As China's bank loan growth slowed in the second quarter, analysts urge more stimulus from Beijing to soften the blow from weakening economic growth and lingering trade frictions with the U.S.
Policy options could range from cutting banks' required reserve ratios again and capping money market rates via cash injection, to easing restrictions on the property market and shadow banking system which were once seen as the culprits of China's mounting debt, three analysts said.
Any further stimulus, however, won't likely be massive or executed in a crude manner as the government is mindful of not rebuilding a debt pile of which it has been trying to get out, they added.
"The policymakers will become more hesitant about aggressive stimulus...as they need to avoid a flood of cash," said Bo Zhuang, chief China economist at research firm TS Lombard, adding that China is facing growing pressure to boost stimulus as loan growth dropped.
In the three months ended June 30, outstanding yuan loans by all financial institutions in China rose 13.00% from a year earlier, according to data from the Chinese central bank. The year-over-year growth had accelerated for three consecutive quarters: it reached 13.70% at the end of the first quarter, from 12.70% in the second quarter of 2018.
Banks of all sizes, as well as rural lenders, reported slower growth of new loans in the second quarter compared with a year earlier, the data show.
Despite the slower growth, more loans were priced below benchmark interest rates in the second quarter, heeding the government's call to lend more to support the real economy. In June, around 17.76% of new loans were priced below benchmark interest rates, up from 17.71% in May and 9.93% a year ago.



Subdued loan demand
For more than a year, the Chinese government has tried to free up more cash for lending, particularly to small businesses, as well as to make loans more affordable in a bid to rejuvenate tapering economic growth. Measures include cutting banks' required reserve ratios, injecting cash in the banking system via open market operations, as well as setting ambitious lending targets for the banks.
Those measures unwound some of the government's previous efforts to reduce the country's debt level, and increased the supply of loans over the past year. But as global trade frictions made the economic outlook murkier, more Chinese companies have slowed or stopped making new investments, and more people held off buying homes.
"Since the beginning of this year…banks find it hard to [extend credit] due to lack of credit demand," said Larry Hu, chief China economist for Macquarie Group.
Hu noted that corporate short-term lending, rather than long-term facilities, has been the biggest driver to credit growth this year.
In the first seven months this year, corporate short-term lending jumped to 2.1 trillion yuan from 0.8 trillion yuan a year ago, Hu said. Corporate long-term loans, meanwhile, dropped to 3.8 trillion yuan from 4.2 trillion a year earlier, he added.
Long-term loans signal the level of long-term investments that power economic growth in the years ahead. In fact, China's growth in industrial production, capital spending and retail sales in July had all slowed from a year earlier. The country's gross domestic product growth slid to 6.2% in the second quarter, the weakest expansion in at least 27 years.
The slower growth of credit hints a further slowdown in economic growth in the next quarters, Julian Evans-Pritchard, senior China Economist, warned in a research note.
China's latest reform of its loan prime rate quotations, which increases the market's role in setting lending rates, will likely let companies borrow more cheaply on the long run, analysts said. There is a potential downside though: profitability from lending is likely to drop too, further compressing banks' margins.
Banks are reluctant to lend
Chinese banks are increasingly cautious about lending, following a government-led takeover of Baoshang Bank Co. Ltd. in May and liquidity injection by state-run financial institutions into Bank of Jinzhou Co. Ltd. in July, according to TS Lombard's Zhuang.
"The challenge is risk aversion. Smaller banks are reluctant to lend due to rise of bad loan risks…[I]t has also been more difficult for them to find funding sources after the banks seizures," Zhuang said.
As of June 30, bad loans at Chinese banks grew to 2.24 trillion Chinese yuan from 2.16 trillion yuan recorded as of March 31 and 1.96 trillion yuan recorded a year ago. The overnight Shanghai Interbank Offered Rate, which measures the funding cost in China's interbank market, stood at 2.642% on Aug. 20, up from 2.300% on Jan. 2.
Hu from Macquarie added that Chinese banks are opting for short-term corporate lending and parking the extra money on the bond market, in a bid to reduce bad loan risk amid a slowing economy.
Zhuang argued, instead of monetary stimulus that Beijing has been deploying, fiscal stimulus such as easing restrictions on shadow banking and the property market will likely be the preferred policy from now on.
So far, the Chinese government has announced such stimulus including a cut to personal income taxes, a reduction in value-added taxes as well as increased investments in infrastructure projects, according to Zhuang, noting that such measures allow the government to support economic growth without direct injection of liquidity.
"[W]e have to wait for more bad news for stimulus to be escalated," Macquarie's Hu said.
As of Aug. 19, US$1 was equivalent to 7.05 Chinese yuan.
