China's Credit Growth Trails Estimates Amid Debt Cleanup

(Bloomberg) -- China’s broadest gauge of new credit trailed projections amid renewed government pledges to tackle financial risk.

  • Aggregate financing stood at 1.33 trillion yuan ($212 billion) in March, compared with an estimated 1.8 trillion yuan in a Bloomberg survey and 1.17 trillion yuan the prior month
  • New yuan loans stood at 1.12 trillion yuan, the People’s Bank of China said Friday, versus a projected 1.18 trillion yuan and 839.3 billion yuan in February
  • The broad M2 money supply increased 8.2 percent, compared with a forecast for 8.9 percent growth

The data show that the crackdown on shadow banking is weighing on credit growth. That adds to uncertainties facing the economy such as intensifying trade tension with the U.S. The report also suggests efforts to rein in debt and ensure stability are taking effect as President Xi Jinping prepares the economy for a broader financial opening-up to the world.

“The credit numbers reflect continued deleveraging,” said Wang Tao, chief China economist at UBS Group AG in Hong Kong, adding that the pace of credit growth moderation has been well managed and gradual. “Economic growth will slow through this year as slower credit growth, especially tighter local government debt financing, leads to weaker infrastructure investment and a moderation in property activities.”

The total amount of shadow banking credit in the economy saw a net decline of 133.5 billion yuan in the first quarter. The main reason for that was a 331.4 billion yuan drop in entrusted loans, which are organized by a bank between borrowers and lenders.

Other gauges rose: Trust loans, made by trust companies to finance infrastructure and real estate, expanded by 75.8 billion yuan while bankers’ acceptance, short-term credit issued by a company with a bank’s guarantee, rose by 122.1 billion yuan.

What Our Economists Say:

“A moderate rise bucked a seasonal tendency to rebound strongly, raising prospects of a larger-than-expected drag on growth from deleveraging,” Bloomberg economists Tom Orlik and Fielding Chen wrote in a note. “Components of shadow lending slumped, reflecting the government’s efforts to tamp down financial risk. Strong bank lending was an offset -- and showed continued progress on bringing off-balance sheet financing back on to the books.”

New PBOC Governor Yi Gang said Wednesday that more financial-sector opening will be realized by June. That followed Xi’s pledge Tuesday for a “new phase of opening up” in his keynote address to the Boao Forum for Asia.

As that happens China is moving away from using the credit supply to steer monetary policy, which means that there’s less of connection between credit growth to the broader economy. The March M2 growth pace was near a record low level reached at the end of last year.

“The market shouldn’t read too much into short-term M2 growth, which dropped mainly due to seasonal and short-term liquidity factors,” said Ruan Jianhong, head of the PBOC’s Financial Survey and Statistics Department, according to Securities Times, a state-backed publication. “Liquidity in the banking system is adequate in general.”

©2018 Bloomberg L.P.

With assistance from Yinan Zhao

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