Bloomberg News

China Signals Credit Easing as October Loans Jump to $93 Billion

November 13, 2011

Nov. 12 (Bloomberg) -- China’s lending jumped by more than analysts forecast in October, signaling that the government may be loosening credit quotas to support growth in the world’s second-biggest economy as Europe’s debt crisis deepens.

Local-currency lending was 586.8 billion yuan ($92.5 billion), the People’s Bank of China said in a statement on its website yesterday. That was the most since June, exceeding the previous month’s 470 billion yuan and all 18 estimates in a Bloomberg News survey. M2, the broad measure of money supply, rose 12.9 percent.

Chinese officials aim to sustain the nation’s expansion as the property market cools and Europe’s slowdown hits exports. Daiwa Capital Markets sees a rebound in lending through this quarter after Premier Wen Jiabao said economic policies may be “fine-tuned” and pledged support for smaller companies. In China, the government guides lending levels.

“This is a meaningful pickup in new loans which suggests selective easing has already started,” said Qu Hongbin, a Hong Kong-based economist with HSBC Holdings Plc. “This should help stabilize growth with small and medium-sized enterprises and increase credit support for ongoing infrastructure projects. China has no risk of a hard landing.”

The government aims to sustain the momentum of an economy that grew 9.1 percent in the third quarter. Exports increased in October at the slowest pace in two years excluding seasonal distortions, industrial output growth weakened and home sales fell 25 percent from September.

Stocks Slide

The Shanghai Composite Index fell 1.9 percent last week on concern that Europe’s crisis may not be contained.

Most economists expect the government to loosen some fiscal or monetary policies without cutting interest rates as inflation stays above a full-year target of 4 percent, a Bloomberg News survey showed this week.

The nation’s four biggest state-owned banks including China Construction Bank Corp. and Bank of China Ltd. extended more than a third of their 240 billion yuan of October loans in the final two days of the month, the 21st Century Business Herald reported yesterday. It cited an unidentified person familiar with the situation.

“Lending needs to be eased in the fourth quarter after the over-tightening of credit conditions,” said Wang Tao, a Hong Kong-based economist with UBS AG.

‘Fine-Tuning’

The central bank may cut reserve requirements for smaller lenders to free up credit for small companies hit hardest by a credit squeeze, economists say. Mizuho expects a reduction as early as this month while Societe Generale SA sees a move by the end of the year.

“Premier Wen’s fine-tuning announcement was the signal that the balance of risks had shifted from inflation to growth,” said Tim Condon, Singapore-based head of Asian research at ING Groep NV. “We expect more fine-tuning and a cut in the required reserve ratio within three months.”

If the loosening continues, new loans should be about 650 billion yuan in both November and December, bringing the full- year total to more than 7.5 trillion yuan, said Sun Mingchun, head of China research at Daiwa Capital Markets in Hong Kong. “This will significantly reduce the risk of a hard landing in the fourth quarter,” he said.

Money Supply

The expansion in M2 money supply in October compared with the 13 percent median estimate in a Bloomberg News survey and a 13 percent gain the previous month. The central bank set a target of 16 percent growth this year.

Economists at Capital Economics Ltd. and Standard Chartered Plc say money-supply growth may be distorted as savers shift funds into wealth management products from savings accounts. These products aren’t included in M2. Consumer prices rose 5.5 percent last month while the benchmark one-year deposit rate is 3.5 percent.

Household deposits declined for a second month in October, falling by 727.2 billion yuan, yesterday’s data showedd.

“This may be related to new rules that forbid wealth management products from being classified as regular deposits,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA. “It also suggests that banks’ capacity to lend is deteriorating.”

Interest rates lagging behind the pace of inflation run the risk of undermining banks’ deposit bases, Thomas Byrne, a senior vice president at Moody’s Investors Service said in a Nov. 9 interview.

--Zheng Lifei, with assistance from Ailing Tan in Singapore and Nerys Avery in Beijing. Editors: Paul Panckhurst, Cherian Thomas

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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