A man counts 100 renminbi notes with the Chinese flag in the background.
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The number of new bank loans in China fell to a 15-year low in July, which some analysts see as a sign of continued weakness in the economy. But others say investors should “not panic” as seasonality and regulations contributed to the unexpected slowdown.
New loans in the world’s second-largest economy totaled just 260 billion yuan ($36.28 billion), down 88 percent from a year earlier and falling short of expectations of 450 billion yuan.
Iris Tan, senior equity analyst at Morningstar, said the decline in credit growth in July was due to weaker credit demand and slowing spending by both businesses and households.
She noted that the number of short-term loans to households fell significantly, indicating continued weakness in consumer confidence and spending. Tan said the number of corporate loans continued to grow but at a slower pace, mainly due to discounted banknotes.
But factors other than the economic slowdown also contributed to the decline in credit. Tan pointed out that the decline in short-term corporate credit was due to regulatory measures that prevent money from “self-circulating” in the financial system.
In this “self-circulating” practice, she explained, large corporations borrow money at very low interest rates and invest that money in the form of high-interest structured deposits or deposit agreements with a bank rather than doing business or making investments.
Jasmine Duan, senior investment strategist at RBC Wealth Management Asia, said: “New loans are not flowing into the real economy, but they are flowing into the overall financial arbitrage. And we think that’s why the PBoC keeps saying we shouldn’t pay too much attention to overall credit growth, because in the past a lot of these loans have not flowed into the real economy.”
In a statement on Tuesday, it said there were “no signs” that the regulatory crackdown would end soon. The company expects “loan growth to continue to be weak in the coming months, particularly in RMB loans.”
Morningstar’s Tan said the market should “not panic” over the sudden swings in monthly data, as July is typically a weak month for credit growth.
She noted that bank credit growth remained broadly stable compared to 2023 at 8.7%, up from 8.8% in June.
“This is in line with the government’s guidance to slow credit growth. We believe that slower but still reasonable credit growth benefits banks by reducing their capital consumption and reducing the risk of irrational price competition for new credit growth,” she said.
However, these factors cannot offset the ongoing weakness in the Chinese economy. RBC’s Duan said the data suggested that both households and businesses continued to have a “relatively gloomy” outlook for the Chinese economy.
“Unless the real estate market bottoms out and gradually stabilizes, we believe it is unlikely that credit growth will pick up significantly,” she concluded.
