Chinese banks extend US$84.9b new loans in July

This is over 20% below the market forecast of US$108 billion.

Chinese banks extended US$84.9 billion in new loans in July, said the People’s Bank of China (the central bank), over 20% below the market forecast of US$108 billion. The sharp fall in the value of new loans is a serious cause for concern since bank lending is the main credit creation mechanism in China.

The government restricts corporate access to alternative financing sources and Chinese banks grant loans only on government orders. Because of this, money and credit numbers are closely watched as they reveal both policy aims and the state of credit demand. Yao Wei, China economist at Societe Generale in Hong Kong, believes the big drop in new lending could indicate the rising risk of bad debts accumulating.

"The loan number is quite small, it's quite a surprise. I think it reflects that the PBOC and banking regulator are concerned about credit risks on bank balance sheets," she said. She expects the central bank to cut required reserve ratios (RRR) for lenders to help stimulate lending.

"I think they (government) are taking this opportunity to diversify financing channels. But the banking system is big and other means are not enough to compensate for that, which actually drags on the pace of recovery," she said.

The central bank cut 150 basis points from RRR in three steps since November 2011, releasing some US$189 billion for new lending, but to apparent little effect. It has also cut interest rates twice this year. China's total social financing aggregate, which measures liquidity in the economy, was US$164 billion in July, a 41% plunge from the US$280 billion in June.

The broad M2 money supply rose 13.9% last month from a year earlier. PBOC has promised to increase monetary policy fine-tuning in the second half to boost the economy, repeating recent assurances by top leaders to counter a steady and worrisome deceleration in growth.