China's loan growth numbers to look more modest after January record

Chinese banks' issuance of record new yuan loans in January is not likely to be a signal that lenders will open the floodgates of credit amid easing monetary conditions.

Banks in China issued 4.199 trillion yuan of new loans in January, the strongest month on record, according to data released Feb. 11 by the People's Bank of China, or PBOC. Still, the outstanding loan balance of the banking system, which indicates the overall available bank credit, slowed to its lowest pace of growth since March 2006, rising 11.17% from a year earlier.

The central bank did not elaborate. Some of the expired loans might not have been renewed and were taken out of the banking system, offsetting the increased volume from new loans, analysts said. January is usually a strong month for lending as companies and local governments secure funding for new projects.

The PBOC will remain "disciplined" and another wave of credit is not likely, said Wenyu Xu, Shanghai-based macro analyst at Huatai Futures Co. "Monetary easing may show a stop-and-go pattern in the coming months on the back of still-sluggish property and private consumption sectors," Xu said.

Support for economy

Beijing has been reducing borrowing costs and freeing up more bank liquidity for lending in recent months to shore up its economy, where growth has slowed following the government’s crackdown on excess leverage in the real estate sector as well as lingering supply-chain challenges due to the pandemic. GDP growth slowed to 4.0% year over year in the fourth quarter. That compared with GDP growth of 18.3%, 7.9% and 4.9%, respectively, in the first three quarters.

The authorities will be measured with their easing steps, as any large-scale liquidity flush would unwind years-long efforts to bring down high corporate debt, analysts said. Some believe another rate cut in February is still on the table, after the PBOC trimmed its Loan Prime Rate in December 2021 and January and further lowered its reserve requirement ratio in December 2021 to boost economic growth.

In its Monetary Policy Implementation Report for the fourth quarter of 2021, also released Feb. 11, the PBOC reiterated that one of its goals is to keep banking system stable with a "reasonable abundance of liquidity."

Stability top priority

Stability is still the top priority in China, especially when it comes to the economy. "Beijing can engineer a return of credit impulse to stabilize growth, even in the absence of a quick turnaround of the housing market," Morgan Stanley said in a research note. The loan mix will improve in the coming months with filter-through of fiscal boost to infrastructure projects, the investment bank said.

Total social financing, or TSF — a broad measure of credit and liquidity in the world's second-biggest economy — rose 10.6% year over year to 6.17 trillion yuan in January, helped by the government front-loading bond issuances, central bank data showed.

Both TSF and new yuan loans "are likely to stay somewhat upbeat in the first half of 2022 [as] policymakers still see the need to lift the suppressed property sector and boost economic growth," said Michael Zeng, a Hong Kong-based banking analyst at Daiwa Capital Markets.

Still, "faster loan growth may not add more pressure to banks' net interest margins and nonperforming loans as lenders are carefully managing the rate spread between deposits and loans," Zeng said, noting that industry statistics showed that NIM improved in the fourth quarter of 2021.