Poor growth in lending a concern

Private investment boost needed as effect of monetary stimulus declines, economists say

China's lower-than-expected new yuan lending growth in July points to the need to make more efforts to boost private investment as the effectiveness of monetary stimulus declines, economists said.

Total social financing, or non-government borrowing, the broadest measure for credit and liquidity, hit 487.9 billion yuan ($73.4 billion) in July, far below market expectations, according to the People's Bank of China, the central bank.

Two other main gauges of money supply continued to show a widened divergence, raising concerns over the possibility of China falling into the liquidity trap, a situation where money it pumps into the market fails to flow into the real economy.

The narrow measure of money supply, M1, which includes cash and demand deposits, increased by 25.4 percent in July year-on-year, while the broad measure of money supply that includes cash and all types of deposits, M2, grew by 10.2 percent.

It is too early to say that the nation has already fallen into the liquidity trap, but "the divergence is sounding an alarm bell", said Ying Xiwen, an economist at China Minsheng Securities Co.

Ying said the surging M1 is mainly caused by enterprises' decision to bank the money in their accounts when few good investment options are available.

"The government has to find solutions to lower the M1 growth, as business confidence remains in the doldrums," Ying said.

Wang Youxin, an economist at the Institute of International Finance, a think tank affiliated with the Bank of China, said that the government needs to ensure that small companies have easy access to financing at a time when large-scale State-owned companies tend to get loans more easily.

Wang suggested that as monetary stimulus becomes less effective, more fiscal measures, such as tax cuts, and targeted policies leading investment into some industries, such as high technology, would help decrease the gap.

Su Jian, an economics professor at Peking University, said the central bank does not have enough incentives to relax monetary policy, unless the bank thinks it would be helpful to stabilize market expectations.

"The authorities may get less determined in pushing reform if they find it is difficult to achieve a growth target of at least 6.5 percent (for this year)," he said. "It would be better to stick to the reform agenda, (because) the corporate sector would be less likely to hold onto cash if uncertainties are reduced."