China's Credit Expansion Slows as Li Curbs Shadow Banking

Sunday, 11 August 2013 01:06 PM

(Updates with economist’s comment in fourth paragraph.)

Aug. 9 (Bloomberg) -- China’s broadest measure of new credit fell to a 21-month low as Premier Li Keqiang extended a campaign to curb a record expansion of lending that’s added risks to the nation’s financial system.

Aggregate financing was 808.8 billion yuan ($132 billion), the People’s Bank of China said in Beijing today, compared with the 925 billion yuan median estimate of analysts surveyed by Bloomberg News. New yuan loans exceeded forecasts and accounted for about 87 percent of the total, the most since September 2011. M2 money supply growth unexpectedly accelerated to 14.5 percent.

Policy makers are persisting with a crackdown on shadow banking following a government-engineered cash crunch in June even after a two-quarter economic slowdown. A report today showing faster gains in industrial output adds to evidence that growth is stabilizing after data yesterday showed exports rebounded more than estimated.

“Today’s overall outcome is a good one: Credit growth is slowing but real activity, including domestic demand and exports, are picking up,” said Wang Tao, chief China economist at UBS AG in Hong Kong.

While reduced credit may make it tougher for Li to achieve this year’s 7.5 percent growth target, it would ease dangers of a financial crisis. China’s lending surge in the past five years is of a magnitude that tipped Asian nations into crisis in the late 1990s, according to Goldman Sachs Group Inc., and the State Council last month ordered the first nationwide audit of government debt in two years.

Loan Estimates

New yuan loans were 699.9 billion yuan in July, compared with the 640 billion yuan median analyst estimate and 540 billion yuan a year earlier. Aggregate financing, which includes bond and equity sales, entrusted loans and bankers’ acceptance bills, compared with 1.04 trillion yuan in June and 1.05 trillion yuan a year ago.

M2 growth compared with the median economist estimate of 13.9 percent and 14 percent in June.

“The implication is that money is returning to the formal banking system’s on-balance-sheet activities,” said Yao Wei, China economist at Societe Generale SA in Hong Kong.

The cash crunch in June helped squeeze speculative lending and rein in what Vice Finance Minister Zhu Guangyao said were “prominent” shadow-banking risks.

The seven-day repurchase rate, which rose to a record 11.62 percent in June, has since dropped to 3.66 percent as the central bank added funds. The PBOC injected a net 20 billion yuan into the financial system this week, after 136 billion yuan in the five days ended Aug. 2.

Negative Impact

“We do see some negative impact of the June interbank liquidity crunch on credit availability for the real economy as evidenced by the sharp fall in corporate bond issuance and bills,” Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said in a note today. “But we believe the impact is muted as Premier Li Keqiang’s team has taken decisive measures to calm the interbank market and to support growth.”

Today’s data showed net corporate bond issuance last month was 46.1 billion yuan, down from 248.6 billion yuan in July 2012.

China’s industrial output rose more than estimated in July, adding to signs the economy is stabilizing after unexpectedly strong trade figures yesterday.

Factory production increased 9.7 percent from a year earlier, the National Bureau of Statistics said today. Retail sales advanced 13.2 percent while fixed-asset investment excluding rural households grew 20.1 percent in the first seven months of the year.

Stocks Rise

The Shanghai Composite Index of stocks reversed losses after the industrial-output report, rising 0.4 percent at the close. The MSCI Asia Pacific Index fell 0.1 percent as of 6:25 p.m. in Tokyo.

The gain in factory output was the most since December excluding distortions from the Chinese New Year holiday in January and February. The median estimate of 47 economists surveyed by Bloomberg News was for growth of 8.9 percent, unchanged from June’s rate.

“The data confirms that China has bottomed out,” Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong, said in a note. Output is picking up on an anticipated rebound in demand due to government stimulus and recent reductions in inventories, he said.

Retail Sales

Retail sales compared with the median projection for a 13.5 percent advance and a 13.3 percent increase the previous month. The median estimate for fixed-asset investment was a 20 percent increase after a 20.1 percent gain in the first half.

China’s passenger-vehicle sales rose 10.5 percent in July as automakers increased production and dealerships stepped up discounts to clear inventory, figures from the state-backed China Association of Automobile Manufacturers showed today. Wholesale deliveries of 1.24 million units topped the median estimate of 1.22 million from six analysts surveyed by Bloomberg News.

Data released earlier today showed consumer prices rose 2.7 percent in July from a year earlier, the seventh straight month below than the government’s 2013 target of 3.5 percent. Producer prices fell 2.3 percent, the 17th consecutive monthly decline.

The nation’s exports rose 5.1 percent in July from a year earlier, while imports gained 10.9 percent, the customs administration said yesterday.

--Alan Wong, Nerys Avery, Shen Hu. Editors: Scott Lanman, Nerys Avery

To contact Bloomberg News staff for this story: Nerys Avery at navery2@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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