China's credit expands in June as stimulus efforts kick in

The pick-up suggests that relaxed rules for local authorities to get financing and record-low interest rates are boosting demand for credit.
The pick-up suggests that relaxed rules for local authorities to get financing and record-low interest rates are boosting demand for credit.PHOTO: REUTERS

BEIJING (BLOOMBERG) - China's broadest measure of new credit increased the most since January after the government stepped in to boost provincial finances and the central bank accelerated monetary easing.

Aggregate financing, which includes bank loans and off- balance-sheet credit, was 1.86 trillion yuan (S$408.2 billion) in June, according to the People's Bank of China, higher than all 23 forecasts in a Bloomberg survey of economists.

The pick-up suggests that relaxed rules for local authorities to get financing and record-low interest rates are boosting demand for credit.

China's leadership strengthened its policy response in face of a slowdown in growth - estimated at 6.8 per cent last quarter - and a stock-market rout that at one stage had wiped almost US$4 trillion off equity valuations.

"The data is a good signal: The economy is recovering on a pickup in investment," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong.

Relaxed local government financing rules "will continue to drive infrastructure investment in the third quarter."

Stocks gained after the lending report, though slid in later trading. The Shanghai Composite Index was down 0.3 per cent as of noon local time, after advancing the past three trading days amid a concerted effort by officials to halt drop.

Also released Tuesday was the M2 measure of money supply, which rose 11.8 per cent in June from a year earlier, the biggest gain since February according to data compiled by Bloomberg.

Meantime, there was evidence that less capital flowed out of China last quarter, with China's foreign-exchange reserves posting the smallest decline in a year. The holdings, US$3.69 trillion as of June 30, had shrunk the most on record in January-through-March as money left the country and the central bank bought yuan to stabilize the yuan's exchange rate.

In other signs that growth is stabilizing, China's exports rose for the first time in four months in June and the nation's consumer-price index increased 1.4 per cent from a year earlier, compared with a 1.2 per cent increase in May. The statistics authority is scheduled to release the nation's second quarter gross domestic product tomorrow at 10:00 a.m.

The PBOC cut benchmark interest rates to record lows last month in the fourth reduction since November. The government has also relaxed a loan-to-deposit ratio for banks.

"This doesn't only reflect PBOC's easing, but also State Council's," said Wang Tao, chief China economist at UBS Group AG in Hong Kong, using the name for the Chinese government's cabinet. "As the downward pressure on the economy mounts, the government has relaxed regulations."

Despite the benchmark rate reductions, deepening factory- gate deflation has elevated real borrowing costs for Chinese companies.

"What we want to see is whether the costs of funding for Chinese firms have also dropped significantly, which has not happened much," said Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong.

Liu sees further monetary easing, including an even lower interest rate this quarter, and two reductions in the required-reserve ratio by year-end.