China Bank Lending & Broad Credit (Mar.) - Capital Economics
China Economics

China Bank Lending & Broad Credit (Mar.)

China Data Response
Written by Sheana Yue

After an uptick in February, the slowdown in credit growth resumed in March. Hawkish signals in the government’s work report suggest that the deceleration will continue as policymakers focus on reining in credit risks. This will become a growing headwind to the economy in the second half of the year.

Credit growth resumes its downward trajectory

  • After an uptick in February, the slowdown in credit growth resumed in March. Hawkish signals in the government’s work report suggest that the deceleration will continue as policymakers focus on reining in credit risks. This will become a growing headwind to the economy in the second half of the year.
  • As expected, there was a step up in the net increases of both bank loans and aggregate financing (AFRE), the PBOC’s measure of broad credit, in March relative to February. Chinese banks extended RMB2,730bn in net new local currency loans (the Bloomberg median was RMB2,400bn, our forecast was RMB2,150bn), while AFRE saw a net increase of RMB3,340bn (Bloomberg: RMB3,800bn, CE: RMB3,450bn).
  • But given that these figures are highly seasonal, 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 12.9% y/y to 12.6%, driven entirely by slower lending to firms. (See Chart 1.) Media reports suggest that the PBOC in February instructed banks to cap new lending in Q1 at the same level as a year ago. Regulators are also tightening oversight of corporate bond issuance in response to the recent increase in defaults. (See Chart 2.) And the contraction in shadow credit deepened as well. (See Chart 3.) These shifts more than offset a slight acceleration in equity issuance (though not credit, this is part of AFRE).
  • Overall, after the uptick in February, growth in outstanding AFRE declined from 13.3% y/y to an 11-month low of 12.3%. This is one of the sharpest decelerations on record. (See Chart 4.)
  • We think that credit growth will slow further over the rest of the year. Bank lending faces significant headwinds: the PBOC reportedly followed up its Q1 mandate with a similar request in March to cap new lending for 2021 as a whole. Coupled with lower local government bond quotas, this window guidance points to a much weaker credit impulse this year. 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


Sheana Yue, Assistant Economist, sheana.yue@capitaleconomics.com
Mark Williams, Chief Asia Economist, mark.williams@capitaleconomics.com