Sharp growth in enterprise loans alongside short-term loans to households helped to drive Chinese lending to a record high for the month of February.
The new credit volume in China continued to increase in February, hitting a record high for the period. In February, renminbi loans increased by 1.81 trillion yuan, for an expansion of of 592.8 billion yuan compared to the same period last year.
The M2 money supply increased by 12.9% year-on-year (YoY terms), for accelerations of 0.3 and 3.7 percentage points compared to the end of the preceding month and the same period last year respectively.
Total social financing came in ahead of expectations at 3.16 trillion yuan in February, 1.95 trillion yuan more than the same period in 2022.
In addition to bank loans, Chinese bond issuance was also strong in February. Net financing of government bonds reached 813.8 billion yuan, for a YoY increase of 541.6 billion yuan compared to the 272.2 billion yuan for the same period last year. Net financing of corporate bonds was 364.4 billion yuan, for a significant rise compared to the previous month.
“With the economic recovery in good shape, improved expectations of market players, continued efforts to stabilize the economy, and competitive bank lending, credit growth has been more positive than in previous years,” said Wen Bin (温彬), chief economist at China Minsheng Bank.
“Following the sharp increase in credit in January, the scale of new additions in February continued to hit a record high for the period.
“The pace of government bond issuance this year continues to advance, much higher than the 272.2 billion yuan in the same period last year. The volatility of the bond market has slowed down, and corporate bond issuance has gradually returned to normal. In February, corporate bond issuance rebounded significantly.”
Enterprise loans remained the chief source of new growth credit in February, while short-term loans to households saw a rapid increase.
In February, loans to enterprises (institutions) increased by 1.61 trillion yuan, for a YoY expansion of 370 billion yuan. Medium and long-term loans to enterprises increased by 1.11 trillion yuan, for a YoY expansion of of 604.8 billion.
Following the resumption of work and production after the Spring Festival, China’s manufacturing PMI jumped to 52.6 in February and manufacturing activities expanded at their fastest rate in more than 10 years, driving a rise in enterprise credit demand.
Other major drivers of credit growth for enterprises have been infrastructure loans backed by policy development financial instruments, as well as manufacturing sector loans and real estate loans backed by government policy.
In February, household loans increased by 208.1 billion yuan, for a YoY expansion of 545 billion yuan, and a sizeable rise even given the low base set last year. Short-term loans to households increased by 121.8 billion yuan, for an expansion of of 412.9 billion yuan compared to the same period last year. Household medium and long-term loans were 86.3 billion yuan, for a YoY increase of 132.2 billion yuan.
Analysts say that China’s consumption environment have seen steady improvements as the influence of the Covid pandemic continue to recede, and the impacts of policy support become more pronounced.
They have also expressed concern, however, about the potential for arbitrage in the form of conversion of mortgages into business loans, inflating the scale of the later.
Wen Bin said that while rapid credit growth at the start of 2023 boded well for the Chinese economy, it had the potential to put further pressure on the financial system.
“Official financial data indicates that after experiencing rapid growth in January, the credit supply in February still maintained a relatively fast pace, against a background of recovery in endogenous financial demand from the real economy, support from policies to stabilise growth and an environment of low-interest rate loans,” he said.
“Government bonds and corporate bonds have also remained at relatively high levels, reflecting vigour in the economy while helping to boost confidence and speed up the process of credit expansion.
“However, the excessive credit growth since the beginning of the year has also put pressure on the liabilities side for some banks. The liquidity of the inter-bank market has tightened and volatility has increased.
“Additionally, with low interest rates and competition for growth in scale, the pressure is growing on the net interest margins and revenues of banks, and there may be a significant amount of arbitrage behaviour causing capital to circulate idly.”