China's September new loans and TSF rebound

RMB new loans growth posted a strong rebound in September, led by medium-long term loans. RMB new loans were CNY1050bn, up from CNY810bn in August and above expectations (consensus: CNY900bn). It is encouraging to see that loan structure improved with medium-long term corporate loans jumping to CNY356bn, from CNY122bn in August. This suggests that the central government's efforts to counter the local bureaucratic inaction and push for starts of infrastructure investment may be taking effect. Meanwhile, household loans rise to CNY422bn from CNY353bn in August on robust property sales. And it is expected to expand further given the PBoC cut down-payments for first-time home buyers in low-tier cities recently.

As a result, total social financing (TSF) shows a strong pickup in September. TSF registered at CNY1.3trn in September, up from trn in July (or 14.5 % y/y). Month on month, the improvement in TSF was led by a notable increase in new RMB loans to the real economy, which climbed to CNY1039bn from CNY776bn in August. Among other components of the TSF, off-balance sheet lending expanded by CNY100bn. Corporate bond issuance continued to improve to CNY373bn (August: CNY288bn), while equity financing fell again to CNY35bn in conjuncture with the bearish stock market in September. On a y/y basis, TSF stock growth remained flat at ~12% in September, and so did the new loan (15.4% y/y), while broad money (M2) growth moderated to 13.1% y/y from 13.3%, likely due to capital outflows. The FX reserve posted a decline of USD43bn to trn.

Despite a rebound in new loans, the weak growth and PPI deflation still point to the need for an interest rate cut. The tepid PMIs and deteriorating imports point to a further weakening in growth in September. 

"We maintain our forecast of one benchmark rate cut of 25bp in Q4, with the timing in October-November. The focus in October will be the 19 October release of GDP data. We believe the faster-than-expected slowdown in property and manufacturing investment plus sluggish export growth point to a weakening of GDP growth in Q3 (Barclays: 6.5% y/y, consensus: 6.8%). We also continue to look for one to two 50bp RRR cuts in Q4 2015, depending on capital flows", notes Barclays.

Moreover, the expansion of a credit-asset pledged relending program announced on 10 October provides another tool to fine-tune liquidity management by the central bank, especially to facilitate fund injections to small and medium banks, to avoid financial risks, and boost bank lending