After accelerating in recent months, broad credit growth slowed slightly in November. We think this marks the start of a slowdown in credit growth as the PBOC turns its attention to tackling financial risks.
Credit growth starts to slow as bond defaults weigh
- After accelerating in recent months, broad credit growth slowed slightly in November. We think this marks the start of a slowdown in credit growth as the PBOC turns its attention to tackling financial risks.
- Chinese banks extended RMB 1,430bn in net new local currency loans in October, up from RMB690bn in September (the Bloomberg median was RMB1,450bn, our forecast was RMB1,350bn). The PBOC’s measure of aggregate financing to the real economy (AFRE) saw a net increase of RMB2,130bn, up from a RMB1,420bn rise in the prior month (Bloomberg RMB2,050bn, CE RMB1,900bn).
- 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 continued to edge down, from 12.9% y/y to 12.8%. (See Chart 1.) Issuance of corporate bonds also eased last month. (See Chart 2.) A key factor has been the recent bout of bond defaults, which has led to cancelled bond issues due to concerns about weak demand. The recent recovery in shadow credit also reversed last month possibly 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 edged down for the first time in a year, from 13.7% y/y to 13.6%. (See Chart 4.)
- Looking ahead, we think this marks a turning point in the credit cycle. Bank lending has started to slow which we think will continue in the coming months given that loan quotas are now being tightened. And the recent jump in corporate bond defaults suggests that, with the economy now back on track, officials are resuming their efforts to rein in risky borrowing and withdraw the implicit state guarantees that distort credit allocation. This will weigh on the pace of non-bank credit and while it won’t derail China’s economic recovery overnight, it will 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