New-loan issuance on the mainland beat market expectations last month, rising 25 per cent to 586.8 billion yuan (HK$719 billion) - easing fears of a hard landing and indicating Beijing's strategy of selectively loosening monetary policy is starting to take effect.
Most of the growth occurred in the second half of the month after Premier Wen Jiabao called for a 'fine-tuning' of economic policy. The market expectation for October was new loans of around 500 billion yuan.
If the loosening continues, new-loan growth could reach 650 billion yuan both this month and next, taking full-year loan growth higher than market forecasts of 7.5 trillion yuan, said Sun Mingchun, the chief economist for greater China at Daiwa Capital Markets.
'If this happens, it will significantly reduce the hard-landing risk in the fourth quarter,' said Sun.
Economists said the situation in Europe and sharply falling inflation were likely to spur further loosening.
But Qu Hongbin, chief economist for Asian economic research at HSBC, said he did not expect a reduction in bank's reserve requirement ratio in the near term. The ratio determines the minimum reserves commercial banks must hold, measured against customer deposits and notes.
Apart from selective credit easing measures, the People's Bank of China has also tweaked its regular open market operations, reducing the sale of central banknotes to the market. This has effectively meant an injection of 163 billion yuan of liquidity in the past two weeks. Qu said the selective easing would 'continue to filter through to support small companies' and that the mainland was 'still on track for a soft landing'.
October loan growth showed that the market need not worry about the economy faltering, and that the banks had responded quickly to Wen's 'fine-tuning' call, said Lu Zhengwei, chief economist at Industrial Bank.
The growth in loan issuance was driven by a significant rise in new loans to companies, which jumped 55 per cent to 454.8 billion yuan last month. Year-on-year growth in M2 money supply, which includes cash and most deposits and is an indication of the amount of money in circulation, slowed marginally to 12.9 per cent. Deposit growth fell to 13.6 per cent year on year, from 14.2 per cent in September.
Sun of Daiwa said the loosening was probably only temporary 'to avoid an imminent hard landing rather than to engineer another boom'.