China’s Loan Growth Drops To New Low On Weak Credit Demand

(Bloomberg) -- Loan growth in China fell to a record low last month, overshadowing an unexpected pickup in credit and suggesting that borrowing demand remains weak in the world’s second-largest economy. 

A measure of domestic loan growth expanded by 10.4% year-on-year in January, according to data published Friday by the People’s Bank of China, the slowest pace in monthly data going back to 2003. Aggregate financing — the widest measure of credit in the economy — rose 9.5%, unchanged from December.

The slowdown indicates “still-relatively sluggish credit demand, despite net new social financing and net new loans beating market expectations. But market expectations were low,” wrote Duncan Wrigley, chief China economist at Pantheon Macroeconomics, in a note. 

The amount of growth in both credit and loans topped new monthly records and beat forecasts among economists surveyed by Bloomberg. That reflected seasonal effects as banks tend to boost lending at the start of the year when they have abundant loan quota to tap. Government stimulus aimed at boosting infrastructure investment was also a factor. 

Calls are mounting for authorities to do more to stimulate the economy. Data this week showed Chinese consumer prices falling in January at the fastest pace since the global financial crisis, as the nation has struggled to revive domestic demand and consumer confidence. 

There were some positive signs in Friday’s credit data related to housing. Net medium- and long-term loans to households — a proxy for mortgages — rose to the highest since early 2023. But economists said that data is hard to interpret without a gross lending figure.

“On the surface, this is a solid figure — very close to January 2017 or 2018, when the housing market was in much better shape,” Wrigley said. “But it’s too early to pop open the champagne.”

One positive sign that current stimulus is taking effect is the narrowing gap between China’s M1 and M2 money growth measures. M2, which includes more long-term deposits, has surged ahead of M1 this year, reflecting a housing market slump and weak corporate investment growth.

The People’s Bank of China last month announced a bigger-than-expected cut of the reserve requirement ratio for banks and hinted at more support measures to come, although it held a key interest rate and disappointed investors expecting the first cut since August.

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Concerns about yuan volatility and uncertainty over when the Federal Reserve would start cutting interest rates are considered to have limited the PBOC’s room for easing. Still, central bank Governor Pan Gongsheng has noted signs of an impending pivot in the US.

China surprised investors this week when it unexpectedly replaced the head of its securities regulator, a move that may foreshadow more forceful measures by the government to end the stock market rout.

An ongoing slump in the property sector — which once accounted for almost a third of all loans — continues to weigh on borrowing demand. Residents are reluctant to take out mortgages as the outlook for income and home prices is uncertain. Bank are wary of lending to developers as many have defaulted.

The PBOC has said it will ensure credit grows rapidly and at a sustainable pace throughout 2024 in an effort to spur corporate borrowing and money supply expansion. China’s top leaders have also said the pace of credit expansion should be in step with both the economic growth and inflation targets — which some economists interpreted to mean a credit growth rate of at least 8%.

(Updates with additional context.)

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