from a RMB3,090bn rise in the prior month (Bloomberg RMB3,065bn, CE RMB3,500bn).
- The net new lending figures are highly seasonal, so it makes sense to focus on the year-on-year change in the outstanding amounts to gauge the underlying trend. On this basis, bank loan growth increased from 13.1% y/y to 13.2%. (See Chart 1.) Corporate bond issuance also picked up last month. But what stands out most is the stronger growth in government bond issuance, from 15.2% y/y to 17.2% (see Chart 2). This alone drove about three-fifths of the acceleration in overall credit growth last month.
- The contraction in shadow credit eased for the first time since the outbreak of COVID-19, from -7.3% y/y in April to -6.7%. (See Chart 3.) If this trend continues, it may signal that regulators are relaxing restrictions on the sector, but so far there is little broader evidence of a shift in stance. Taken together, overall growth in AFRE increased from 12.0% y/y in April to 12.5%, a 21-month high. (See Chart 4.)
- We think credit growth will continue to accelerate in the months ahead given loose monetary conditions, political pressure on banks to lend more and plans for a further ramp up in government borrowing. This should drive a rebound in investment and help shore up economic activity in the near-term. But further ahead, another round of state-led stimulus will worsen resource allocation and lead to a jump in debt levels.
Chart 1: RMB Bank Loans* (Outstanding, % y/y)
Chart 2: Direct Financing (Outstanding, % y/y)
Chart 3: Shadow Financing (Outstanding, % y/y)
Chart 4: Aggregate Financing (Outstanding, % y/y)
Sources: CEIC, Capital Economics