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China Money May 2023

China: Credit data disappoints in May; Central Bank cuts rates

In May, Chinese banks distributed CNY 1360 billion in new yuan loans, up from May’s 719 billion figure but below market expectations. Money supply expanded 11.6% year on year in May (April: +12.4% yoy). The figure marked the worst reading since June 2022 and was also below market expectations. Meanwhile, the stock of total social financing (TSF)—a broader measure of credit and liquidity in the economy—increased 9.5% in May (April: 10.0% yoy).

In June, in response to weak credit and real sector data, the PBOC cut the 7-Day Reverse Repo Rate by 10 basis points from 2.00% to 1.90%. Moreover, the Bank cut the Medium-Term Lending Facility by 10 basis points, while large state-owned bank lowered their deposit rates.

Looking forward, further monetary stimulus is in the offing, particularly if the economy continues to deflate: A 10 bp cut to the 1-Year Loan Prime Rate could follow as early as 20 June.

Giving their forecast for the months ahead, UOB analysts said:

“For the rest of the year, we do not anticipate additional interest rate cuts after the 10 bps in Jun unless economic conditions continue to worsen. Nonetheless, we maintain our forecast for a 25bps reduction in banks’ reserve requirement ratio (RRR) in 2H23 to release more long-term funding into the banking system.”

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