China’s New Loan Figures Plunge to 15-Year Low, but Analysts Urge Calm

China’s new bank loans plummeted to their lowest level in 15 years, totaling just 260 billion yuan ($36.28 billion) in July. This represents an 88% drop from the same month last year and falls short of expectations, which had projected 450 billion yuan in new loans.

The drastic decline in loan figures has sparked concerns about the strength of China’s economy. However, some analysts suggest that investors should remain calm, attributing the drop to a combination of seasonal factors and recent regulatory changes rather than a signal of deeper economic distress.

Iris Tan, a senior equity analyst at Morningstar, explained that the sharp reduction in July’s loan growth was influenced by weakened credit demand from both businesses and households. Household short-term loans, in particular, fell significantly, highlighting ongoing concerns about consumer confidence and spending. Although corporate loans continued to grow, the pace was slower, primarily driven by discounted bank notes.

Tan also pointed out that the decline was partly due to new regulations targeting “self-circulating” practices in the financial system. This practice involves large enterprises borrowing money at low costs and then depositing it into banks as high-yield structured deposits, rather than using it for operational or investment purposes. The crackdown on such practices is intended to redirect funds into the real economy rather than financial arbitrage.

Jasmine Duan, a senior investment strategist at RBC Wealth Management Asia, echoed Tan’s sentiment, noting that much of the borrowed money had previously gone into financial arbitrage rather than the real economy. Duan suggested that the People’s Bank of China (PBOC) has downplayed the significance of overall credit growth due to these issues, expecting continued weak credit growth in the near term, particularly for RMB loans.

Despite the weak monthly figures, Tan emphasized that the market should not overreact. She noted that July is typically a slow month for credit growth, and year-to-date bank loan growth remains relatively stable at 8.7%, compared to 8.8% in June. This stability aligns with the government’s strategy to moderate credit growth, which, according to Tan, benefits banks by reducing equity consumption and mitigating risks associated with aggressive loan pricing.

However, Tan and other analysts acknowledge that the sluggish loan growth reflects broader economic challenges. RBC’s Duan highlighted that the current data suggests a cautious outlook from both households and corporations. She emphasized that without stabilization in the property market, it is unlikely that loan growth will see a significant rebound.

In summary, while July’s loan data points to notable weakness in China’s financial sector, analysts advise against panic. They argue that the decline results from a mix of regulatory measures and seasonal trends rather than an outright economic collapse. The ongoing challenge remains the stabilization of the property market, which will be crucial for revitalizing loan growth and overall economic confidence.