The latest lending data out of China missed expectations.
New outstanding loans fell to 667 billion yuan, from 793 billion yuan in April. This was also short expectations of 815 billion yuan.
Outstanding loans were up 14.5% in May, down from 14.9% in April.
Total social financing (TSF) — financing available to the economy from the financial sector — fell to 1.190 trillion yuan, down from 1.747 trillion yuan in April. This was shy of expectations for 1.6 trillion yuan. TSF eased to 22.1% in May, from 22.3% the previous month.
Meanwhile, M2, a broad measure of money supply, was up 15.8% in May, down from 16.1% in April.
"These lower than expected credit data will likely trigger market concerns about monetary tightening when economic momentum stays weak," wrote Bank of America's Ting Lu.
"However, after going through the data details, we believe that the seemingly disappointing headline new loan and TSF data reflect that those arbitrage activities were being squeezed by tougher regulatory rules, which is actually good for the health of China’s financial system."
Concerns of a Chinese credit crisis
Total Social Financing is a Chinese measure of credit growth that includes — outstanding bank loans, trust and entrusted loans, bankers’ acceptance, and corporate bonds.
In their annual Article IV review of the Chinese economy published late last month, the IMF warned about the growth in total social financing.
"The rapid growth in total social financing—a broad measure of credit—raises concerns about the quality of investment and its impact on repayment capacity, especially since a fast-growing share of credit is flowing through less-well supervised parts of the financial system."
BAMLThe main bear argument on China now is that it is taking more and more credit growth, to deliver less and less economic growth.
The People's Bank of China's 2013 financial stability report also warned of the "perils of bad loans." The bad loan balance was at 1.07 trillion yuan at the end of 2012. Defaulted loans of commercial banks was up 46% from the start of the year to 528.1 billion yuan. And analysts warn that companies' ability to repay loans is declining.
Of course some argue that with the state backing banks and companies, a crisis is unlikely. But this has raised concerns about long-term growth and the health of China's financial system.
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