China economy

China banks reduce loans in March, amid fears over debt build-up

Analysts had expected slight rise in level of new loans in a usually busy period for Chinese lenders

PUBLISHED : Friday, 14 April, 2017, 4:40pm
UPDATED : Friday, 14 April, 2017, 11:05pm

China’s banks unexpectedly extended less credit in March than in the previous month as the government tries to contain the risks from an explosive build-up in debt and an overheating housing market.

The central bank has raised interest rates on money market instruments and special short and mid-term loans several times in recent months to contain debt risks and discourage speculation, although it is treading cautiously to avoid hurting economic growth.

China’s banks made 1.02 trillion yuan (US$148.15 billion) in new loans in March, down from 1.17 trillion yuan in February. Analysts had predicted 1.25 trillion yuan.

However, China’s banks still extended the third-highest loans on record for a single quarter, totalling 4.22 trillion yuan from to January to March.

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The first quarter is usually the busiest of the year for Chinese banks when they have a fresh annual quota and look to lock up key clients.

The central government has made containing financial risks a top priority this year, calling for vigilance against asset bubbles and urging companies to reduce leverage.

But it has still targeted economic growth of about 6.5 per cent this year, which will require copious amounts of new credit.

Strong data early this year have added to views that growth in China’s economy is improving, driven by record bank lending last year, higher government infrastructure spending and a frenzied housing market, which are fuelling a construction boom.

Most of China’s “Big Five” banks reported last month that bad loan ratios were stabilising, probably giving policymakers more confidence that risks from bank lending are under control.

But many analysts believe sour loans are far higher than banks admit and some China watchers warn a debt crisis may be inevitable if loan and money supply growth continues to sharply outpace the rate of economic expansion.

Broad M2 money supply in March grew 10.6 per cent from a year earlier, central bank data showed on Friday, the slowest monthly growth since July and missing forecasts for an 11.1 per cent expansion.

Outstanding yuan loans grew 12.4 per cent by month-end on an annual basis, lower than an expected 12.7 per cent rise.

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China has also lowered its target for broad money supply growth to about 12 per cent from about 13 per cent for 2016, signalling a bid to rein in debt risks while keeping growth on track.

Along with gingerly bumping up some interest rates, the People’s Bank of China withdrew 705 billion yuan from the financial system through its open market operations in the first 12 weeks of this year, a 1.1 trillion yuan negative swing from a year ago, ING estimates.

Still, analysts do not expect a full-blown policy rate increase this year, which could risk a knock to economic growth ahead of a key party meeting in the autumn when a new generation of leaders will be picked.

China’s total social financing, a broad measure of credit and liquidity in the economy, rose to 2.12 trillion yuan in March from 1.15 trillion yuan in February.