Money supply growth fails to maintain momentum

The Bank of China Ltd stand at a services expo in Beijing. New yuan-denominated loans rose 10 percent to 9.78 trillion yuan in 2014 from 8.89 trillion yuan for 2013, according to figures released by the People's Bank of China on Thursday. [Photo/China Daily]

Experts say credit slowdown in December reflects shift toward 'new financial normal'

Money supply growth remained tight in China during December with lenders extending far less credit than in November, reflecting the country's "new financial normal", experts said on Thursday.

According to data released by the People's Bank of China, the central bank, China's broad M2 money supply measure grew 12.2 percent in December, far below market expectations and down on the 13.6 percent growth in M2 recorded in 2013.

During the period Chinese lenders disbursed 697.3 billion yuan ($112.55 billion), central bank data showed on Thursday.

New yuan loans for the year rose by about 10 percent to 9.78 trillion yuan from 8.89 trillion yuan for 2013.

"The slowdown in M2 money supply has reflected－in terms of monetary operation－the restructuring of the Chinese economy, the narrowing of off-balance-sheet financing, the slowdown of expansion of the sectors that have excess capacity, and the tightening of regulations in the interbank business," said Sheng Songcheng, head of the statistics and analysis department of the PBOC.

Other features of the new financial normal include the decrease in funds outstanding for foreign exchange, the narrowing of the ratio of current account surplus to GDP, and changes in the central bank's ways of injecting money into the market, Sheng said.

As of Dec 31, funds outstanding for foreign exchange stood at 27.07 trillion yuan, an increase of 641.1 billion yuan, compared with a much larger growth of more than 2.7 trillion yuan in 2013.

The significant drop in growth of funds outstanding for foreign exchange has also changed the way that the PBOC used to inject base money into the market by soaking up foreign exchange liquidity, putting huge downward pressure for the growth of money supply. It is one of the main reasons for the slowdown in M2 growth last year, he said.

Hua Changchun, a China economist at Nomura Holdings Inc in Hong Kong, said in a research note: "The weak money growth data reaffirms the signal from the PMIs and ordinary imports that China's domestic demand remained weak in December.

"However, we also see tentative signs of the effects of policy easing such as benchmark rate cuts and easing of the loan-to-deposit ratio rule as credit growth improved."

With economic growth continuing to slow, the PBOC cut interest rates for the first time in two years in November.

Hua said foreign exchange reserves fell to $3.84 trillion by the end of December from $3.89 trillion at the end of September, which suggests mild capital outflows.

The PBOC data also showed that total social financing, a broad measure of liquidity designed to capture some lending outside of traditional banking, hit 16.46 trillion yuan last year and was down from the 17.29 trillion yuan recorded in 2013.

In December, total social financing jumped to 1.69 trillion yuan, compared with 1.15 trillion for November. Outstanding yuan loans increased by 13.6 percent at the end of December, compared with 13.4 percent at the end of November.

Zhu Haibin, chief China economist at JPMorgan Chase & Co, said: "Overall, the December credit data continued to suggest a shift towards more accommodative credit policy. Despite the weaker-than-expected loan figure, the fact that medium and long-term loans accounted for almost all the loan increase, the pickup in non-bank financing, and the easing in loan-to-deposit ratio calculation suggest that policymakers are encouraging bank lending to support the real economy."

Zhu expects the PBOC to adopt a mixture of traditional and new policy instruments in 2015, forecasting new loans to increase to 11 trillion yuan, or 13.5 percent, in 2015 and total social financing to hit 17 trillion yuan, or 13 percent growth.

Loan, deposit measures change

The People's Bank of China is changing its calculation of bank deposits and loans as it moves to increase supervision of cash in the banking system amid a resurgence in shadow banking activity.

December loan figures showed that the shadow banking portion of what China calls total social financing was the highest since January 2014, reversing the trend of shrinking off-balance sheet credit seen in most during the last six months of last year.

The steps the PBOC is taking also show that its recent adjustment to how banks calculate their loan-deposit ratios was not a form of monetary easing but rather an initial step to applying further pressure on shadow banking.

The latest changes were described in a transcript of an official briefing obtained by Reuters.

In the future, when the PBOC calculates deposits, it will include deposits by non-deposit-taking institutions made in accounts at banks' deposit-taking institutions.

As for lending, it will include loans by deposit-taking institutions to non-deposit-taking institutions.

The transcript made particular mention of margin deposits from brokerages at banks. Regulators have expressed concern that a massive stock market rally that began in November might lead to overheating, given large amounts of cheap leverage provided through brokers' margin accounts.

Equities surge on credit data

Shares on the Chinese mainland rallied the most in a week on Thursday as credit growth data spurred speculation that authorities are taking steps to support economic growth.

The Shanghai Composite Index advanced 3.5 percent to 3,336.46 points, the most since Jan 5. Aggregate financing was 1.69 trillion yuan ($273 billion) in December, the People's Bank of China said. While new yuan loans missed economists' forecasts, shadow lending rose to the highest in monthly records that began in 2012.

The benchmark index halted a 4.5 percent weeklong slide that spurred concern the nation's $5 trillion stock market was losing momentum after a world-beating rally sent the gauge to the highest level since August 2009. Trading volumes were 52 percent below the 30-day average.

The CSI 300 Index rose 2.9 percent. Hong Kong's Hang Seng China Enterprises Index added 1.5 percent.

The Shanghai Composite is the best performer among 93 global indexes tracked by Bloomberg over the past year with a 65 percent gain. It trades at 12.4 times 12-month projected earnings, the highest level since May 2011.

A gauge of financial stocks in the CSI 300 surged 4.4 percent, the most among the 10 industry groups. The sub-index jumped 86 percent last year on expectations the central bank will ease monetary policy after cutting interest rates in November.