China's new loans only reached a measly RMB505.2b in October

Blame it on lower small-business lending.

According to Barclays, the People’s Bank of China (PBOC) announced on 12 November 2012 that total new RMB loans in October amounted to RMB 505.2bn (Bloomberg consensus RMB 600bn).

Here's more from Barclays:

The gap was primarily due to weaker retail business loans on both seasonality as well as small bank deposit constraint, in our view. Overall, monetary condition remains loose as TSF already reached RMB 13trn YTD (higher than 2009), mid- to long-term financing picked up in October, and YTD new loans (RMB 7.2trn) are on track to reach RMB 8-8.5trn.

The new loan mix in October showed significantly weaker retail business loans but stronger mid- to loan-term corporate loans, which confirmed our view that infrastructure loans gradually picked up and large banks still have sufficient funding to support them, while smaller banks are likely constrained by slower deposit growth and hesitate to grow small business loans on rising credit risks. We maintain our preference for large banks - ICBC and BOC are our OWs.

Key highlights for the month include the following: 1) weakness in short-term retail loans (retail business loans), likely reflecting tight deposit funding at mid- and small banks and possibly risk concerns at these banks;2) medium- to long-term (MLT) loans and bonds picked up, accounting for 42% of total financing; 3) the Big 4 banks' new loan market share rose to 44%, the highest month this year; 4) Total Social Financing (TSF) for October was strong at RMB 1.29tn, driven by growth in corporate bonds; and 5) Total RMB deposits were down by RMB280bn in October on seasonality after a strong quarter-ended September (growth of RMB 1.65trn).

October new loans weaker on lower small-business lending
October new RMB loans amounted to RMB 505.2bn (lower than market expectation of RMB 600bn), 44% of which were extended by big 4 banks (~RMB 220bn, according to news report by 21 cbh on 5 November). In the first 10 months, total RMB loans reached RMB 7.2tn, accounting for 85-90% of the RMB 8-8.5tn annual new loans target.

Banks will have RMB0.77-1.27trn available to extend in the last two months of this year under the full year loan quota of RMB 8-8.5trn (ie. RMB 385-635bn per month in Nov and Dec 2012).

In the breakdown, new corporate loans rose RMB 359bn (vs. RMB 293bn in Sep), despite continued negative discounted bills growth (-RMB 73bn). The growth of MLT corporate loans have picked up (+RMB 169bn in Oct vs. RMB 128bn in Sep) moderately. In contrast, retail loans growth slowed down substantially (+RMB 146bn in Oct vs. RMB 331bn in Sep) due to ST retail loans, mainly individual business loans in our view, which only up RMB 31bn in Oct (vs. RMB 174bn in Sep).

New MLT retail loans growth also slid slightly to RMB 115bn from RMB 159bn in Sep). In general, loan growth have slowed down in Oct, except for MLT corporate loans. We expect that banks to closely follow the loan target guidance in the last two months of this year and smoothly control their lending pace, as required by the regulator.

Deposits showed seasonal decline
Total RMB deposits declined by RMB 280bn in Oct (after a strong growth of RMB 1.65trn in Sep), which is likely to be another factor limiting total loan growth. The decreased RMB deposits in Oct was mainly attributable to retail deposits (-RMB 664bn in Oct vs. +RMB1.1trn in Sep) and corporate deposits (-RMB116bn in Oct vs. +RMB 480bn in Sep), which was partially offset by fiscal deposits growth of RMB481 bn.

However, we noticed that the decline in deposits was less than previous quarter-beginning months (-RMB 798bn in Jan, -RMB 466bn in Apr, and –RMB 501bn in Jul 2012). Money supply indicators M0, M1 and M2 grew 10.5%, 6.1% and 14.1% respectively, down from 13.3%, 7.3% and 14.8% y/y in previous month.

TSF remained strong if eliminating seasonal effect
Total social financing (TSF) in October was RMB 1.29tn, down 22% m/m, but up 63% y/y. It was the highest figure among the non-quarter-ended months in 2012 so far, which indicated that the TSF remained strong in October without any seasonal factors.

The number also put the new TSF for the years to date (Jan-Oct) to RMB 13tn, higher than the full year amount of RMB 11.7tn in 2011. We expect the new TSF in 2012 could reach a record high, versus the previous peak of RMB 14tn in 2010.

Looking at the breakdown, we observe that the October TSF was mainly driven by corporate bonds. New corporate bonds increased to RMB 299bn, the highest in this year so far, up 71% m/m and 83% y/y, accounting for 23% of the TSF in October.

We believe it was mainly driven by 1) government’s encouraging policy for debt financing to support economic growth, 2) banks’ prudent credit policy focusing enterprises to issue debt and 3) lower funding cost of debt financing. While other new non-bank credit financing (entrusted loans, trust loans and bank acceptance) reported m/m declines in October (-35%, -29% and -63%), the amounts (RMB 94bn, RMB 145bn and RMB 79bn) were still very high if we compared to other non-quarter-ended monthly figures.

Total non-bank financing accounted for 51% of TSF in October, same as the level in September. Monthly new FX loans reached RMB 129m, the second highest amount in this year so far after RMB 176bn in September. We believe the sequential expectation of RMB appreciation and US’s QE3 policy could continue to support the FX loan growth in the short-term.