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China Loans Grow at Slowest Pace on Record Amid Weak Demand

(Bloomberg) -- China’s bank loans expanded at the slowest pace on record in February, underscoring weakness in borrowing demand despite steps by the central bank to ease policy and help the economy.

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The stock of yuan loans grew 9.7% in February from a year ago, the lowest in data going back to 2003, according to figures released by the People’s Bank of China on Friday. It was also the first time the rate dropped below 10%.

The stock of aggregate financing — a broad measure of credit — expanded just 9%, also near a record low. The M1 money supply measure, which includes cash in circulation and corporate demand deposit, weakened to 1.2%, the lowest level since January 2022. That indicator is closely watched, given a slowdown signals that companies are not planning to use money in near term to invest or expand production.

“The key problem is demand in the real economy, and that can’t be solved just by monetary policy,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. “Markets may have to lower expectations for credit growth further.”

Borrowing demand in the world’s second-largest economy has been sluggish, and weakness at the start of 2024 threatens to make Beijing’s economic growth target of around 5% all the more difficult to reach. China has also experienced weak or negative price growth across its economy in recent months, which should weigh on loan growth.

China’s budget released this month suggests the country is aiming for nominal growth of above 7% this year, according to analysts. Top economic policymakers have pledged to keep money supply and credit growth in line with the growth target as well as an inflation target of 3% this year, with the PBOC previously saying it would ensure credit grows rapidly and at a sustainable pace throughout 2024.

What Bloomberg Economics Says ...

“Combined January-February data — which smooth out distortions from the Lunar New Year — showed total new loans fell 342 billion yuan from a year earlier. The People’s Bank of China kept rates unchanged earlier Friday. The credit data suggest that wasn’t optimal. What’s needed is a strong dose of stimulus to lift confidence and spur growth.”

— Eric Zhu, economist

Read the full report here.

China’s central bank has taken some steps recently to spur demand, including by lowering a key reference rate for long-term loans including mortgages by a record amount last month, and cutting the amount of cash banks must keep in reserves. But that’s done little to revive activity so far.

Wary of flooding the market with too much liquidity that isn’t being routed in ways that support growth, the PBOC earlier on Friday drained cash from the banking system for the first time since November 2022 via its one-year policy loans. The move was seen as one to deter financial speculation in an environment where monetary stimulus seems to be fueling a bond market rally more than helping the economy.

More fiscal stimulus and a bottoming-out of the property market will be required to help credit demand rebound, according to Ding. In the meantime, a slower money and credit growth in the range of 8% to 9% may be “desirable” for the central bank since it has put more focus on using loans more efficiently, he said.

There may still be room for the PBOC to cut interest rates this year, even though economists are divided on the timing of a possible move.

“Weak credit growth at start of year signals more room for policy support,” said Lynn Song, chief China economist at ING Groep NV.

The PBOC highlighted in its last monetary policy report that markets shouldn’t only look at the growth rate of credit but rather how financing is satisfying the need of key areas of the economy, such as the green and tech sectors.

In a sign that bodes ill for the troubled property market, households’ mid and long-term loans — a proxy of mortgages — contracted in February. That suggests families repaid more home loans than they ramped up new borrowing.

February is typically a slow month for credit expansion. Banks aren’t usually in a rush to meet their quarterly loan targets during the period. The Lunar New Year holiday, which was a day longer than usual this year, reduced the number of working days.

The release also raised eyebrows due to its later-than-usual timing. It was the first time since February 2020 that the data was published on or later than the 15th, which is usually at the end of a five-day window for its release.

--With assistance from James Mayger and Tom Hancock.

(Updates with new details throughout.)

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