China’s Credit Expands at Slowest Pace Since February 2020

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China added new credit at the slowest pace since February 2020 when the nation was in the depths of the initial Covid-19 lockdown, with the slowdown exacerbated by a drop in shadow banking.

• Aggregate financing was 1.06 trillion yuan ($163 billion), the People’s Bank of China said Wednesday, lower than 3.7 trillion yuan in June and also below 1.7 trillion yuan in the same month last year. The median estimate in a survey of economists was 1.7 trillion yuan
• Financial institutions offered 1.08 trillion yuan of new loans in the month, down from 2.1 trillion yuan in June. Economists projected 1.2 trillion yuan

Key Insights

• Credit expansion usually weakens in July after a spike in June, when banks rush to boost lending at the end of the second quarter
• The central bank’s cut to the amount of cash banks have to hold in reserve from mid-July should provide a boost to lending, as it will release about 1 trillion yuan in liquidity
• “The data doesn’t represent a drastic tightening of policy,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong. Instead, it shows the central bank’s effort to optimize the structural allocation of credit among different sectors, he said
• The growth rate of outstanding credit may bottom out and rebound in the fourth quarter on faster government bond issuance, the official China Securities Journal newspaper said in a front-page report earlier this month

What Bloomberg’s Economists Say

The slowdown in China’s aggregate financing in July likely won’t last long. Increasing downward pressure on the economy -- in particular from the delta variant wave -- means that targeted fiscal and monetary support is likely to be stepped up.  

-- Eric Zhu, economist

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• China’s leadership signaled accelerated fiscal spending and other targeted support in the second half of 2021 at a Politburo meeting last month, while the PBOC reiterated in its quarterly monetary report earlier this week that it will guide loans to grow “reasonably” and ensure the pace of credit expansion matches nominal economic growth
• A sharp slowdown in shadow financing indicates authorities’ continued effort to deleverage, said Zhou Hao, senior emerging markets economist at Commerzbank AG in Singapore. Zhou expects the growth of the stock of outstanding credit to slow to around 10% by the end of this year, and then to 8% by the end of 2022, so credit expansion matches with nominal economic growth as the PBOC targets

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• The stock of outstanding credit rose 10.7% to reach 302.5 trillion yuan, growing at the slowest pace since February 2020. The stock of outstanding yuan loans rose to 185.4 trillion yuan
• In July, broad M2 money supply grew 8.3%, below the previous month’s pace of 8.6%
• Shadow banking -- comprising entrusted loans, trust loans and undiscounted banker’s acceptances -- fell 403.8 billion billion yuan last month
• Net corporate bond issuance expanded 295.9 billion yuan, while government bond financing was 182 billion yuan

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With assistance from Bloomberg