The slowdown in broad credit growth gathered momentum in December. We think credit growth will drop back further in the coming months as the PBOC continues to focus on reining in financial risks now that the economy is back on track.
Credit growth continues to slow as bond defaults weigh
- The slowdown in broad credit growth gathered momentum in December. We think credit growth will drop back further in the coming months as the PBOC continues to focus on reining in financial risks now that the economy is back on track.
- Chinese banks extended RMB1,260bn in net new local currency loans in December (the Bloomberg median was RMB1,250bn, our forecast was RMB1,220bn). The PBOC’s measure of aggregate financing to the real economy (AFRE) saw a net increase of RMB1,720bn (Bloomberg RMB2,130bn, CE RMB2,100bn).
- 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 held steady at 12.8% y/y. (See Chart 1.) But issuance of corporate bonds continued to slow last month (see Chart 2), as the recent bout of bond defaults weighed on investor demand. Shadow credit also weakened further likely due to related worries over credit risk. (See Chart 3.) This more than offset a further pick-up in other forms of non-bank financing, namely government bond issuance and equity issuance. (See Chart 2 again.) Overall, growth in outstanding AFRE continued to slow, from 13.6% y/y to 13.3%. (See Chart 4.)
- Looking ahead, broad credit growth appears to have passed its peak and is likely to remain on a downward trajectory. Bank lending has started to edge down which we think will continue in the coming months given that loan quotas are now being tightened. And with credit spreads still widening, there are few signs that officials are backing away from their recently relaunched efforts to withdraw the implicit state guarantees that distort credit allocation. This will weigh on the pace of non-bank credit and gradually weaken the recent tailwinds from policy stimulus.
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