China’s Economy: Weak Credit Growth and Demand Plague Economic Recovery

China remains in weak economic shape – this is shown by current data on credit growth and credit demand.

China: Weak credit growth, weak credit demand

Credit growth in China remained flat in October constantwith a sharp increase in government bond sales to finance stimulus measures offsetting weak corporate and household borrowing and a sharp decline in shadow financing.

The People’s Bank of China said Monday that total financing flows, a broad measure of lending, were 1.85 trillion yuan ($254 billion). This missed the expectations of economists, who had expected an increase of 1.95 trillion yuan.

Credit expansion in October was mainly driven by government debt issuance, which accounted for the largest share since 2018 and highlighted private sector weakness. Total funding inventory rose 9.3% year over year last month, ending the longest streak of sub-10% growth rates in history.

Economists have been closely watching a pick-up in credit demand as a barometer of China’s economic recovery. A slump in the property market combined with low business confidence in some sectors has led to relatively slow credit expansion this year.

Growth in yuan-denominated loans slowed to 10.9% year-on-year in October, reaching the lowest level since April 2022. Economists said the data showed weak demand from businesses for loans for long-term investments.

Political implication

“Credit demand remains weak,” said Ming Ming, chief economist at Citic Securities Ltd. “With the aim of reducing borrowing costs for the real economy and supporting domestic demand, there is still room for increased monetary policy.” China’s central bank is now expected to promptly will further reduce financing costs.

China’s overall financing growth remained weak in October – single-digit expansion pace driven by government bond issuance

An unseasonal increase in government bond sales is boosting lending. In September and October, 2.6 trillion yuan worth of new government bonds were sold to finance stimulus measures, mainly in the form of infrastructure investments, supported by the PBOC, which released long-term liquidity into the financial system by lowering the reserve requirement ratio.

Treasury sales accounted for nearly 85% of the month-over-month credit increase, the highest share since at least 2018, according to Bloomberg calculations.

Treasury sales drive lending in China: Nearly 85% of net lending in October came from Treasury sales

Nonfinancial companies borrowed a net 516 billion yuan in October, supported by more than 300 billion yuan in short-term bill loans. These changes are often used by banks to increase the size of their loan portfolio in times of weak loan demand and to meet regulatory requirements.

“The reliance on bill financing as a growth engine suggests that the credit structure is still not good,” Citic’s Ming said. New medium- and long-term corporate loans, reflecting companies’ willingness to expand their investments, rose less than in October last year.

The data also suggests weak household confidence.

In October, 71 billion yuan in additional medium- and long-term loans were extended to households compared to the previous month – an indicator for mortgages. This was a smaller increase than in September.

Duncan Wrigley, chief China economist at Pantheon Macroeconomics, said the figures are a sign of weak housing sales after developers’ debt problems came back to the fore.

Household short-term loans contracted by 105 billion yuan, the sharpest decline in October dating back to 2007.

China in depression: weaker credit demand as a sign

Broad money growth, as measured by M2, remained unchanged at 10.3% month-on-month.

In contrast, the money supply M1, which measures cash in circulation and sight deposits, only grew by 1.9%. The widening gap between the two indicators was cited by analysts as a sign of subdued economic activity and cautious saving by households and businesses.

China: Money supply growth points to weak sentiment – slow credit growth and wide gap between M1 and M2

“The widening gap between M1 and M2 is worrying. It suggests that companies are holding cash balances for savings rather than transactional purposes, which would have a negative impact on near-term growth,” said Adam Wolfe, economist at Absolute Strategy Research.

The shadow banking sector’s loan volume fell by nearly 260 billion yuan, the sharpest decline since mid-2022. Some parts of China’s shadow banking sector, such as. B. Investment companies are affected by liquidity problems due to the collapsing real estate market.

Last month, the PBOC said outstanding real estate loans fell for the first time on an annual basis in the quarter ended September – underscoring the stress in the sector, despite official assurances from the government that it is working to stabilize it.

“The data to me points to an economy in China that is stabilizing with the help of strong government support, but is still a long way from reaccelerating,” said Rory Green, China economist at TS Lombard. Rather, China seems to have slipped into a depression.

FMW/Bloomberg

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