China outstanding bank loans fell in August, backing new moves to boost credit to support economy

The growth in China’s outstanding bank loans fell again in August, supporting the central bank’s decision to start easing credit conditions and suggesting further steps ahead to support an economy pressured by the trade war with the United States.

The country’s commercial banks extended 1.28 trillion yuan (US$170.22 billion) in new loans in August, higher than the 1.06 trillion yuan in July, according to data released by the People’s Bank of China on Wednesday.

However, outstanding bank loans at the end of August slowed to 12.4 per cent above the year-earlier level, down from 12.6 per cent at the end of July and 13.2 per cent in August a year ago, underscoring the shortfall in bank lending as economic growth slows.

Aggregate financing, the broadest measure of credit support for the real economy, rose to 1.98 trillion yuan (US$278.22 billion) last month, well above expectations of 1.60 trillion yuan, higher than 1.01 trillion yuan in July and about the same as a year earlier.

Wang Jun, chief economist at Zhongyuan Bank, said the lending data reflected long-standing concerns over domestic demand. Although expectations for further global monetary easing created the conditions for China to follow suit, Wang warned that a large-scale easing will not solve the structural problems holding credit growth in China back, such as the difficulty small businesses continue to have raising funds.

“We cannot solely rely on monetary tools,” he said. “While remaining committed to structural reform, the government should increase its leverage moderately to boost demand.”

Further monetary stimulus is now anticipated, as the prolonged trade war continues to put downward pressure on growth.

On Tuesday, international ratings agency Fitch joined others in cutting China’s growth outlook for next year to 5.7 per cent – below the 6.0 per cent floor of the government’s growth target range for 2019, and down from its previous projection of 6.0 per cent.

In the last week, the government has taken additional steps to support growth. The central bank cut the amount of money banks must hold in reserve, freeing up US$126 billion for banks to lend. It also increased the amount of special purpose bonds that local governments can issue to boost infrastructure investment.

Analysts expected the central bank to use two monetary tools to stabilise the economy, including guiding state-owned banks to lend to key investment projects and further liquidity injections and rate cuts to lower fundraising costs.

The central bank is expected to cut rates through its new loan prime rate mechanism as early as next week, when 265 billion yuan (US$37 billion) of loans to commercial banks through its medium-term lending facility mature.