China July new bank loans down, credit growth weakens further

China’s new bank loans tumbled in July from a month earlier and other key credit gauges also weakened, even after policymakers cut interest rates and promised to roll out more support for the faltering economy.

Chinese banks extended 345.9 billion yuan ($47.80 billion) of new yuan loans in July, tumbling 89% from June and falling far short of analysts’ forecasts, data from the People’s Bank of China showed on Friday.

Analysts polled by Reuters had expected new loans last month to fall sharply from 3.05 trillion yuan in June to 800 billion yuan, after record lending in the first half as the central bank tried to shore up sputtering demand and investment.

The reading was also much lower than 679 billion yuan in July 2022.

While lending in China typically tends to fall back in July for seasonal reasons, the weak credit readings come days after other grim data which showed the world’s second-largest economy slipped into deflation last month while exports and imports plummeted, adding pressure on Beijing to roll out more forceful stimulus measures.

“China’s bank loan growth fell to its lowest in seven months in July, while broad credit growth dropped to a record low,” Capital Economics said in a note to clients. “We expect further policy rate cuts (as soon as next Tuesday) and a spike in government bond issuance in the coming months, but unless there is a wider improvement in business and household sentiment, this probably won’t lift credit growth much.”

China’s economic momentum has faltered in recent months despite strong bank lending in the first half.

Household loans, mostly mortgages, contracted by 200.7 billion yuan, in July, compared with 963.9 billion yuan in June, as a debt crisis in the property sector deepened, while corporate loans slid to 237.8 billion yuan last month from 2.28 trillion yuan in June, central bank data showed.

China’s top leaders pledged in late July to step up policy support for the economy amid the tortuous post-COVID recovery, followed by a raft of similar pledges from various government agencies. But details so far have been scant, disappointing investors.

Central bank officials have pledged to use policy tools such as reserve requirement ratio (RRR) cuts to ensure reasonably ample liquidity.

The central bank in June cut its benchmark lending rates by a modest 10 basis points, the first such reduction in 10 months. A number of analysts predict further small cuts this year, but say that may do little to turnaround the economic malaise quickly as long as consumers and companies remain so cautious about new borrowing.

“Unlike in the past, when policymakers could reliably pump-up credit simply by relaxing quantitative controls on bank lending, the constraint now is weak credit demand,” Capital Economics added.

“Reviving demand would require much larger rate cuts than the PBOC is accustomed to, or for regulatory measures to succeed in restoring confidence in the housing market.”

More fiscal stimulus is also expected, with local governments -- many of which are already heavily indebted -- being told to speed up bond issuance to fund infrastructure projects.

Broad M2 money supply grew by 10.7% in July from a year earlier, according to central bank data, decelerating from 11.3% in June and the slowest pace since April 2022. Analysts had expected it to expand by 11%.

Outstanding yuan loans expanded by 11.1% in July from the year before, the lowest so far this year, compared with 11.3% growth the previous month. Analysts had expected 11.3% growth.

Annual growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, also cooled, to 8.9% in July from 9.0% in June.

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.

In July, TSF slumped to 528.2 billion yuan from 4.22 trillion yuan in June. Analysts polled by Reuters had predicted July TSF at 1.1 trillion yuan. Floods have damaged corn and rice crops in China’s key northern grain-producing belt, traders and analysts said, with more rain in the forecast as another typhoon approaches, threatening to add to global food inflation pressures. The hit to China’s cereal crops - the full extent of which is not yet clear - comes as consumers worldwide face tightening food supplies amid India’s ban on rice exports last month and disruptions in Black Sea grain shipments caused by the war in Ukraine.

“The flooded area in the north will see some yield losses,” said a Singapore-based trader at Chinese grain-trading company. “We will have a clear picture on the extent of damage after flood waters recede.”

Agencies