China July new loans stronger than expected; money supply picks up

By Kevin Yao and Fang Cheng

BEIJING (Reuters) - China's new yuan loans exceeded expectations in July while growth of broad money supply rebounded to a five-month high, as the central bank sought to step up policy support for the economy amid a growing trade battle with the United States.

Chinese banks extended 1.45 trillion yuan ($211 billion)in net new loans in July, data from the People's Bank of China showed on Monday, in line with that released by China's banking and insurance regulator on Saturday.

Analysts polled by Reuters had predicted new yuan loans of 1.2 trillion yuan, down sharply from June's 1.84 trillion. Chinese banks usually make fewer loans in July after ramping up lending in June. In July last year, new loans only totalled 825.5 billion yuan.

"New loans exceeded expectations due to policy support," said E Yongjian, an analyst at Bank of Communications in Shanghai.

"The central bank has stepped up liquidity support for banks and encouraged their lending to targeted areas such as small firms and infrastructure projects."

Outstanding yuan loans grew 13.2 percent in July from a year earlier, faster than an expected 12.8 percent rise and compared with an increase of 12.7 percent in June.

MONEY SUPPLY GROWTH REBOUNDS

Broad M2 money supply grew 8.5 percent in July from a year earlier - the highest in five months, beating forecasts for an expansion of 8.2 percent and compared with a record low of 8.0 percent in June.

China's policymakers have been pumping more liquidity into the financial system to encourage banks to lend to struggling firms, but there are signs that lenders are turning cautious as defaults rise, complicating efforts to channel money to sectors that need it.

Non-performing loans (NPLs) of commercial banks rose to 1.96 trillion yuan as of the end of June, up 183 billion yuan from the end of March, the China Banking and Insurance Regulatory Commission said in a separate statement on Monday.

The increase in NPLs was in line with rising funding costs and credit strains for some firms amid Beijing's crackdown on riskier lending practices and an ensuing rise in refinancing costs.

More stringent rules imposed by regulators on recognising NPLs have also bumped up bad loan numbers.

But with rapidly expanding U.S. tariffs threatening to trigger a sharper slowdown in China's already cooling economy, Beijing has started to moderate the pace and intensity of its deleveraging campaign.

It has also begun rolling out growth boosting measures ranging from higher infrastructure spending to liquidity injections and tax cuts.

The consensus view is that authorities are likely to modestly loosen monetary and fiscal policy in various ways, including further cuts in banks' reserve requirements on top of three this year already.

Some China watchers fear Beijing's shift in focus to supporting growth may spell a return to its credit-fuelled spending binges of the past, undercutting its multi-year campaign to reduce risks in the financial system and a mountain of debt.

China's banks extended a record 13.53 trillion yuan in new loans last year, and lent 9.03 trillion yuan in the first half of this year, a jump of 13 percent from the same period of 2017.

DELEVERAGING DRIVE

In July, household loans, mostly mortgages, fell to 634.4 billion yuan from 707.3 billion yuan a month earlier, while corporate loans fell to 650.1 billion yuan in July from 981.9 billion yuan a month earlier, according to the central bank's data.

China's total social financing (TSF), a broad measure of credit and liquidity in the economy, dropped to 1.04 trillion yuan in July from 1.18 trillion yuan in June, data from the central bank showed on Monday.

TSF includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales.

It can provide hints of activity in China's vast and unregulated shadow banking sector, which authorities have also been targeting in their campaign to reduce systemic risks.

Combined trust loans, entrusted loans and undiscounted bankers' acceptances, which are common forms of shadow banking finance, fell by 488.6 billion yuan in July, following a slide of 1.26 trillion yuan in the first six months.

The declines in July reflect the impact of the authorities' deleveraging drive.

A central bank adviser said recently China should limit the credit impact of its risk and debt reduction drive, voicing concern that tightening may have gone too far.

But unless business conditions deteriorate markedly, most economists believe Beijing will stick with its deleveraging campaign, albeit at a more cautious pace, as it waits to see how the trade dispute plays out.

For now, a return to massive money printing like that seen during the global financial crisis, which would risk a further debt blowout, does not seem to be on the cards.

($1 = 6.8801 Chinese yuan renminbi)

(Reporting by Kevin Yao and Cheng Fang; Additional reporting by Ryan Woo; Editing by Richard Borsuk and Darren Schuettler)