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China: Credit data strongly disappoint in July

August 13, 2014

New yuan loans totaled CNY 385 billion (USD 62.1 billion) in July, which was well below the CNY 1.1 trillion recorded in the previous month. The print fell well shy of the CNY 780 billion expected by market analysts and represented the lowest reading since December 2009. In the 12 months up to July, new yuan loans totaled CNY 9.2 trillion (June: CNY 9.6 trillion), which represented the lowest level in three months.

Total social financing—a broader measure of liquidity in the economy that includes loans, bonds and other non-traditional instruments—declined sharply from CNY 2.0 trillion in June to just CNY 273 billion in July. The print represented the lowest reading since October 2008 and largely undershot the CNY 1.5 trillion that market analysts had expected. Meanwhile, in order to manage liquidity in the money market, the People’s Bank of China (PBOC) continued to conduct its twice-a-week reverse repurchasing operations.

Annual M2 growth, the broadest measure of money supply in China, decelerated from 14.7% in June to 13.5% in July. June’s print had represented the fastest expansion in 10 months. July’s reading was below the 14.4% increase the market had expected.

Most analysts believe that recent data do not reflect a change in the PBOC’s monetary policy stance and that July’s figures can be partially explained by seasonality, a base effect and further pressures in shadow banking. That said, Liu Li-Gang, Chief Economist for Greater China at ANZ warns that:

“Today's monetary data should not be viewed lightly. It means that the financial system is engaging a rapid de-leveraging process, which could have significant repercussions on the real economy. Such a sharp drop in credit is in fact a quantitative tightening, which will lead to high interest rates and endanger China’s macroeconomic objective. […] Furthermore, it also suggests that the past monetary policy tweaks have not worked as intended. Although the PBoC has been always reluctant to ease, China's macroeconomic objective will eventually outweigh the current monetary policy inertia. We believe a RRR cut is imminent in order to restore confidence.”

In this regard, Changchun Hua, China Economist at Nomura International, states:

“[…] from a bigger picture perspective it is also conceivable that the weaker money and credit data reflect the PBoC’s desire to not loosen monetary policy too significantly over concerns of fanning the larger problems of overinvestment and leverage next year.”

FocusEconomics Consensus Forecast participants expect M2 to expand 12.9% in 2014, which is unchanged over the previous month’s forecast. In 2015, the panel sees M2 growth of 12.6%.


Author: Ricard Torné, Lead Economist

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China Money July 2014 1

Note: New yuan loans in CNY billion and year-on-year variation of M2.
Source: People’s Bank of China (PBOC) and FocusEconomics calculations.


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