Increase in corporate financing leads to decline in demand for bank lending

New yuan lending dropped to its lowest monthly point in a year in October, contracting by 14 percent year-on-year.

The decline has exacerbated worries that the current economic rebound will not receive enough financial support to be sustained.

Lenders extended 505.2 billion yuan ($80 billion) worth of new loans last month, falling below the 590 billion yuan the market had expected. The amount was also down from the 623 billion yuan extended in September, according to data released by the People's Bank of China, the country's central bank, on Monday.

"The decline was understandable as deposits decreased at the beginning of the quarter, and as a rise in financing through corporate bonds lessened the demand for bank loans," said E Yongjian, a financial analyst at Bank of Communications Ltd.

The central bank's figures showed yuan-denominated deposits held by lenders decreased by nearly 280 billion yuan in October. E added the decline helps explain why banks were more hesitant to extend loans, noting that those institutions must abide by loan-to-deposit ratio requirements, which are set at 75 percent for most lenders.

Also in October, the total amount of "social financing", which includes loans, bond issues and stocks, came in at 1.29 trillion yuan, down from 1.65 trillion yuan in September.

Issuances of corporate bonds raised 299.2 billion yuan in the month, compared with 227.8 billion in September, making them the only means of financing that showed an increase last month.

Non-bank financing, particularly debt issuance, picked up, helped in part by supporting policies, said Chang Jian, China economist with Barclays Bank.

The share of bank credit in total financing fell to 55.5 percent from 59 percent in 2011, while that of debt financing increased to 14.3 percent from 9.5 percent, according to the central bank's figures.

The amount of debt financing rose by 135 billion yuan last month year-on-year.

The latest data support the central bank's view that the country's monetary and financing conditions are not so restrictive that they will fail to support annual economic growth at a rate of between 7.5 and 8 percent, Chang said.

"In other words, aggressive easing has not been necessary."

Yao Wei, China economist at Societe Generale SA, said it seems the central bank does intend to put a cap on bank lending for the year, keeping the amount lent out below 8.5 trillion yuan.

She said the country's credit stock remains accommodative, noting the total amount of outstanding bank credit increased by 15.9 percent year-on-year in October, only slightly less than the 16.2 percent rise seen in September.

"This is half of the peak level reached in late 2009, but already twice the speed of nominal GDP growth," Yao said. "Having learned its previous lessons, the PBOC may start taking into consideration the possible effects of monetary easing on domestic inflation even more down the road.

Zhu Haibin, chief economist in China with JPMorgan Chase & Co, said, "it is worth noting that the notable increase seen in non-bank lending since August this year, in particular trust loans, as well as corporate bond financing, appears to be consistent with the increasing number of public investments being made into infrastructure, railways, environmental protection and clean energy."

Chang estimated the total amount of new financing issued in China is on track to reach a new record of 15 trillion yuan this year, up from the previous peak of 14 trillion yuan, which was set in 2010.

With economic growth expected to accelerate but inflation also expected to pick up toward the end of the year, the likelihood of seeing further interest rate cuts in 2012 is diminishing, Zhu said.

"We expect the central bank will hold interest rates at their current levels in 2013," he said.

Zhu said that one more cut of 50 basis points will probably be made to the reserve requirement ratio this year.

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(China Daily 11/13/2012 page13)