China's credit growth peaks as PBOC brakes on easing

The gain will likely last for the short term.

Chinese banks’ credit growth has peaked as the People’s Bank of China (PBOC) has become more wary of relaxing amidst the recovery, according to a Jefferies report, with the momentum likely to last for a short term given to strong fund inflows.

Total social financing (TSF) balance grew 12.8% YoY and loan growth reached 13.2% YoY in line with market expectations. The PBOC has confirmed that H2's new credit would be slightly higher than H2 2019, with governor Yi Gang saying that new RMB loans could hit nearly $2.85t (RMB20t) and TSF could rise by more than $4.28t (RMB30t).

The central bank will also guide to a lower enterprise funding cost, the report said. In the breakdown of the profit sacrifice to the real economy, $165b (RMB1.16t) is interest-rate-related, indicating around 72bp decline in loan yield, analysts Shujin Chen and Alfred He noted.

“Assuming banks’ average loan yield declines by the same as LPR, this suggests <27bp further LPR decline. But since the expectation is based on economic recovery and strong loan demand, it will largely depend on: is the economy back to China’s targeted growth trajectory?” the analysts said.

New loans recorded in June were driven by personal loans and infrastructure projects, with new long-term personal lending reaching $90.7b (RMB635b) on the back of strong property prices. On the other hand, M1 growth slowed amid strong property sales, likely because of a regulatory clampdown on “structured deposit – discounted bill arbitrage”, the report said.