China’s new loan growth to fall further after sharp drop in October

China’s credit growth is set to decelerate further in the coming quarters after it slowed by almost half in October, analysts said.

New loans growth last month came in at 651 billion yuan, 47 per cent lower than the 1.22 trillion yuan posted in September, but in line with Bloomberg’s median forecast of 672 billion.

Medium to long-term household loans rose 489 billion yuan in October compared with September’s 574 billion yuan growth. These represented 75 per cent of total new yuan loans last month.

“The growth was still strong due to the delayed effect of booming property sales in the past months,” China International Capital Corp (CICC) analysts wrote in a research report.

ANZ analysts Raymond Yeung and David Qu said in a note that the drop in household loans indicated that mortgage tightening measures imposed by local governments have started to bite.

Starting in the golden week holiday in early October, local authorities in at least 21 mainland cities have introduced measures to cool down the red-hot housing market, ranging from raising down-payments for first and second homes to limiting purchases of multiple dwellings.

The CICC report said: “As the demand for residential mortgages declines after the recent property tightening, we expect the growth of household loans to slow down further.”

Meanwhile, medium to long-term corporate credit fell even more sharply in October. It came in at 73 billion yuan, down 84 per cent from the 447 billion yuan last month.

“The decline may be partly due to seasonal effects because banks usually slow their lending activities in the fourth quarter [but] the contraction in non-household credit still suggests that underlying demand by corporates remains sluggish,” the ANZ analysts said.

They expect to see sluggish credit extention in the last three months of the year, as banks postpone some lending activity to next year amid tighter mortgage conditions.

Julian Evans-Pritchard, China economist at Capital Economics, said in a note that the dramatic decline of China’s new loan growth in October was “entirely seasonal”, given that growth in outstanding bank loans actually edged up from 13 per cent to 13.1 per cent year-on-year.

However, he believes the credit slowdown has further to run.

“Looking ahead, we expect broad credit to resume its slowdown slide in the coming months, as Chinese policymakers continue to prioritise tackling credit risks over boosting economic activity, which has held up well recently,” Evans-Pritchard said.

It is possible that the People’s Bank of China may reverse course and conduct further policy loosening if faced with the prospect of an external shock such as the imposition of major trade tariffs by Donald Trump’s administration, he said. But he believes that the central bank will refrain from further easing until clear signs of renewed economic weakness emerge, most likely during the middle of next year.

CICC said that real interest rates have fallen significantly on the back of continued economic stimulus aimed at boosting output. Meanwhile the accumulated effects of monetary and fiscal loosening since last year mean there is enough fuel in the tank for China to achieve its 2016 growth target, and economic growth is likely to remain stable next year.

“Against this backdrop, we expect no change to the benchmark interest rates in 2017 and no reserve requirement rate cut in the first half next year,” CICC said.