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China Money January 2024

China: Credit data beats market expectations in January

In January, Chinese banks distributed CNY 4920 billion in new yuan loans, up from December’s 1170 billion figure and beating market expectations. Money supply expanded 8.7% in year-on-year terms in January, which followed December’s 9.7% increase. January’s result marked the worst reading since November 2021, but was likely distorted by the Lunar New Year festivities falling in February this year vs January last year. Finally, the stock of total social financing (TSF)—a broader measure of credit and liquidity in the economy that includes loans, bonds and other non-traditional instruments—increased 9.5% in January (December: 9.5% yoy).

In early February, the Central Bank cut the reserve ratio for banks by 50 basis points, marking a continuation of the cautious monetary easing cycle seen in 2023.

Our panelists expect the Central Bank to trim policy rates this year in order to support economic activity, though cuts will be modest due to a desire to protect the yuan and banks’ profit margins.

Putting the better-than-expected January credit data into perspective, Nomura analysts said:

“Despite the latest stronger-than-expected reading in credit growth, we remain highly cautious about the near-term growth outlook, as reflected in the weak January inflation reading, which points to still-weak consumer demand, especially food consumption. We retain our view that the ongoing economic dip is to worsen further into the spring.”

On monetary policy, United Overseas Bank’s Ho Woei Chen said:

“As China continues to face deflationary pressures and growth challenges in the near-term, we expect further monetary easing from the central bank. This includes our expectation for the 1Y and 5Y loan prime rates (LPR) to drop by 10 bps to 3.35% and 4.10% respectively by end-1Q24. PBOC Governor Pan flagged more scope for China’s monetary policy operations as US’ interest rate peaks and is subsequently expected to ease. Thus, further rate cuts in China cannot be ruled out while we also see room for a further reduction to banks’ RRR in 2Q or 3Q but that will become more limited given the PBOC’s floor at 5.0%.”

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