China lending drops sharply, fuels calls for bolder stimulus moves

[BEIJING] China's bank lending tumbled in October and money supply growth cooled, raising fears of a sharper slowdown in the economy and prompting some economists to urge the government to ratchet up stimulus measures, including cutting interest rates.

Chinese banks made a much less-than-expected 548.3 billion yuan (US$89.5 billion) worth of new loans in October, down 36 per cent from September, central bank data showed on Friday, pointing to deepening economic weakness in the fourth quarter.

The drop in credit came after some banks reported bad loans rose at their fastest clip in two years over the summer, while deposits shrank, limiting their ability to lend and highlighting growing strains on the financial system as the world's second-largest economy cools.

"The downward pressure on the economy will increase if we don't step up policy support," said Wang Jun, senior economist at China Centre for International Economic Exchanges (CCIEE), a well-connected think-tank in Beijing.

Mr Wang said the central bank should first consider cutting reserve requirement ratios (RRR) for all banks to encourage them to lend more, although cutting interest rates remains an option.

Broad M2 money supply rose 12.6 per cent in October from a year earlier, trailing market expectations of 12.9 per cent and the second slowest growth rate in 2-1/2 years.

Other data on Thursday also showed that China's economy lost further momentum in October, with factory growth dipping and investment growth hitting a near 13-year low as the property market continued to weaken.

The surprisingly weak credit data came despite the central bank's recent injection of some 770 billion yuan (US$125.63 billion) in three-month loans into some banks via a"medium-term lending facility", fuelling doubts about the effectiveness of its targeted policy approach.

"The central bank seems to be more inclined to use innovative tools to release liquidity, but such tools have limited effectiveness," said Niu Li, an economist at the State Information Centre, a top government think-tank.

Mr Niu said either cutting interest rates or RRR should be policy options, given low inflation and high borrowing costs. He expects fourth-quarter growth to slow to 7.2-7.3 per cent, bringing full-year growth to 7.3 per cent.

Despite a raft of stimulus measures earlier in the year, China's annual growth slowed to 7.3 per cent in the third quarter, the weakest since the global financial crisis.

Still, few government economists see the central bank making any aggressive policy moves before the end of the year. "The probability of cutting interest rates and RRR will be high next year," said Zhang Bin, senior economist at the Chinese Academy of Social Sciences (CASS), a top government think-tank.

Chinese leaders have indicated they will tolerate slower growth as long as the job market remains strong, but a further slowdown could hit manufacturers harder, raising the risk of debt defaults that could cascade through the financial system.

Highlighting the growing pressure facing Chinese companies, the industry ministry has said financing costs of manufacturers jumped 13.5 per cent in the first nine months from a year earlier, and were 5.6 percentage points higher than factories'revenue growth.

Sluggish demand and overcapacity are compounding the problems, particularly for heavy industry like steel mills.

Policymakers have ruled out big stimulus measures as China is still struggling to deal with a mountain of local government debt, the hangover from 4 trillion yuan (US$650 billion) in spending rolled out in 2008/09 to cushion the impact of the global crisis.

Similarly, the central bank has only cut RRR for selected banks and pumped more short-term cash into the system in a bid to channel credit to more vulnerable sectors of the economy.

Debt levels at China's 200 biggest companies increased by five times between 2007 and 2013 and financial pressures on them will likely intensify as the economy continues to cool, Standard & Poor's said on Friday.

Top government think-tanks, which make policy proposals, have urged the government to cut its economic growth target next year, probably to around 7 per cent, from around 7.5 per cent this year.

Chinese leaders are due to map out economic and reform plans for 2015 at a major work conference next month, including economic targets for the year ahead which will be unveiled in parliament next March.

The soft economic performance in October cemented the view that China is on track to grow at its weakest pace in 24 years.

The government is almost certain to miss its annual growth target this year for the fist time since 1999, when the economy was hit by the Asian financial crisis.

REUTERS