State Media Points to Room for Monetary Loosening as China’s M2 Growth Hits New Low

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A new report from China’ state-owned media says that the latest official figures for June credit extension and lending leave room for further loosening of monetary policy, including a further cut in the required reserve ratio.

Data from the Chinese central bank indicates that total social financing in June was 1.18 trillion yuan, for a decline of 590.2 billion yuan compared to the same period last year.

New renminbi lending was 1.84 trillion yuan, for a year-on-year rise of 305.4 billion, while the M2 money supply posted a YoY increase of 8%, for an all-time historic low.

The state-owned Economic Information Daily cites analysts as saying that while June lending was in line with expectations, total social financing and M2 growth fell short of forecasts.

“The situation of on-balance sheet lending finding it difficult to continue off-balance sheet financing still continues, and there is further room for monetary loosening,” said the report.

“Over the next two months there is a significant possibility that the central bank will further reduce the reserve ratio.’

Central bank media spokeswoman Ruan Jianhong (阮健弘) said that the main reason for the decline in total social financing was heightened regulation and the ongoing impacts of China’s deleveraging campaign, which have been particularly pronounced for entrusted lending and trust loans.

“In terms of fund usage, in the recent past a large volume of entrusted loans and trust loan were invested in local government financing platforms and real estate enterprises,” said Ruan. “During the process of deleveraging, non-standard financing in these sectors is declining.”

Ruan pointed out that as of the end of June the renminbi loan and corporate bond balances posted YoY growth of 12.7% and 8.7% respectively, which had a significant impact upon the decline of trust loans and entrusted loans.

Liu Dongliang (刘东亮), senior analyst with the asset management department of China Merchants Bank, said that monetary policy would continue to shift towards a neutral, loose direction, and that further reserve ratio reductions were on the way.

Liu nonetheless pointed to certain barriers, however, barring the flow of loosened liquidity towards real financing.

“The marginal effect of solely replying on monetary policy is continuously declining, and there is a need to expand the vigorous use of fiscal policy, or make appropriate adjustments to the regulatory environment.”

Jiang Chao (姜超), chief macro-economics analyst with Haitong Securities, said that non-standard financing had contracted significantly in 2018 following further standardisation of financial regulation and policy.

This had impacted the issuance of low-grade debt in tandem with rising credit risk, with bank loans remaining the key source of capital flows towards the real economy.

Jiang says total social financing growth could continue to slow as credit risk rises.

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