China new bank loans unexpectedly rise in May, forex deposits hit record high

10 Jun 2021 / 22:47 H.

BEIJING: China's new bank loans unexpectedly rose in May from the previous month but broader credit growth continued to slow, as the central bank seeks to contain rising debt in the world's second-largest economy.

Top Chinese leaders have repeatedly vowed to avoid any sharp policy turns, keeping borrowing costs low and telling banks to maintain support for small firms, while being more watchful about extending credit to hot areas of the economy such as property.

“The peak of the credit cycle must have passed, but the downward slope seems to be smoother than expected,“ said Luo Yunong, fixed income analyst at Industrial Securities.

Chinese banks extended 1.5 trillion yuan (RM966 billion) in new yuan loans in May, up from 1.47 trillion yuan in April and beating analysts' expectations of 1.41 trillion yuan, according to data released by the People's Bank of China (PBOC) today.

The tally also was higher than the 1.48 trillion yuan issued the same month a year earlier, when policymakers rolled out unprecedented measures to deal with the shock from the coronavirus crisis.

Loans to households surged to 623.2 billion yuan in May from 528.3 billion yuan in April, while corporate loans rose to 805.7 billion yuan last month from April's 755.2 billion yuan.

As expected, growth in outstanding yuan loans eased to 12.2% year-on-year, the slowest pace since February 2020, and compared with 12.3% in April. Excluding that early 2020 period, it marked the slowest growth since 2002, according to Capital Economics.

Broad M2 money supply grew 8.3% from a year earlier, above estimates of 8.1% forecast in the Reuters poll and matching the pace in April.

In 2020, the central bank encouraged banks to lower rates for virus-stricken firms and extended loan payment deadlines for small companies, among other measures, to give borrowers breathing space during the coronavirus crisis. But with the economy back to pre-pandemic levels, policymakers are now looking to slowly unwind emergency measures and cool credit growth to contain debt risks, without impeding the recovery.

PBOC governor Yi Gang said today that inflation is “basically under control”, and monetary policy would be kept steady, in comments a day after data showed the fastest rise in factory-gate prices in over 12 years.

“We must adhere to policy stability as a priority, and stick to implementing normal monetary policy,“ he told a financial forum in Shanghai, forecasting this year’s inflation at below 2%.

“Keeping interest rates at a proper level is conducive to the stable and healthy development of the markets,“ the governor said.

Yi said that China's interest rates, though higher than major economies, are still relatively low among developing and emerging economies.

Yi also reiterated that the central bank will keep the yuan exchange rate basically stable, while vowing to further improve China's exchange rate mechanism.

China has taken a series of measures recently to rein in rapid rise in the yuan, which hit a three-year high against the dollar on the back of China's robust economic recovery and attractive yields.

Meanwhile, growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, slowed to 11% in May, the weakest pace since February 2020, and compared with 11.7% in April.

Analysts attributed to the weaker TSF growth to slowing issuance of corporate and government bonds, and a contraction in shadow credit, which could hamper economic growth in the future.

“The slowdown in credit growth is happening even faster than we had been anticipating a couple of months ago,“ Julian Evans-Pritchard at Capital Economics said in a note.

“While the economy has so far weathered the withdrawal in policy support very well, the usual lags mean that weaker credit growth will become a growing headwind to activity over the next few quarters.”

TSF includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales.

TSF rose to 1.92 trillion yuan in May from 1.85 trillion yuan in April, but missed expectations. Analysts polled by Reuters had expected May TSF of 2.00 trillion yuan.

Separately, the PBOC said China's foreign exchange deposits hit a record high of US$1.01 trillion (RM4.16 trillion at the end of May, compared with US$1 trillion a month earlier.

Foreign exchange deposits have been steadily growing since last year, boosted by China's huge trade surplus and continued capital inflows into Chinese stocks and bonds. Foreign holdings of Chinese bonds hit a record last month.

The PBOC said the foreign cash deposits grew 35.7% year-on-year, and were up by US$9.4 billion from a month ago.

A mountain of dollars on deposit in China has grown so large that banks are struggling to lend the currency. Traders say it poses a risk to official efforts to control a fast-rising yuan. The yuan has gained about 12% against the dollar since May 2020, hitting its strongest levels in more than three years.

The rapid appreciation has prompted policymakers to announce a slew of measures recently to rein in the rally.

Many policymakers have warned market participants against betting on one-sided moves in the currency, and the PBOC raised the reserve requirement ratio on foreign exchange deposits for the first time in 14 years, in an attempt to tighten foreign currency liquidity.

Earlier today, the FX regulator said two-way volatility in the yuan exchange rate would become normal, and called for companies to hedge their FX risks. – Reuters

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