A man is counting 100 yuan notes with the Chinese flag in the background.
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New bank loans in China fell to their lowest level in 15 years in July, which some analysts see as a sign of continued economic weakness. But others said investors “should not panic” as seasonal and regulatory factors contributed to the unexpected slowdown.
New loans in the world’s second-largest economy were just 260 billion yuan ($36.28 billion), down 88% from a year ago and below expectations of 450 billion yuan.
Morningstar senior equity analyst Iris Tan explained that the decline in loan growth in July was due to weaker credit demand and spending by businesses and households.
She pointed to a sharp decline in short-term loans to households, pointing to continued weakness in consumer confidence and spending. Corporate loans continued to expand, but at a slower pace, driven mainly by bank bill discounting, Tan said.
Still, factors other than a weak economy contributed to the decline in lending. Tan pointed out that the decline in short-term corporate loans was due to regulatory measures that prevented the “self-circulation” of funds in the financial system.
She explained that this “self-revolving” approach is when large businesses borrow money at very low costs and deposit the money in banks as high-yielding structured deposits or deposit agreements, rather than for operations or investments.
Jasmine Duan, senior investment strategist for Asia at RBC Wealth Management, said: “The new loans are not going into the real economy, they are going into all this financial arbitrage, and we think the People’s Bank of China… that’s why they continue to continue Mentioned that we should not pay too much attention to the growth of overall credit loans, because many credit loans did not enter the real economy in the past.
Nomura said in a report on Tuesday that there were “no signs” that the regulatory crackdown would end soon, adding that “credit growth is expected to be soft in the coming months, especially for yuan loans.”
As a result, Morningstar’s Tan said the market “should not panic” about sudden swings in monthly data, as July is typically a weak month for credit growth.
She noted that year-to-date bank loan growth has remained essentially stable compared with 2023, at 8.7% from 8.8% in June.
“This is in line with the government’s guidance to slow down credit growth. We believe that slower but still reasonable credit growth is good for banks because it reduces equity consumption and reduces the risk of irrational pricing competition for new loan growth,” she said.
Still, these factors cannot offset the impact of China’s continued economic downturn. Royal Bank of Canada’s Duan said data showed households and businesses’ outlook for the Chinese economy remained “relatively low.”
“We believe that if the real estate market does not bottom out and gradually stabilize, it will be difficult for loan growth to rebound significantly,” she concluded.
