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New yuan loans reached 702.5 billion yuan last month, after slumping to 385.2 billion yuan in July from June’s 1.08 trillion yuan. Photo: Reuters

China credit fluctuation stirs policy uncertainty

China's overall credit supply has rebounded from earlier lows but is still short of market expectations, helping the stock market yesterday to recover losses triggered by Premier Li Keqiang's statement about weak M2 growth.

The mainland's overall credit supply has rebounded from earlier lows but is still short of market expectations, helping the stock market yesterday to recover losses triggered by Premier Li Keqiang's statement about weak M2 growth.

Analysts said liquidity remained loose as indicated by interbank rates and the record trade surplus last month. But high funding costs have hurt business expansion, which, together with persistent deflation at factory gate, underscores a dilemma that Li is facing in tackling the weak demand.

Li has made clear his reluctance to flood the market with liquidity for fear of fuelling new bubbles and hurting the progress in economic restructuring.

However, analysts say keeping the tap tighten in certain areas such as property and infrastructure investment would make borrowing even more expensive and risk a sharp economic downturn.

"We don't expect policymakers to launch significant monetary easing in order to offset the credit slowdown," said Julian Evans-Pritchard at London-based Capital Economics.

"That said, they are likely to adopt some targeted measures in the months ahead to ensure that borrowing costs don't rise too sharply for small and private firms."

Aggregate social financing, the broadest gauge of credit supply that includes loans extended through wealth management products and shadow banking system, rebounded to 957.4 billion yuan (HK$1.21 trillion) last month from the near six-year low of 273.1 billion yuan in July, central bank data showed. It still trailed the median forecast of 1.135 trillion yuan in a Bloomberg survey of economists.

New yuan loans reached 702.5 billion yuan last month, after slumping to 385.2 billion yuan in July from June's 1.08 trillion yuan.

The Shanghai Composite Index edged up 0.88 per cent after the new data.

Li told the World Economic Forum earlier this week that economic growth, although slowing, faced no hard-landing risks.

M2, a gauge of money supply, expanded 12.6 per cent at the end of last month, he said, compared with July's 13.5 per cent. Beijing was able to tolerate a slower expansion as long as the job market was stable, he told the audience.

His comments fuelled speculation that economic growth may fall below the 7.5 per cent target this year after expanding 7.4 per cent in the first half.

However, Li also said: "For those that truly need support, if they are thirsty, certainly we will provide water."

He vowed on pursuing "forceful reforms" and nationwide innovation drives to rejuvenate the economy although he refrained from outlining any new or concrete steps.

To Li's relief, the GDP numbers may be differently processed in the coming months as the National Bureau of Statistics plans to adjust the way it is calculated.

Goldman Sachs economist Song Yu said these adjustments, including treating research and development expenditure as investment rather than cost, might push up real economic growth by 0.1 to 0.2 percentage point.

In the year so far, the government has adopted selective easing steps, such as cutting reserve requirement ratio for some banks and lowering tax for small and rural businesses for the economy. It has also revised the budget law to allow local authorities to issue debt directly to expand financing channels.

This article appeared in the South China Morning Post print edition as: Mainland credit fluctuation stirs policy uncertainty
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