China’s credit growth hit slowest since 2017 in September, analysts expect pickup in Q4

China’s credit growth hit the slowest pace since 2017 mainly dragged by the slowing housing market and sluggish credit demand from the corporate sector.

Chinese banks extended 1.66 trillion yuan of new yuan loans in September, up from 1.22 trillion yuan in August, data released by the People’s Bank of China (PBOC) showed on Wednesday. That’s lower than 1.85 trillion yuan expected by analysts surveyed by Reuters and also lower than 1.9 trillion yuan a year earlier.

Loans to the household sector, mostly mortgages, increased to 788.6 billion yuan in September from 575.5 billion yuan in August, while corporate loans increased to 980.3 billion yuan from 696.3 billion yuan, the data showed.

Outstanding yuan loans grew 11.9 per cent from a year earlier, the slowest pace since May 2002, compared to expected 12.1 per cent, matching the pace in August.

Broad M2 money supply grew 8.3 per cent from a year ago, beating expectations of 8.1 per cent forecast and edging up slightly from 8.2 per cent in August.

Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, decelerated to 10 per cent in September from a year earlier, marking the slowest pace since at least 2017 and down from 10.3 per cent in August.

TSF includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales. In September, TSF fell to 2.9 trillion yuan from 2.96 trillion yuan in August, compared to expected 3.105 trillion yuan.

“Given the strict controls on the real estate sector and debt of local government financing vehicles, the market should not have too high expectations on credit growth,” said Luo Yunong, analyst at Industrial Securities.

“The key is to see when financing for household mortgages and real estate loans will be relaxed, and how strong the fiscal policy is to offset the economic downturn.”

Companies remained cautious about production and investment in September and the activity cooled from the previous month, according to a note from the Financial Research Center at the Bank of Communications. In addition, home sales in China’s 30 major cities declined further in September from the prior month, which point to weaker credit demand from the household sector, it said.

Notably, M1 money supply grew 3.7 per cent in September from a year earlier, the slowest pace since January 2020 and decelerating from the 4.2 per cent a month earlier.

China’s fiscal deposits fell by 503.1 billion yuan in September, which boosted money creation and supported M2 growth, while the lower M1 growth suggested that business activities in the corporate sector weakened last month, said Wen Bin, chief economist at Minsheng Securities.

Bill discount rates tumbled again at the end of September, indicating financing demand from the real economy remained weak, according to a note from Zhongtai Securities.

Analysts mostly believe that credit growth has bottomed out and will rebound in the fourth quarter of the year.

“As PBOC policy turns more supportive in response to strains in the property sector, we think credit growth will level off in the coming quarters. But the usual lags mean that tight credit conditions will remain a headwind to economic activity for a while,” Capital Economics said in a note.

Local governments are quickening special bond issuance to spur infrastructure investment and support growth, which could help boost TSF in the coming months, analysts said. Data from the finance ministry showed local governments issued a net 1.84 trillion yuan ($285.6 billion) in special bonds in January-August, accounting for about half of the annual quota.

Wang Tao, Chief China Economist at UBS, said that China’s overall credit growth is expected to bottom out at the end of September or October.

If China’s real estate activities drop significantly, there is a chance for more fiscal and monetary policy easing and the central bank will likely cut banks’ reserve requirement ratio (RRR) again to support market liquidity.