Mainland bank loans on target to pass expectations this year

703.9b yuan doled out in August in apparent effort to bolster the flagging economy

PUBLISHED : Wednesday, 12 September, 2012, 12:00am
UPDATED : Wednesday, 12 September, 2012, 3:05am

The value of loans made by China's banks this year looks set to exceed market expectations, given that borrowings grew more than anticipated last month.

Banks made 703.9 billion yuan (HK$861 billion) of local currency loans in August in what appears to be an effort to stimulate the economy. That beat market expectations of 600 billion yuan. The market originally expected new loans to hit 8 trillion yuan this year.

The total social financing aggregate, a broad measure of liquidity, reached 1.24 trillion yuan in August, the People's Bank of China reported.

The uptick in loan growth followed two interest rate cuts since early June, government approval for more subway and railway projects and signals that job stability is at risk because of an overall slowing economy. Imports fell last month and industrial output rose the least in three years.

"It's a really mixed picture, and we're not sure whether [China] has bottomed out," said Stephen Green, an economist at Standard Chartered Bank.

China's M2, a measure that includes cash and most forms of deposits, grew 13.5 per cent last month from a year earlier. This missed analyst forecasts of a 14 per cent rise.

The market consensus is that new loans could now hit 8.5 trillion yuan this year, as outstanding credit grew 16.1 per cent compared with a year earlier, Citibank economist Shuang Ding said.

Normal outstanding credit growth was about 14.5 per cent, or an increase of 600 billion yuan, a month, said Shuang, adding that loans totalled about 6 trillion yuan at the end of last month.

Macquarie Securities yesterday downgraded its full-year gross domestic product growth forecast for China to 7.7 per cent from 8.1 per cent. Capital Economics marked down its forecast to 7.6 per cent, from 8 per cent.

Economists said the limited room for monetary expansion this year and next, and weakening economic growth drivers, were behind the downgrades.

China is expected to continue to lower the reserve requirement ratio for banks, which frees up funds for lending, as monetary policies remain tight, partly due to concerns for inflation.

Liu Ligang, an economist at ANZ, said the central bank's policy of using reverse repo operations to inject liquidity into the system had not been effective.

"The short-term nature of this type of liquidity injection has prevented banks from lending long to the real economy," said Liu. He added that fiscal policies had already been relaxed and China's 2.7 trillion yuan investments in fixed-assets this year had exceeded about 56 per cent of last year's GDP.

Some economists say if the central bank does not switch its monetary policies soon to cutting the reserve ratio, Beijing could fail to revamp the fast-decelerating economy in the fourth quarter.

Other more optimistic economists expect China's economy to bottom out soon.

"With more monetary and fiscal easing measures under way, China could see its economy bounce in the fourth quarter after stabilising in the third," said Joy Yang, chief economist for Greater China at Mirae Asset Securities.