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China Money August 2023

China: New yuan loans beat market expectations in August; Central Bank cuts reserve requirement

In August, Chinese banks distributed CNY 1360 billion in new yuan loans, up from July’s 346 billion figure and slightly above market expectations. Higher corporate loans boosted the reading and offset weak household loans. Mortgage loans were particularly downbeat, potentially reflecting soft consumer sentiment and households delaying purchases due to expectations of further property easing ahead. Money supply grew 10.6% in year-on-year terms in August, which was a deterioration from July’s 10.7% increase. August’s result marked the worst reading since April 2022. Finally, the stock of total social financing (TSF)—a broader measure of credit and liquidity in the economy—increased 9.0% in the month (July had marked a historic low of 8.9% yoy).

Regarding monetary policy, the Central Bank cut key interest rates in August by 10–15 basis points, and in mid-September announced it would cut reserve requirements for banks by 25 basis points. Our panelists expect further cuts to policy rates by the end of the year to shore up the shaky economy.

Digging into the credit data, EIU analysts said:

“There were […] signs that Chinese households were taking out short-term low-interest loans to pay off high-interest mortgages early. New short-term household loans increased by 20.7%, while medium- and long-term household loans (mostly mortgages) tumbled by 39.7%. However, EIU expects that wave of prepayment to subside, following the government’s mandate to cut rates on existing mortgages. […] A more significant driver to the increase in TSF flows came from the government. Noticeably, local government financing accelerated significantly in August […] we expect the Chinese administration to step up spending, including through increased bond issuance.”

On the outlook for monetary policy, Nomura analysts said:

“Based on our calculations, this 25bp RRR cut will release slightly more than RMB500bn in loanable funds. […] We continue to expect one more 20bp cut to the 7-day OMO reverse repo rate and one more 15bp cut to the 1-year MLF rate by year-end.”

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