China economy

China’s latest financial data paints a bleak economic outlook amid trade war with US

  • New yuan loans, a key source of funding for growth, halved in October from September
  • Fiscal revenue, the source of government efforts, recorded a rare drop in October from the same month a year earlier
PUBLISHED : Wednesday, 14 November, 2018, 1:09am
UPDATED : Wednesday, 14 November, 2018, 4:48am

China’s financial condition weakened in October, pointing to a further deceleration in the world’s second-biggest economy amid the trade war with the United States.

While Beijing has been pressing the country’s banks to boost lending to the “real economy”, newly granted loans nearly halved to 677 billion yuan (US$97.32 billion) in October, from 1.38 trillion yuan (US$198.39 billion) in September, according to data released by the People’s Bank of China on Tuesday.

While October is a seasonally weaker month for Chinese credit data, the fall was sharper than all economists’ estimates.

Total social financing – a broad measure of various forms of credit support to economic growth such as loans, bonds and trust investments – shrank to 728.8 billion yuan in October, or just a third of the 2.17 trillion yuan of September, the central bank data showed.

It also marked the lowest reading since January 2017, the first month for which comparable data was available.

As support to economic growth from China’s banking system has dried up despite Beijing’s push, the government’s fiscal revenue has dropped. The country’s fiscal revenue fell 3.1 per cent in October from a year earlier, the first fall in 2018, according to the data released by Ministry of Finance on Tuesday.

The weak financial and fiscal data come as the Chinese leadership tweaks its policy priorities to bolster economic activities amid the trade war with the US. In particular, the central bank has cut the reserve requirement ratio – the amount of money banks must keep at the central bank – by 1 percentage point from October 15 to release US$110 billion additional cash to banks for lending to factories and construction projects.

Bank lending falls sharply, suggesting businesses reluctant to invest

Analysts said Beijing’s policies proved too mild to be effective.

“The effectiveness of China’s monetary policy is waning and money has not flowed into the real economy,” Shen Jianguang, chief economist at JD Finance, said.

“China should be wary of falling into a kind of liquidity trap,” Shen said, referring to a situation when monetary policy easing becomes useless in generating economic activity.

“Off-balance financing has been shrinking … now the space of monetary policy has become very limited. It is necessary to implement fiscal measures such as tax cuts,” Shen said.

Lu Ting, chief China economist at Nomura International in Hong Kong, wrote in a note that the policy easing so far was insufficient to shore up China’s economic performance and financial markets, pointing to an economic outlook that “would get worse before getting better”.

Lu wrote that financial institutions are cautious in lending “against a backdrop of weakening domestic demand, rising credit defaults and a cooling property sector”.

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Annual growth of the broad M2 money supply, another key credit gauge, slowed to 8 per cent as of the end of last month from 8.3 per cent as the end of September, the central bank said.

China’s economic growth has already decelerated to 6.5 per cent in the third quarter, the lowest growth since the first quarter of 2009.

China’s National Bureau of Statistics will release monthly economic indicators for investment, consumption and industrial production on Wednesday.

China’s fiscal revenue fell in October due to tax cuts as well as an economic slowdown.

Beijing to cushion – not stop – yuan decline in long run

China’s personal income tax revenue, for instance, rose just 7 per cent in October from a year ago, decelerating by 13.8 percentage points from September, because China started to implement a higher tax threshold in October.