China’s M2 supply growth slows in July, loan growth to continue to slow this year

China’s loan growth surprised on the downside in July, implying that momentum would decelerate in the second half of 2016.

China’s M2 money supply growth decelerated in July to 10.2 percent year-on-year. The monthly New Yuan Loan came in at RMB 463.6 billion in July. Outstanding RMB loans were up 11.6 percent on an annual basis. Meanwhile, household loans continued to be the most solid driving factor of the RMB loan.

It came in at RMB 457.5 billion, 99 percent of overall monthly loans. The growth of M2 continued to be slow, whereas M1 growth remained strong, rising 25.4 percent year-on-year.

Loan demand from the production sector is expected to continue to be slow in the second half of this year due to the subdued economic outlook and decelerating private sector investment, said ANZ in a research note. Also, if housing market decelerates in the months ahead, loan growth will be affected. The authorities are becoming cautious of the overheated housing market and have begun to tighten policies.

Divergence between the growth of M1 and M2 is expected to continue in the months to come, added ANZ. Corporates’ hoarding of cash is likely to continue even if tighter policy in the housing market slows the fund flow from consumers to developers. The weaker than anticipated monetary data underlines the need to steady aggregate demand. Given the monetary policy’s falling marginal utility, upbeat fiscal policy should be bolstered further, said ANZ.

“We forecast another RRR cut of 50bps this year, aimed at meeting the annual target of the M2 money supply growth of 13 percent”, added ANZ.

The Chinese central bank has showed its concern that an additional easing of policy might add more pressure to the currency exchange rate and might result in additional outflow. But the present M2 growth is considerably lower than the annual target that raises the possibility of a reduction of RRR, stated ANZ.

Moreover, the PBoC is expected to continue injecting mid-and long-term liquidity through target instruments such as Medium-term Lending Facilities (MLF) and Pledged Supplementary Lending (PSL). This is expected to expand the central bank’s balance sheet and raise the overall liquidity supply, according to ANZ.