China’s February credit grows faster than expected, supporting recovery

By Judy Hua & Kevin Yao

BEIJING (Reuters). China reported unexpectedly high credit growth in February. The country’s money supply grew at the fastest pace for nearly 7 years. This is Beijing’s attempt to support an economic recovery that is emerging amid rising global risk.

After a COVID-induced slump that rattled businesses and consumer confidence, the government lifted its December pandemic restrictions and has begun to restore credit demand. There are concerns that momentum could wane after the initial rebound.

“China’s strong credit extension in February has somehow offset the recent concerns clouding the pace of economic recovery, suggesting that the overall economy is still on a solid footing,” Zhou Hao is an economist at Guotai Junan International.

From 9.4% in January, the growth in outstanding total social funding (TSF), an economic measure that includes credit and liquidity, increased to 9.9% in Feb from a year ago. It is the highest rate since November 2022.

TSF refers to off-balance sheet forms financing that are not available in the traditional bank lending system. These include initial public offerings (IPOs), loans from trust companies, and bond sales.

Other credit gauges were also showing solid gains.

According to central bank data, broad M2 money supply rose 12.9% from one year ago. It was the fastest rate since March 2016. This is well above the 12.5% estimate in the Reuters poll. It was also higher than the January pace of 12.6%.

From a record-breaking January, new bank lending was much lower than expected in February.

Last month, banks extended new loans worth 1.81 trillion Yuan ($260 billion). Analysts predicted that they would drop to 1.50 trillion Yuan, from 4.9 trillion yuan in Jan. This compares with 1.23 trillion trillion yuan one year ago.

It was widely anticipated that February loans would see a pullback from January. This is because Chinese banks tend not to front-load loans at year’s beginning to gain better customers and market share.

Three bankers revealed to Reuters last month that the central banks had asked some banks to slow their lending pace to reduce risks following January’s record-breaking credit cycle.

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China has set a modest goal for economic growth in this year’s China, which is 5%. This comes after its economy contracted to 3% last year, which was the lowest level in almost 50 years.

While the central bank has committed to making timely policy adjustments in support of growth, analysts feel it has little room for maneuver because of concerns over capital flight as a result of continued Federal Reserve policy tightening.

Although the economy has seen a slight recovery over the past two-months, the data are mixed.

China’s factory sector grew at its fastest pace in over a decade in February. The mobility of people is clearly improving and new home prices may be steadying. Inflation unexpectedly slowed in February because consumers are still cautious. Meanwhile, exports and imports dropped again.

Among other closely watched credit measures, outstanding yuan loans grew 11.6% in February from a year earlier — the highest since December 2021 and compared with 11.3% growth in January. Analysts expected 11.4% growth.

TSF for February decreased to 3.16 trillion Yuan, from 5.98 Trillion yuan in January. However, it was still significantly higher than the expectations of 2.20 Trillion yuan.

However, Friday’s credit data showed some inequalities.

From 257.2 billion yuan at January’s end, household loans (mostly mortgages) fell to 208.1 million yuan by February. Corporate loans dropped to 1.61 trillion from 4.68 trillion yuan.

However, household deposits declined sharply to 792 billion yuan (6.2 trillion yuan) in February. Analysts are watching closely to see if that figure indicates that consumers are returning to spending after a year of job losses and lockdowns.

Capital Economics stated in a note sent to clients that it expected credit growth to increase further in the coming months. It cited signs of improvement within the battered real estate sector but warned of potential risks.

“This credit cycle will not receive much of a tailwind from policy easing – the NPC (parliament) signalled a stable fiscal stance and little in the way of additional monetary support,” Capital Economics stated this in a note to its clients.

“As such, the rebound in credit growth may fizzle out later in the year once the initial reopening boost has run its course.”

(Reporting by Judy Hua, Kevin Yao; Editing By Kim Coghill