China's July new lending sharply down to 540b yuan

BEIJING?-- China's new yuan-denominated lending in July declined sharply to 540.1 billion yuan ($85.19 billion), down from 919.8 billion yuan in June, the People's Bank of China, the central bank, announced Friday.

M2, a broad measure of the money supply that covers cash in circulation and all deposits, increased 13.9 percent year-on-year to 91.91 trillion yuan at the end of July, up 0.3 percentage points from the end of June but lower than the 14-percent annual target set by the government for 2012.

Preliminary data showed that social financing, a measure of funds raised by entities in the real economy, totaled 8.82 trillion yuan in the first seven months, up 514.3 billion yuan from the same period in 2011, said the PBOC.

Despite being much lower than market expectations, the deceleration in lending growth in July does not necessarily suggest a tightening of the money supply, economists said.

Peng Wensheng, chief economist with China International Capital Corporation Limited, said the sharp decline was merely a seasonal decrease following a credit expansion in June.

The narrow measure of money supply (M1), which covers cash in circulation plus demand deposits, rose 4.6 percent year on year to 28.31 trillion yuan at the end of July.

Analysts also believe that the slowdown in lending was in line with the weakening industrial and investment activities that came along with the country's slowing economic growth.

The weak growth in new lending, especially in long-term loans, showed that China's efforts to stabilize growth have not yet yielded measurable effects, said a report from Bank of Communications, China's fifth-largest lender by assets.

The latest data from the National Bureau of Statistics (NBS) showed that China's industrial value-added output expanded 9.2 percent year on year in July, 0.3 percentage point lower than June's 9.5 percent and the slowest growth since May 2009.

Meanwhile, China's urban fixed asset investment rose 20.4 percent year on year to 18.43 trillion yuan in the first seven months of 2012. The growth rate stayed flat with that in the first half of the year, the NBS data showed.

In a bid to bolster the economy, the central bank cut benchmark interest rates twice in May and June, separately. It had previously lowered the reserve requirement ratio three times before the rate cut.

Economists said the sharp decrease in July lending could have prompted further credit easing, especially when domestic consumer inflation eased to its lowest rate in two and a half years in July.

Lian Ping, chief economist with Bank of Communications, said that in the face of complicated and uncertain conditions in both the domestic and external markets, China will keep its monetary policy basically prudent with some fine-tunings toward easing.

Lu Zhengwei, chief economist with Industrial Bank, said he expected the central bank to lower banks' reserve requirement ratio by 50 basis points in August, but there would be no further interest rate cuts.

But they also pointed out that room for further easing may be limited, as China still faces inflationary pressure in the medium and long terms.

The central bank also warned in a quarterly monetary policy report that consumer prices could bounce back after August on the back of rising costs of labor and resource-intensive products such as electricity, water and natural gas.

There is no need or condition for significant easing moves, said Lian, adding that the potential inflationary pressure and warming property market could also influence the way China adjusts its monetary policy.

Bank of Communications said it expected credit growth to remain stable in the second half, and that new lending for the whole year will stay around 8 to 8.5 trillion yuan in 2012.

China's GDP expanded 7.6 percent in the second quarter from a year ago, down sharply from 9.5 percent a year earlier and half a point below the 8.1 percent rise seen in the first three months of this year.