Credit growth in China dropped back further last month due to a broad-based slowdown in both bank and non-bank lending. Credit is likely to continue decelerating as the PBOC focuses on reining in financial risks. This will become a growing headwind to the economy in the second half of the year.
Credit growth continues to slow as policy turns less supportive
- Credit growth in China dropped back further last month due to a broad-based slowdown in both bank and non-bank lending. Credit is likely to continue decelerating as the PBOC focuses on reining in financial risks. This will become a growing headwind to the economy in the second half of the year.
- Chinese banks extended a record RMB3,580bn in net new local currency loans in January, close to both the Bloomberg median (RMB3,500bn) and our forecast (RMB3,550bn). The PBOC’s measure of aggregate financing to the real economy (AFRE) saw a net increase of RMB 5,170bn (Bloomberg RMB4,700bn, CE RMB4,600bn), close to the all-time high reached last March.
- But January’s net new credit figures are usually the highest of the year, so this high level doesn’t signify much. It makes more sense to focus on the year-on-year change in the outstanding amounts to gauge the underlying trend. On this basis, bank loan growth slowed from 12.8% y/y to 12.7%. (See Chart 1.)
- Non-bank financing eased as well. Equity issuance picked up (this is part of AFRE, though not credit) (see Chart 2) and so did shadow credit, fractionally. This was driven by bank acceptance drafts, growth of which jumped from 5.3% y/y to 15.3%. (See Chart 3.) But this was not enough to offset a further slowdown in issuance of corporate bonds and a drop back in government bond issuance as local government quotas weren’t renewed. Overall, growth in outstanding AFRE slowed from 13.3% y/y to 13.0%. (See Chart 4.)
- We think broad credit growth will decelerate further. Bank lending will continue to slow given that loan quotas are now being tightened. Interbank rates have risen sharply in recent weeks. That’s partly a seasonal effect ahead of Lunar New Year. But it’s partly a consequence of actions by the PBOC, which has on net withdrawn liquidity, rather than injecting it as it normally does ahead of the festival. We expect that more hawkish stance to remain and for this to slow the pace of non-bank credit growth. There’s typically around a six-month lag before shifts in credit growth show up in the wider economy: the credit slowdown will be a growing drag in the second half of the year.
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