China's new loans plummet to 15-year low in July as demand falters

China's loan drop: China’s new bank loans fell sharply in July, marking the lowest level in nearly 15 years. The drop, attributed to weak credit demand and seasonal trends, has heightened speculation that the central bank might introduce additional easing measures.

In July, Chinese banks issued only 260 billion yuan ($36.28 billion) in new yuan loans, a 88 per cent decline from the previous month and below analysts' expectations. 

Rate cuts anticipated

The People's Bank of China (PBOC) released this data on Tuesday, with forecasts having predicted a figure of 450 billion yuan, reflecting the traditionally subdued credit expansion in July.

Analysts now anticipate further interest rate cuts from the PBOC, though concerns remain about potential capital flight and pressure on the yuan. 

Zhou Shilei, Director of Global Financial Markets at UOB (China), commented on the data's weakness, noting that past rate cuts have had limited impact and suggesting that further reductions may be on the horizon.

Household, corporate loans drop

The latest figures represent a significant drop from June's 2.13 trillion yuan and a decrease from 345.9 billion yuan a year earlier. For the first seven months of 2024, new yuan loans totalled 13.53 trillion yuan.

The PBOC did not break down July’s figures by month, but estimates based on available data indicate a sharp decline compared to the January-June period. 

Household loans, primarily mortgages, shrank by 210 billion yuan in July, reversing June's increase of 570.9 billion yuan. Corporate loans also fell to 130 billion yuan from 1.63 trillion yuan the previous month.

A PBOC survey revealed a significant drop in loan demand in the second quarter, with the loan demand index declining from 71.5 percent to 55.1 per cent.

China's economic growth for the second quarter fell short of expectations, and July’s economic indicators showed minimal improvement, with slowing export growth and consumer inflation impacted by weather-related food supply disruptions.

Looking ahead, the PBOC has pledged to guide credit growth and lower financing costs for both companies and households. 

Rate cuts insufficient

In response to the economic slowdown, the central bank unexpectedly conducted a medium-term lending facility operation on July 25, cutting interest rates. 

Concurrently, major state-owned banks lowered deposit rates to mitigate the impact on their already reduced margins.

Despite these measures, Capital Economics predicts that the PBOC's rate cuts will not be sufficient to significantly boost credit demand, forecasting an additional 20 basis points cut to the loan prime rate this year.

Outstanding yuan loan growth eased to 8.7 percent year-on-year, slightly below June's 8.8 per cent and analysts' expectations. 

On a positive note, the broad M2 money supply rose by 6.3 percent in July, surpassing the forecast of 6.1 per cent and the record low of 6.2 percent in June.

Additionally, the annual growth rate of total social financing edged up to 8.2 per cent from 8.1 per cent in June, although total social financing fell short of expectations, dropping to 770 billion yuan from 1.1 trillion yuan in forecasts and 3.3 trillion yuan in June.

(With Reuters Inputs)