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China’s monetary data for the month of May, point to a set of structural weakness in the economy, as Chinese commercial banks extended loans worth USD 149.56 billion in new yuan loans. This well exceeded market expectations and previous month’s levels as the central bank holds on to an accommodative policy to support the slowing economy.
RMB loan net rose to RMB985.5 billion, stronger than market expectations of RMB750 billion, resulting in a total RMB loan outstanding of RMB100.1 trillion. Household loans contributed to 58 percent of the total new loans. The loans extended to non-FI institutions (including corporates and other entities) increased by RMB359.7 billion or 36 percent of the total loan growth.
Despite the strong loan growth, the monthly Total Social Financing (TSF) amounted to RMB659.9 billion, weaker than expectations of RMB1 trillion. Bank loans contributed to 142 percent of the monthly TSF while the corporate bond issuance dropped by RMB39.7 billion, compared with the monthly average RMB380 billion net increase over the first four months of the year, data released by the central bank showed Wednesday.
"Bank lending beat expectations but the drop in total social financing shows regulators are trying to push for deleveraging," said Nie Wen, Economist, Hwabao Trust, Shanghai.
Meanwhile, M1 supply grew at a faster rate than M2 due to huge liquidity injections post a stock market crash last summer to prevent a financial shock. M2 grew 11.8 percent y/y which is below the PBoC's target of 13 percent. M1 surged 23.7 percent, suggesting a faster increase in corporate demand deposit than time deposit.
The divergence between M1 and M2 growths indicates the corporates’ preference to hold cash. With an uncertain economic prospect, the demand deposits could easily turn into short-term financial investments which will heighten the risk of financial bubbles via booming wealth management products or other unregulated activities.
Against such a backdrop, most market participants expect the PBoC to hold rates. However, slow inflation and weak growth prospects are unlikely to call for a rate hold. Therefore, the central bank’s policy meet this month will remain a close watch.
