China Loans Plunge to 14-Year Low, Adding to Deflation Risk

Chinese banks extended the smallest amount of monthly loans since 2009 in July, a further sign of weak demand in the world’s second-largest economy that raises the risk of prolonged deflation pressure.

(Bloomberg) — Chinese banks extended the smallest amount of monthly loans since 2009 in July, a further sign of weak demand in the world’s second-largest economy that raises the risk of prolonged deflation pressure. 

New loans reached 345.9 billion yuan in July, the People’s Bank of China said Friday, less than half the 780 billion yuan economists had forecast in a Bloomberg survey. Aggregate financing, a broad measure of credit, was 528.2 billion yuan last month, also well below estimates.

“It is a big disappointment, proving the fragile status of the recovery in China,” said Kiyong Seong, lead Asia macro strategist at Societe Generale. The probability of further PBOC easing in the near term is notably rising, he said.   

The plunge in loans is another sign of weak demand in China, and adds to a raft of negative data recently showing deflation in the economy, plunging exports and a slump in manufacturing activity. On top of that, the property market crisis is worsening, with fears mounting of another default of a major developer.


The offshore yuan extended a decline shortly after the data, dropping as much as 0.2% to 7.2558 per dollar, the weakest since July 7.

What Bloomberg Economics Says…

China’s much lower-than-expected credit growth in July sends a clear signal that the rate cut in June by the People’s Bank of China was not enough to boost sentiment in the economy. Credit demand by private enterprises and households turned sluggish after a short-lived jump in June as weak confidence continued to hinder investment and home purchases. 

David Qu, China economist

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The gloomy economic news is adding pressure on policymakers to boost monetary and fiscal stimulus. However, the PBOC has been proceeding cautiously, held back by several factors, including a weak yuan and financial stability risks, given high debt levels in the economy.

Xing Zhaopeng, a senior China strategist at Australia & New Zealand Banking Group, said with the PBOC’s focus on stabilizing the currency, it likely can’t do much in the short term.

“It is hard to see credit growth turning around,” he said. “Deflationary risk will remain in place going forward.”

July is traditionally a weak month for financing activities, with banks not in a rush to meet their lending targets at the beginning of the quarter. June was also a strong month for credit, which could have affected last month’s demand.  

Other key highlights of the PBOC’s data:

  • Household mid- and long-term loans, a proxy for mortgages, contracted by 67.2 billion yuan in July, a sign that households continued to make early pre-payment of mortgages
  • Medium and long-term loans to companies also plunged in July from the previous month, dropping to 271.2 billion yuan in July
  • The year-on-year growth rate of broad M2 money supply slowed sharply to 10.7%, while growth in the stock of credit grew 8.9%, the slowest pace in data going back to 2017.

“Economic fundamentals are not great, particularly in the property sector,” said Lu Ting, chief China economist at Nomura Holdings Inc. “Household credit numbers are very weak and businesses also don’t seem to have a strong motive to borrow.”

He said the most direct action the central bank can take is to cut interest rates. There is “still a window for rate cuts in the coming two to three months, but the room for the reductions will be limited,” he said.

The PBOC is expected to keep a key rate on its one-year policy loans — known as the medium-term lending facility — unchanged at 2.65% next week, according to economists surveyed by Bloomberg. 

–With assistance from Wenjin Lv.

(Updates to add further detail. A previous version of the story was corrected to reflect new loans in billions of yuan.)

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