China's new bank loans, which had grown strongly in May and June, were weaker than expected in July and export growth showed a sharp deceleration, prompting analysts to predict monetary policy easing measures sooner than expected.
Asian stocks fell after the data, with European shares also trading in the red Friday morning. The Australian dollar – considered by some as a proxy for market views on the possibiltiy of a hard landing in China - fell.
New loans amounted to 540.1 billion yuan ($85 billion) in July, versus expectations of around 700 billion yuan in a Bloomberg survey of economists and of 690 billion yuan in a Reuters survey, a sharp pullback from June’s 920 billion yuan.
One consequence of the drop in loans is the danger of a slowdown in investment - especially investment by local governments in projects such as infrastructure which would boost the economy.
“For the local governments, the major source of funding is bank lending,” Wei Yao, China economist, at Societe Generale told Emerging Markets. “I think [the banks] are giving loans but not as much as before.”
Yao said that a string of local governments have announced big local stimulus packages and credit expansion would have been “much faster” despite weak private credit demand had banks approved the loans for these plans.
It seems that the People’s Bank of China (PBOC) and the banking regulator are “somewhat cautious” about credit risk accumulating in the banking system, as levels of non-performing loans are rising, she added.
Although disappointing, the number “looks comparable with July outturns in recent years,” analysts at Barclays Capital wrote in a market note.
‘TOO OPTIMISTIC’ FORECASTS
They said the disappointment was party because the forecasts about the pace of the Chinese recovery and the external downturn, the efforts the PBOC is willing to make and banks’ willingness to extend loans had been “too optimistic.”
Lending was even lower in July last year and broad credit growth has been boosted by a strong rise in corporate bonds, Capital Economics analysts wrote.
“Overall though, the lending data, alongside the rest of July’s weak numbers are likely to prompt renewed efforts by policymakers to get banks lending,” they said.
Perhaps more worrying for policymakers, China’s export growth fell sharply, posting an increase of just 1 percent year-on-year in July from June’s 11.3 percent and against analyst expectations of a 8.6 percent rise.
The fall was led by a deceleration in exports to the U.S. and Europe, reflecting the effect of the prolonged eurozone crisis.
“The export slowdown is likely more worrisome for the policymakers, as exports still account for 30 percent of GDP, and more importantly, the sector is labor intensive,” Barclays Capital analysts wrote.
“If the deceleration continues, we are likely to see more material deterioration in job market conditions in the coming months,” they said, adding that an “imminent monetary policy move, such as rate cuts, cannot be ruled out.”
Societe Generale’s Yao said the PBOC was likely to allow the banks to lend more to special financing vehicles set up by local governments to apply for loans but was also very likely to ease monetary conditions.
“I think they will cut reserve requirement ratio (RRR) rather than the interest rate,” Yao said. “CPI seems to be bottoming out now, with food prices rising.”
China’s inflation hit a 30-month low in July but food prices showed an increase, figures released earlier in the week showed.
A cut in RRR is “a matter of days” said Yao, whose opinion was echoed by economists at Capital Economics, who expect a cut “very soon” and a reduction in the PBOC’s benchmark rate during the quarter.