China’s new yuan-denominated loans cut in May as central bank cuts stimulus

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The Chinese national flag is hoisted over the headquarters of the People’s Bank of China, the central bank (PBC), in Beijing, China, April 4, 2020. REUTERS / Carlos Garcia Rawlins

A Reuters poll showed that new bank loans in China likely fell in May as the central bank gradually reduces pandemic-triggered stimulus to cut debt and financial risks as the economy shows strong signs of recovery.

According to an average estimate of 29 economists, Chinese banks issued 1.41 trillion yuan ($ 220.54 billion) in new yuan-denominated loans last month, up from 1.47 trillion yuan in April.

This will be less than the 1.48 trillion yuan issued in the same month a year earlier, when politics was firmly in emergency mode to cushion the economic impact of the COVID-19 crisis and paralyzing lockdowns.

Annual yuan-denominated loans outstanding are expected to rise 12.2% in May, continuing a slow but steady decline since February and falling from 12.3% in April, the survey showed. The growth of broad money M2 in May was 8.1%, as in the previous month, which is the lowest rate since July 2019.

The central bank is trying to curb credit growth to contain debt risks, but is acting cautiously to avoid hurting the uneven economic recovery.

Top leaders have repeatedly vowed to avoid policy sharp turns and keep borrowing costs low, suggesting that any rate hike is still a long way off. The authorities advised banks to support small firms, but be more wary of lending to hot areas of the economy such as real estate.

Finance Minister Liu Kun told parliament on Monday that local governments will bolster project reserves to make effective use of the special bonds.

Last week, the Ministry of Finance approved a 4.27 trillion yuan quota for net issuance of local government debt for this year, according to state media reports, slightly below the 4.47 trillion yuan quota previously approved at the annual parliament meeting in March.

“This relatively small revision may indicate that Beijing is confident in a recovery in economic growth and is increasingly focusing on controlling local government debt,” Nomura said in a research note.

Nomura expects the pace of government funding to pick up significantly in the coming months, given that central and local governments completed only 26% of net funding in the first five months of this year.

Any acceleration in the issuance of government bonds can help increase Total Social Funding (TSF), a broad measure of credit and liquidity.

The TSF is expected to rise to 2.00 trillion yuan in May from 1.85 trillion yuan in April.

China’s policymakers are close to setting an average annual economic growth target of around 5% over the next five years, the low end of what was previously considered a global risk that clouded the outlook, policy sources said.

Credit data is expected on June 10-16.

(1 US dollar = 6.3935 RMB)

Our standards: Thomson Reuters Trust Principles.

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