China credit, money, FX reserves growth slows

BEIJING (BestGrowthStock) – The pace of money and credit growth in China slowed markedly in June as the central bank steered its anti-crisis monetary policy back to normal, while the country’s official currency reserves barely grew last quarter.

Banks extended 603.4 billion yuan ($89.1 billion) in net new local-currency loans last month, in line with expectations, but down from May’s 639.4 billion yuan and less than half of last June’s 1.53 trillion yuan, the People’s Bank of China said on Sunday.

As a result, year-on-year growth in the stock of outstanding yuan loans fell to 18.2 percent at the end of June from 21.5 percent in May and 33.8 percent as recently as November.

“China’s efforts to avoid overheating since the end of last year have restricted banks’ ability to extend loans to the property sector as well as to investment vehicles backed by local governments,” said Dong Xian’an, chief macro economist with Industrial Securities in Beijing.

The tightening of policy, following a record surge in lending last year to cushion the global crisis, was reflected in China’s money supply figures.

Annual growth in the closely watched M2 measure moderated to 18.5 percent in June from 21.0 percent in May and 29.7 percent as recently as November. Economists had forecast a 18.7 percent rise.

Annual growth in the narrower M1 gauge, which excludes savings deposits and so is a better barometer of imminent spending intentions, fell to 24.6 percent in June from 29.9 percent in May. In November, the year-on-year growth rate was 34.6 percent.

Unlike many other Asian central banks, the PBOC has not started to reverse the interest rate cuts it made in late 2008 to help the economy weather the global financial crisis.

Indeed, because of a weakening growth outlook, economists have scaled back their expectations of how quickly China will normalize policy, with a majority no longer projecting an increase in borrowing costs this year.

Economists surveyed by Reuters last week said they do not expect the first increase in benchmark lending until the second quarter of 2011.

SMALL RISE IN RESERVES

Dong with Industrial Securities raised the prospect that the PBOC could even take its foot off the monetary brakes soon because the economy is cooling so fast.

He said seasonally adjusted import figures released on Saturday showed that domestic demand was “freezing.

“To avoid a steep slowdown in growth, China will relax its credit tightening in the third quarter,” he said.

Any easing would probably take the form of allowing banks to loosen their rules on lending to property developers, home buyers and local governments.

Because interest rates are so low compared with growth in output and sales, the cost of a loan in China is much less of a constraint than the availability of credit.

On that score, as Sunday’s figures show, the PBOC has been actively reversing its ultra-loose policy stance to hit this year’s annual credit quota of 7.5 trillion yuan, down from a record 9.6 trillion yuan in 2009 — nearly 30 percent of GDP.

E Yongjian, an analyst with Bank of Communications, said the PBOC was unlikely to loosen any time soon as credit growth trends were in line with the central bank’s expectations.

“On the other hand, the possibility of an interest increase has fallen significantly from earlier this year,” E said.

China’s foreign (Read more about foreign investment into China) exchange reserves, the largest stockpile in the world, rose just $7.2 billion in the second quarter to $2.4543 trillion at the end of June. The reserves rose $47.9 billion in the first quarter and $453.1 billion in all of 2009.

China’s massive build-up of reserves commonly cited as evidence by economists that the yuan, in the words of the International Monetary Fund, is significantly undervalued.

Reserves rose $43.4 billion in April and $14.8 billion in June but plunged $51 billion in May.

The PBOC gave no explanation for the changes. The net increase was tiny next to the $41.2 billion trade surplus for the second quarter.

Economists said the slump in the euro will have reduced the dollar value of China’s euro-denominated assets, but other factors could have been at play — including capital outflows linked to demand for dollars due to the crisis of confidence in the euro zone and diminished expectations of a yuan revaluation.

(Reporting by Michael Wei, Langi Chiang and Emma Graham-Harrison; Writing by Alan Wheatley)

China credit, money, FX reserves growth slows