In a concerning development for China’s economy, the latest data reveals a significant downturn in key credit indicators. Despite recent interest rate reductions and promises of increased support for the faltering economy, China witnessed a substantial decline in new bank loans during July.
China’s Economic Struggle Continues.
Chinese banks disbursed a mere 345.9 billion yuan ($47.80 billion) in new yuan loans last month, marking an 89% plummet from June levels. This staggering drop is the lowest recorded since late 2009, failing to meet analysts’ predictions by a considerable margin. Expectations were for July’s new loans to fall to 800 billion yuan, down from the substantial 3.05 trillion yuan in June. This decline comes in stark contrast to the 679 billion yuan observed in July 2022.
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While a reduction in lending activity is customary for China in July due to seasonal trends, the latest credit data arrives on the heels of other dismal economic indicators. The world’s second-largest economy experienced deflation last month, along with significant declines in both exports and imports. These combined challenges have intensified pressure on Beijing to implement more robust stimulus measures.
Capital Economics remarked, “China’s bank loan growth fell to its lowest in seven months in July, while broad credit growth dropped to a record low.” The research note further suggested potential policy rate cuts and increased government bond issuance, but cautioned that these measures might not suffice without a broader improvement in business and household sentiment.
China’s economic slowdown, attributed to weak demand both domestically and internationally, persists despite robust bank lending in the first half of the year. Household loans, primarily mortgages, contracted by 200.7 billion yuan in July, revealing a significant reversal from June’s increase of 963.9 billion yuan. Corporate loans followed suit, plummeting to 237.8 billion yuan from June’s 2.28 trillion yuan, indicating a deepening crisis within the property sector.
Despite pledges from China’s top leadership to bolster economic support, detailed plans have been scarce, leaving investors disappointed. While the central bank has employed measures such as reserve requirement ratio (RRR) cuts to maintain adequate liquidity, the modest benchmark lending rate reduction of 10 basis points in June hasn’t yielded significant results. The ongoing economic challenges have created a scenario where consumers and companies are hesitant to borrow, diminishing the impact of these interventions.
Luo Yunfeng, an economist at Huajin Securities, highlighted the poor lending data as a reflection of weak financing demand from the real economy. He expressed concern over compelling companies to borrow when their need for funds is minimal.
Economists are also raising alarms about the potential for a balance sheet recession, as Chinese households and private enterprises continue to accumulate savings while reducing borrowing and spending. This cautious approach follows three years of stringent COVID-related restrictions.
To counter these economic struggles, expectations point toward increased fiscal stimulus. Local governments, despite existing heavy debt burdens, have been encouraged to expedite bond issuance for infrastructure projects.
In further signs of economic deceleration, the broad M2 money supply grew by 10.7% in July, slowing from June’s 11.3% and marking the slowest pace since April 2022. Outstanding yuan loans expanded by 11.1% year-on-year in July, the lowest growth rate of the year thus far. Total social financing (TSF), a comprehensive gauge of credit and liquidity, cooled to 8.9% annual growth in July, compared to 9.0% in June.
Despite these challenges, China’s policymakers and analysts remain focused on stabilizing the economy and reinvigorating lending and credit activity.