JPMorgan Econ FI-China July credit disappointed again, led by weak loans-109833606

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Asia Pacific Economic Research

13 August 2024

JPMORGAN

www.jpmorganmarkets.com

Emerging Markets Asia, Economic

and Policy Research

Haibin Zhu

(852) 2800-7039

haibin.zhu@jpmorgan.com

Grace Ng

(852) 2800-7002

grace.h.ng@jpmorgan.com

Tingting Ge

(852) 2800-0143

tingting.ge@jpmorgan.com

Ji Yan

(852) 2800-7673

ji.yan@jpmorgan.com

JPMorgan Chase Bank, N.A., Hong Kong Branch

•July credit came in below expectations. TSF flow printed at 771bn yuan and

TSF growth edged up to 8.2%oya. New loan creation came in weak at 260bn

yuan, with loan growth slowing to 8.7%oya. Meanwhile, M2 growth edged up

to 6.3% but M1 growth registered another record low at -6.6%oya.

•CNY loan component in TSF registered the first monthly decline on record

(-77bn yuan), reflecting weak loan demand but also banks’ low incentive to

lend under low interest rates, NIM compression and capital adequacy pressure

(especially for smaller banks). Non-loan components in TSF were in line with

expectations in July, with net government bond issuance at 691bn yuan, net

corporate bond issuance at 203bn yuan and net decline in shadow credit of 76bn

yuan.

•Our forecasts look for another 25bp RRR cut in 3Q and 10bp rate cut in 4Q.

Changing Fed rate outlook and mitigated CNY depreciation pressure open

room for the PBOC to maintain small-step rate cuts in the coming quarters. But

overall, monetary policy can hardly be labelled as accommodative given the

slow pace of rate cuts and weak credit growth. Despite the policy shift since the

July politburo meeting, the magnitude of policy adjustment runs the risk of

being insufficient to stabilize the economy, hence the risk to 3Q growth forecast

is biased to the downside.

China’s July credit data disappointed the market again. TSF flow came in below

expectations at 771 billion yuan (JPM: 1,378 bn yuan: consensus: 1,001 billion

yuan), compared to 3,300 billion yuan in June (and 537bn yuan in July 2023). The

growth rate of outstanding TSF inched up to 8.2%oya (vs 8.1%oya in June).

Meanwhile, new loan creation came in at 260 billion yuan in July (JPM: 600bn

yuan; consensus: 419bn yuan), with loan growth slowing to 8.7%oya (vs 8.8%oya

in June).

In the breakdown of new loan creation, medium- and long-term loans (MLT loans)

to corporates increased 130 billion yuan in July (vs 970 billion yuan in June), while

short-term loans (ST loans) and bill financing to corporates inched up 9 billion

yuan (vs 631 billion yuan in June). Despite ongoing industry policy support for

manufacturing upgrade, green economy, NEVs, etc., the private corporate sector

in general has remained cautious about investment decisions and increasing

leverage, amid the challenging business environment, deflationary concerns, and

an uncertain economic outlook. Loans to households contracted 210 billion yuan

in July (vs expansion of 571 billion yuan in June), with a 10bn yuan uptick in MTL

loans to households (largely related to mortgage loans). It is in line with renewed

weakness in July new home sales after a temporary recovery in June. For non-loan

TSF components, net government bond issuance rose 691 bn yuan, largely in line

with our high-frequency tracking (vs 848bn yuan in June). Meanwhile, corporate

bond issuance rose 203 billion yuan (vs 210bn yuan in June). Shadow credit (trust

loan, entrust loan and bank acceptance) contracted 76 billion yuan in July, after the

decline of 130 billion yuan in June.

See page 7 for analyst certification and important disclosures.

China: July credit disappointed

again, led by weak loans

Haibin Zhu (852) 2800-7039

haibin.zhu@jpmorgan.com

JPMorgan Chase Bank, N.A., Hong Kong Branch

Grace Ng (852) 2800-7002

grace.h.ng@jpmorgan.com

Tingting Ge (852) 2800-0143

tingting.ge@jpmorgan.com

Ji Yan (852) 2800-7673

ji.yan@jpmorgan.com

Asia Pacific Economic Research

China: July credit disappointed

again, led by weak loans

13 August 2024

JPMORGAN

Regarding monetary aggregates, M2 money supply growth inched up to 6.3%oya in July (vs

6.2%oya in June), on a 0.6% m/m, sa rise (vs +0.0% m/m sa in June). Besides, M1 fell

6.6%oya (another new record low), after the decline of 5.0%oya in June. RMB deposits

growth ticked up to 6.3%oya (vs 6.1%oya in June), and the ratio of annual increase in new

loans to the increase in new deposits inched down to 116% (vs 119% in June). Our estimate

of credit impulse (the gap between TSF growth and nominal GDP growth) stayed unchanged

at 4.0%pts.

Weak loan growth likely reflects both soft credit supply and

demand

The disappointment in July TSF report mainly came from the weak loan growth. Although

new loan creation came in positive at 260bn yuan, the CNY loan component in TSF

contracted by 77bn yuan in July, the first time on record. The statistical coverage difference

between these two measures is that TSF’s CNY loan component does not include banks’

lending to non-bank financial institutions (which contributes to the bulk of the difference) and

overseas CNY loan. Hence, banks’ loan to the real sector (households and corporates) was

net negative in July.

