May new lending and money supply growth surprised consensus to the downside, reconfirming that intensive quantitative tightening measures imposed since last October are filtering through. That said, it’s still too early for Beijing to ease up. We continue to expect another 100bp reserve ratio and 25 rate hikes in the coming months, if not weeks. Concerns about over-tightening are unwarranted given that the current pace of monetary growth at 15% is more than sufficient to support economic growth of around 9%.
Facts:
Chinese banks created RMB551.6bn of new loans in May, lower than Bloomberg Consensus’ expectations for RMB650bn and April’s RMB739.6bn. Outstanding loan growth thus dropped to a 30-month low of 17.1% y-o-y in May (vs. 17.5% in April), closer (albeit still above) to its long-term average of 15-16%.
A breakdown of the new lending numbers suggests the slowdown came mainly from corporate sectors. Lending to corporates fell to RMB324.9bn in May from RMB492.9bn in April, thanks to a larger decline in mid-and-long term loans (RMB118.4bn vs. RMB234.1bn). Short-term loans slowed to RMB138.6bn from RMB204.3bn in April while bill financing rebounded to RMB56.8bn in May from RMB39.5bn in April. New loans to household sectors slowed slightly to RMB217.5bn in May (vs. RMB247bn in April), with mid-and-long-term loans (mostly mortgage lending) softening to RMB126.3bn in May from RMB142.1bn in April.
Money supply growth continued to cool. M2 growth decelerated to a lower than expected rate at 5.1% y-o-y, the slowest pace in the post-crisis era. Meanwhile, M1 growth also edged down to 12.7% y-o-y in May from 12.9% in April, well below market expectation of 13.7% y-o-y.
Implications:
The power of Beijing’s quantitative tightening continued to filter-through in May. In response to the cumulative impact of RRR hikes (8 since last October), and on-going monthly loan quota and window guidance, bank lending eased in May relative to the previous month which recorded a material upside surprise. This also helped to rein in May’s M2 growth rate to a level well below the official annual target of 16%.
This slowdown in new lending and money supply growth also reflected the moderation in economic growth momentum subsequent to the PBoC’s sustained pace of tightening. The increasing stress being felt by enterprises in response to intensifying quantitative tightening was reflected in May’s elevated demand for short-term funding. At the same time, the slowdown in medium and long term loans point to moderating investment growth in the coming quarters.
We continue to believe that tighter monetary conditions will not bring about a hard-landing for China. The current pace of approximately 17% credit growth is still running above trend. If history is a guide, this pace of credit growth remains comfortably sufficient for supporting a GDP growth rate of around 9%. (see China Inside Out: Three big myths on credit, published 21 May). This, plus the recent relaxation of SMEs loans (see China: A little relief: Banking regulator eases lending rules for SMEs, published 8 June) should leave Beijing ample room to continue pushing through with its fight against inflation.
Slower monetary growth is good news for Beijing’s on-going battle against inflation. The historical relationship between CPI and money supply growth suggests CPI should be peaking soon, given that both M2 and M1 growth have already peaked out. So long as the current set of tightening measures is kept in place for another 2-3 months, inflationary pressures should show meaningful signs of decline after 3Q.
Bottom line:
Slowing credit and money supply growth is helpful for containing inflation, although the current pace of credit growth continues to counter concerns about a potential hard landing for China. We expect PBoC to further raise RRR and interest rates to check liquidity and inflationary pressures in the coming months.
QU Hongbin
Co-Head of Asian Economics Research SUN Junwei – China Economist
HSBC Global Research