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China Loans Trail Estimates as Wen Struggles to Fuel Rebound

Published: October 12, 2012 | 9:42 am
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China’s new lending was below analysts’ estimates last month as the government struggles to reverse a slowdown in the world’s second-biggest economy.
Banks extended 623.2 billion yuan ($99.5 billion) of local- currency loans, the People’s Bank of China said on its website today. That compares with the median estimate of 700 billion yuan in a Bloomberg News survey of economists.
China’s central bank has cut interest rates and lenders’ reserve requirements to spur lending, with economic growth sinking just as the Communist Party prepares for a once-a-decade leadership transition that starts next month. While local governments are rolling out plans for infrastructure spending, banks are wary of accumulating bad loans and have failed to make use of extra leeway for offering discounts to borrowers.
Premier Wen Jiabao is “risking handing over a sharply slowing economy to the next administration, a blemish to his otherwise great performance over the last ten years,” said Liu Li-Gang, an economist in Hong Kong at Australia & New Zealand Banking Group Ltd. (ANZ), who previously worked at the World Bank. Liu said the central bank needs to cut lenders’ reserve requirements.
Officials at the nation’s top four lenders have indicated that they are limiting discounts for the best corporate clients to 10 percent on the benchmark lending rate, not the 30 percent allowed by the central bank from July. The officials asked not to be identified as they’re not authorized to speak publicly.

Inflation, Trade

The lending report is ahead of trade figures due tomorrow, inflation data to be announced Oct. 15, and third-quarter gross domestic product scheduled for release on Oct. 18.
“The government has approved many infrastructure projects, but banks are reluctant to lend to local governments,” Xie Dongming, a Singapore-based economist at Oversea-Chinese Banking Corp, said before the release.
For the first nine months, new loans were 6.72 trillion yuan, 18 percent more that the same period in 2011. The government has held off from cranking up lending to the record levels of the financial crisis, when 8.6 trillion yuan was lent in the same period in 2009, according to Bloomberg data.
“Lending at this rate is not going to drive much of an economic rebound,” said Mark Williams, an economist at Capital Economics Ltd. in London. “China’s banks extended fewer new loans in the third quarter than they did in the second.”

Slumping Stocks

Stocks in China have slumped about 14 percent from this year’s high on March 2 on concern the government isn’t loosening monetary policy or introducing stimulus policies fast enough, as the central bank focuses instead on operations in the money market. The benchmark Shanghai Composite Index rose 0.1 percent today on signs of improvement in the U.S. economy.
Alcoa Inc. (AA), the largest U.S. aluminum producer, this week cut its forecast for global consumption of the metal by 1 percentage point on slowing Chinese demand.
China’s September trade figures may show some improvement in exports. Overseas shipments probably rose 5.5 percent from a year earlier, according to the median estimate of 35 economists, after a 2.7 percent gain in August.
Inflation may have been 1.9 percent in September, close to a two-year low, according to the median estimate in a Bloomberg News survey. That masks the potential for a rebound, partly driven by food, that could complicate Wen’s efforts to spur growth, according to estimates from Credit Agricole CIB and Citigroup Inc.

Inflation Risks

Credit Agricole says the inflation rate may approach 4 percent by year-end and Citigroup Inc. estimates a pace of about 3.5 percent. The government also faces the risk of bubbles reinflating in the housing market.
“The lagged impact of rising corn and soybean prices will push consumer inflation above 3 percent by year-end,” said Yao Wei, an economist at Societe Generale SA in Hong Kong. “Pork prices may take up the inflation baton in coming months.”
China’s economy expanded 7.6 percent in the second quarter from a year earlier, the least in three years. Growth may have slowed to 7.4 percent in the third, according to the median estimate of 23 economists surveyed by Bloomberg News from Sept. 11 to 18.
The government has accelerated approvals for investment projects, lowered interest rates and boosted tax support for exporters. At the same time, authorities have refrained from easing monetary policy since rate cuts in June and July and a May reduction in banks’ reserve requirements.

Aggregate Financing

The PBOC last year introduced an aggregate financing measure, designed to capture other funding sources in the economy apart from loans, such as bond and stock issues, trust loans and banks’ off balance-sheet loans.
The indicator was 1.65 trillion yuan last month, compared with 427.9 billion yuan in the same month last year, according to central bank data. For the first nine months, aggregate financing was 11.73 trillion yuan compared with 9.8 trillion yuan in the same period last year.

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