The rather weak loan data reflects weak credit demand. The further deceleration in M1

growth led to a widening gap between M1 and M2 growth at 12.9%pts in July (vs 11.2% in

June). While it may have been exaggerated due to the regulatory crackdown on interest rate

arbitrage and absence of households’ demand deposit from China’s M1 statistics (link), the

underlying driver, namely weak loan demand, remains in place. Corporates prefer to keep

deposits more in time deposits than in demand deposits when there is a lack of investment

opportunities. Household loan is also weak given the renewed weakness of new home sales

in July.

On top of that, we think it is also likely driven by weak incentive for banks to lend. In the past

few months, the PBOC has been trying to de-emphasize the importance of quantitative

monetary policy instruments, and argues that slower money supply growth and credit growth

is a natural outcome of economic transformation (from high credit-intensity to low credit-

intensity), a changing financial market landscape (rising importance of capital market

financing) and improvement in credit transmission. While we think these explanations are

debatable, the official guidance seems to have been well reflected in the credit report. Our

banking analysts’ conversation with banks also suggests that loan growth has been de-

emphasized in recent months although that was one of their KPIs previously. From banks’

business perspective, low interest rates, NIM compression pressure and capital adequacy

problems (especially for smaller banks) have weighed on their incentive to lend.

Look for modest easing ahead: a 25bp RRR cut in 3Q and a 10bp

policy rate cut in 4Q

The recent speech by PBOC Governor Pan and the 2Q Monetary Policy Operation Report

reiterated that China’s monetary policy will shift from quantitative measures to price-based

measures. Amid easing CNY depreciation pressure, the PBOC and state banks seem to have

turned their risk management focus to the interest rate space. Aside from CGB selling from

state banks, some rural banks in Jiangsu province were banned from CGB trading after

misconduct was found by the National Association of Financial Market Institutional

Investors. The PBOC also introduced temporary overnight repo and reverse repo to improve

the interest rate corridor mechanism, and Governor Pan mentioned that the interest rate policy

will shift the focus to the 7-day reverse repo rate as the primary policy rate. The combination

of market-based and administrative measures reflect the PBOC’s recent efforts to strengthen

interest rate policy and guide the formation of an upward CGB yield curve.

Haibin Zhu (852) 2800-7039

haibin.zhu@jpmorgan.com

JPMorgan Chase Bank, N.A., Hong Kong Branch

Grace Ng (852) 2800-7002

grace.h.ng@jpmorgan.com

Tingting Ge (852) 2800-0143

tingting.ge@jpmorgan.com

Ji Yan (852) 2800-7673

ji.yan@jpmorgan.com

Asia Pacific Economic Research

13 August 2024

JPMORGAN

The PBOC’s multiple-objective framework suggests the central bank’s monetary policy

decision needs to balance the trade-offs between near-term and long-term objectives (i.e.

avoid large stimulus), between growth and risk prevention (banks’ NIM compression

pressure), between domestic and external objectives (price stability vs currency stability).

These multiple objectives can conflict with each other in the near term and thus contribute

to dilemma in policy choice by the PBOC. At most time of this year, the PBOC has faced a

policy dilemma between price and currency stability, and between growth and financial

stability concerns. In particular, inadequate domestic demand and deflation pressures called

for rate cuts, but CNY depreciation pressure amid interest rate differentials created the

imperative for more stable interest rates.

Our US economists now expect the FOMC to cut by 50bp at both the September and

November meetings, followed by 25bp cuts at every meeting thereafter. The repricing of the

Fed rate outlook and the softening of the USD means currency stability may no longer be a

binding constraint. With that, we expect the PBOC will continue to cut rates and we add a 10

bps cut in 4Q in addition to the 10 bps cut we had penciled for 1Q25, both aimed at lifting

growth and mitigating deflationary pressure in the economy. While we have downgraded

full-year TSF growth to 8.1% and loan growth to 8.4%, the combination of banks’ weak credit

supply incentive and household and corporates weak credit demand points to additional

downside risk.

The July politburo meeting called for countercyclical policy measures to be strengthened.

However, there is a risk that policy adjustment is not sufficient to stabilize the growth

momentum. On the fiscal side, the focus is to fully utilize the existing fiscal space (e.g. expand

the use of special Treasury bond and special local government bond to support consumption

and other growth stabilization efforts) rather than introduce additional fiscal stimulus. On the

monetary policy front, although the mitigated CNY depreciation pressure opens the room for

the PBOC to maintain small-step rate cuts in the coming months, the monetary policy can

hardly be labeled as accommodative given the slow pace of rate cuts and weak credit.

Money aggregates

percent change

2023 Apr-24 May-24 Jun-24 Jul-24

TSF

stock, %oya 9.5 8.3 8.4 8.1 8.2

flow, bn yuan 35,580 -66 2062 3300 771

RMB loan

stock, %oya 10.6 9.6 9.3 8.8 8.7

flow, bn yuan 22,744 730 950 2130 260

%oya 11.3 7.2 7.0 6.2 6.3

%m/m, sa -0.1 0.3 0.0 0.6

Source: PBOC, J.P. Morgan

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AsiaPacificEconomicResearch13August2024JPMORGANwww.jpmorganmarkets.comEmergingMarketsAsia,EconomicandPolicyResearchHaibinZhu(852)2800-7039haibin.zhu@jpmorgan.comGraceNg(852)2800-7002grace.h.ng@jpmorgan.comTingtingGe(852)2800-0143tingting.ge@jpmorgan.comJiYan(852)2800-7673ji.yan@jpmorgan.comJPMorganC...

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