China Money February 2020


China: New yuan loans disappoint in February, while M2 growths jumps to two-year high

March 16, 2020

In February, Chinese banks distributed CNY 906 billion (USD 130 billion) in new yuan loans. The reading came in well below the CNY 3.34 trillion recorded in January and undershot the CNY 1.10 trillion that market analysts had expected. In the 12 months up to February, new yuan loans totaled CNY 16.9 trillion (12 months to January: CNY 16.9 trillion).

Meanwhile, annual growth in M2—the broadest measure of money supply in China—jumped from January’s 8.4% to a two-year high of 8.8% in February. The print overshot the 8.5% increase that market analysts had expected.

Total social financing (TSF)—a broader measure of credit and liquidity in the economy that includes loans, bonds and other non-traditional instruments—plummeted from CNY 5.07 trillion in January to CNY 855 billion in February. Market analysts had expected a softer decrease in TSF to CNY 1.12 trillion.

The slump in new credit was mainly due to a seasonal effect as banks tend to front-load loans at the start of the year. That said, economic disruptions related to the COVID-19 also played a role in the dismal performance observed in February. In fact, the reading in new loans already included CNY 300 billion in special-purpose loans intended to support small and medium-sized businesses.

Conversely, M2 growth gained steam in February due to easing liquidity conditions. In February, monetary authorities slashed the one-year loan prime rate, the seven-day reverse repo rate and the medium-term lending rate.

In a separate move, the People’s Bank of China (PBOC) cut the reserve requirement ratio (RRR) on 13 March, effective 16 March, by 0.5% to 1.0% percentage points. The RRR cuts are expected to release CNY 550 billion in liquidity to support the economy against disruptions caused by the COVID-19 outbreak. This time, the Bank also expanded the scope of financial institutions that can lend to small- and mid-sized companies under the PBOC’s finance program.

FocusEconomics Consensus Forecast participants expect M2 to expand 8.5% in 2020, which is down 0.2 percentage points from last month’s forecast. In 2021, the panel sees M2 growth of 8.3%.

Author: Ricard Torné, Lead Economist

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China Money Chart

China Money February 20 20 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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