(Bloomberg) — China’s central bank indicated it will step up its fight against deflation and prepare additional policies to revive the economy, after credit data showed private confidence remained weak despite previous interest-rate cuts.
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Aggregate financing, a broad measure of credit, increased less in August than in the same month a year earlier, while new loans extended by financial institutions undershot economist forecasts, according to Bloomberg calculations of data released by the People’s Bank of China on Friday.
In a rare statement accompanying the data release, the PBOC outlined what it plans to do next.
“We will make maintaining price stability and pushing for the mild rebound in prices an important consideration for monetary policy and meet reasonable financing demand for consumption in a more targeted way,” it said.
Policymakers are “preparing to launch some additional measures, further lower the financing costs for businesses and households, and keep liquidity reasonably ample.”
The guidance suggests the latest figures are amplifying concerns that the economy might struggle to meet Beijing’s annual growth target of around 5%. Deflationary pressure is becoming entrenched while a housing slump shows no signs of easing, curbing demand for credit to fund investment and consumption.
The central bank has already made clear that lowering the amount of money lenders must keep in reserve remains on the table this year. A string of rate cuts in recent months hasn’t done enough to stimulate an economy that expanded at the slowest pace in five quarters.
Analysts have been forecasting further rate cuts and a reduction to the reserve requirement ratio, with September seen as a potential window.
“Credit data remained rather weak as the central bank pays more attention to optimizing loan structure than aggregate easing,” said Zhaopeng Xing, a senior strategist at Australia & New Zealand Banking Group.
Companies used deposits to pay back loans while consumers stayed cautious about spending, leading to a rapid drop in the M1 narrow money supply, according to Xing.
What Bloomberg Economics Says …
“China’s August credit report shows the People’s Bank of China’s rate cuts in July have yet to spur borrowing. The pickup in new credit was mainly due to a seasonal bounce and continued fiscal push — not private demand for credit.”
— Eric Zhu, economist. For full analysis, click here
The M1 gauge — which includes cash in circulation and corporate demand deposits — fell 7.3% from a year earlier, the deepest decline in data going back to 1996.
The contraction reflected a “low” willingness to spend on the part of consumers, as well as mismatches between returns on deposits, wealth management products and loans, Xing said.
The Chinese government expedited bond sales to pick up the slack, also likely a reflection of unease among officials about the economy’s momentum. Net government financing in August reached 1.61 trillion yuan last month, the highest since June 2022.
Local authorities last month issued nearly 700 billion yuan of new special bonds, which are mainly used for infrastructure investment, following earlier calls from Beijing to speed up the sales. That was the largest monthly offering since June 2022, according to data compiled by Bloomberg.
The government is making a push to reduce mortgage costs as part of efforts to put a floor under the property downturn. Authorities are considering allowing homeowners to refinance as much as $5.4 trillion of mortgages for millions of families, with cuts by some banks possibly being delivered as soon as this month.
ANZ’s Xing said the five-year loan prime rate — a key reference for mortgage costs — may be reduced by bigger margins than previously seen and the renegotiation of existing mortgage rates should also help consumer confidence to improve.
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