Low interest rates in China are failing to stimulate lending in the economy, creating a challenge for policy makers as they try to support the country’s fragile recovery.
Central bank data showed a sharp slowdown in overall financing, a broad gauge of credit, in July on Friday as new loans and corporate bond issuance weakened.
Meanwhile, growth in M2, the broadest measure of the money supply, accelerated more than expected to 12% in July. Taken together, the data shows that banks are plentiful in cash but are struggling to increase lending to customers amid weak growth and turmoil in the housing market.
Craig Botham, chief China economist at Pantheon Macroeconomics Ltd. Liquidity is plentiful, but no one wants it. Under these circumstances, he said, “monetary policy can do little to support the economy.”
The People’s Bank of China has refrained from cutting key interest rates since cutting them in January and has instead focused on persuading banks to increase lending, especially to target sectors such as small businesses. However, defaults in the real estate sector and a weak economy made banks reluctant to lend.
Recently, Beijing pinned its hopes on political banks to stimulate growth, allocating 1.1 trillion yuan ($163 billion) to be used to fund infrastructure projects.
The mismatch between liquidity and bank lending also increases financial risks, as market interest rates fall below the policy rates set by the central bank.
We need to better monitor changes in the market, said Ming Ming, chief economist at Citic Securities Co. . Leverage and earn money flow into the real economy.
The central bank may be willing to rein in some of the excess liquidity in the banking system on Monday through the Medium Term Lending Facility process. Eight of the 12 economists and analysts polled by Bloomberg predicted it would draw money through the multilateral fund for the first time this year.
Friday’s data showed a sharp decline in long-term loans to households and businesses from June, reflecting weak demand for mortgages and companies’ reluctance to invest further. This comes despite separate data released earlier this week that showed average interest rates for new mortgages and commercial loans eased in June.
Billing financing, a form of short-term borrowing for businesses, rose in July, according to a report Friday. Banks use financing extensively to increase lending and meet regulatory requirements in times of low demand for borrowing.
Outstanding loans rose 10.7% to 334.9 trillion yuan, a slight change from the 10.8% expansion in June.
Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd. “Credit growth is particularly weak compared to last year.” “It reflects that domestic demand remains very weak” due to the ongoing Covid outbreak and weak housing market sentiment, he said. .