(Bloomberg) -- China’s loan expansion disappointed in September in a sign of still weak domestic demand, even though credit growth exceeded expectations thanks largely to a surge in government bond sales.
- Financial institutions offered 1.6 trillion yuan ($226 billion) of new loans last month, according to Bloomberg calculations based on data released by the People’s Bank of China on Monday. That was below a median forecast of 1.9 trillion yuan in a Bloomberg survey of economists
- Aggregate financing, a broad measure of credit, increased 3.8 trillion yuan, Bloomberg calculations showed, compared with 4.1 trillion yuan in the same month a year ago. The median estimate was 3.6 trillion yuan
The PBOC introduced a barrage of stimulus policies in late September, including outsized cuts to interest rates and the reserve requirement ratio, which freed up cash for banks to lend. Finance ministry officials on Saturday also pledged to use more government borrowing and spending to address issues like the property downturn. The impact of such steps will probably take time to materialize, meaning it had yet to be reflected in the latest data.
“With credit growth still in contraction, it remains too soon to declare a turnaround,” said Lynn Song, chief economist for Greater China at ING Bank. “But with the recent and upcoming stimulus policy rollout combined with the last few months of data, there are some encouraging signs that the worst of the credit decline could be over. At the very least, 2025 credit growth should look healthier.”
September is typically a busy month for borrowing activity because banks are in a rush to meet their quarterly loan targets. The headline credit figure benefited from a jump in government bond sales to more than 1.5 trillion yuan in the month. Such sales were slow earlier in the year.
Over 1 trillion yuan worth of local government special bonds — a key funding source for infrastructure investment — were issued in September, the most since June 2022, according to data compiled by Bloomberg.
Credit demand has been stuck in low gear in the past two years as households and businesses turned cautious. It’s also been cooling because of a housing downturn and authorities’ efforts to rein in debt that piled up among local governments.
The risk is that the country is entering a prolonged period of low demand and deflation, which could threaten its growth prospects for years to come.
“While the PBOC will continue to loosen policy, this is unlikely to boost loan demand much,” Zichun Huang, China economist at Capital Economics, said in a note Monday. “A turnaround in credit growth, and therefore economic activity, would require a more substantial step up in government borrowing.”
The year-on-year growth rate in the stock of credit slowed to a fresh record low of 8%, while total loans also expanded at their weakest-ever pace of 7.8%. The gauges have been decelerating for months due to deflation and weakening demand from borrowers.
Corporate mid- and long-term loans increased by 970 billion yuan in September, down from 1.3 trillion yuan in the same month last year. That points to weak business confidence and possible disinterest in expanding investment and production.
New household mid- and long-term loans, a proxy for mortgages, were less than half of the level recorded a year ago.
The effect of the latest housing policy easing is only likely to become evident in data for October and beyond. Home viewing and sales climbed following the announcement of the measures in late September, including relaxation of home purchase restrictions in some of the biggest cities.
(Updates with analyst comments starting in third paragraph.)
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