China’s new bank lending slowed more than expected in April, triggering new concerns over the country’s economic outlook and prompting fresh calls for further monetary easing against the backdrop of heightened trade tensions with the United States.
Banks made 1.02 trillion yuan (US$150 billion) of new yuan loans in April, lower than market expectations for 1.2 trillion yuan in loans and the 1.69 trillion yuan in new lending in March, according to data released by the People’s Bank of China (PBOC) on Thursday.
National aggregate financing, a broad measure of credit to the real economy, dropped to 1.36 trillion yuan in April, half the 2.86 trillion yuan from a month earlier. Growth of M2, the widely watched indicator of money supply, slowed to 8.5 per cent at the end of April from 8.6 per cent in March.
The data release came just ahead of the 11th round of China-US trade negotiations due to take place in Washington starting later on Thursday. The talks could decide whether the US raises the tariff rate on US$200 billion of Chinese imports from the 10 per cent to 25 per cent on Friday.
“The latest drop back in credit growth suggests that, as the prop from this year’s front-loading of local government special bond issuance fades, current monetary conditions may not be loose enough to prevent a renewed slowdown in credit growth,” said Julian Evans-Pritchard, a senior China economist at Capital Economics.
The weak April result “underlines the need for further monetary policy easing” to provide sufficient support for economic growth, Evans-Pritchard added.
Despite the stabilisation of the national growth at 6.4 per cent in the first quarter, both the decline in the April purchasing managers’ index (PMI) announced a week ago and the unexpected drop in April exports reported on Wednesday reinforced market concerned that there could be a further dip in Chinese growth without further economic stimulus, particularly if the US raises trade tariffs.
April’s manufacturing PMI dropped by 0.4 points to 50.1, leaving it just above the expansion-contraction boundary, while the country’s exports dropped unexpectedly by 2.7 per cent to US$193 billion compared to last year.
The latest drop back in credit growth suggests that, as the prop from this year’s front-loading of local government special bond issuance fades, current monetary conditions may not be loose enough to prevent a renewed slowdown in credit growth.
Hours after Trump’s tweet on Sunday announcing his intention to raise trade tariffs, the central bank freed up 280 billion yuan (US$41 billion) of long-term funding for small firms, which are particularly vulnerable to trade war and economic volatility, through a targeted cut in the required reserves for rural commercial banks.
However, it remained tight-lipped on the possibility of further easing, attributing Monday’s cut to its ongoing efforts to set up a three-tier reserve requirement framework to help smaller banks and companies.
Larry Hu, chief China economist at Macquarie Capital, said Beijing may have to use more policy tools to stimulate the economy, but it is too early to change the policy direction.
“It will depend on how much the trade war will impact the Chinese economy,” he said. “The big policy stimulus [in the first quarter] can’t be sustained. Such concerns partly explain the tightening [of lending] in April.”
Economists at Nomura International, led by chief economist Ting Lu, said the room for further easing of monetary policy is “truly limited, as policymakers once again appear seriously concerned about a rapid rise in debt.” Nevertheless, they predicted a rebound in bank lending in May.
....of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!
— Donald J. Trump (@realDonaldTrump) May 5, 2019
Financial stability remains a priority for Beijing, Nomura said, “but we think a double dip is a real risk and believe both markets and policymakers might be a bit too optimistic about the recent growth recovery, as evidenced by the drop in the April manufacturing PMI and export growth.”
The rise in US-China trade tensions and recent sharp drop in stock prices could convince Beijing of the need for more economic stimulus to stabilise growth, they said.
Economists at Morgan Stanley said the government will continue its “pro-growth stance” given weaker April economic data readings and re-escalation of trade tensions, “with full implementation of the announced fiscal easing package and accommodative monetary policy to support government bond issuance.” They noted in particular the PBOC’s move to cut the reserve requirement ratio for smaller banks on Monday.
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