Chinese Data reveals a fall in New Yuan Loans

• China enters liquidity trap


• Major slump in Chinese TSF

Data released has shown that Chinese banks raised their new yuan loans by 463.6 billion yuan ($69.78 billion) in July, the banks did not just slump significantly from the previous month but they also missed analysts forecast, with a slowdown in bank lending widely forecasted. The reading fell below expectations and subsequently hit a 2 year low. This is coming amidst the confusion on whether the central bank would cut interest rates this year. However the Central bank has promised to slightly weaken policies to enable the economy meet growth targets, but the potency of further stimulus measure has been brought into question by a growing local government debt.

Economists polled by Reuters had expected new loans to be 800 billion yuan in July, after 1.38 trillion yuan in June.

A wide measure of liquidity and credit in the economy, the Total Social Financing (TSF) slipped from 1.63 trillion yuan in June to 487.9 billion yuan in July. The downturn in new credit came after a lending binge in the first half of the year that sparked concerns among policy makers over the sustainability of such debt-fuelled growth.  The TSF mostly contains off-balance sheet forms of financing that are seen outside the conventional bank lending system, which include the likes of loans from trust companies, initial public offers and bond sales.

The Chinese growth outlook currently maintains its previous weakness as domestic and global demand grows progressively lighter. Many analysts are being pushed to believe that the central bank may have a very weak inclination to cut rates again due to the well-contained consumer inflation and the moderation in producer price deflation in July.

China’s broadest measure of money supply (the M2 Money Supply), when compared with June’s 11.8% growth, has risen by 10.2% from last year, Analysts had previously anticipated an 11.2% growth in July. Outstanding loans for the yuan climbed 12.9% higher by month-end on an annual basis, against the expectations of 13.8%. The People’s Bank of China has set its M2 growth target for the year at around 13%, hinting at a continued accommodative policy as Beijing plans to initiate hard felt economic restructuring involving state owned enterprises in major industrial sectors.

The slump was only seen in the M2 as the M1 accelerated, further strengthening the evidence that China is slipping into what economists call a “liquidity trap”, a period during which companies and individuals would rather hoard cash than spend it, as they wait out uncertain economic times.