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A closer look behind strong credit data2023/3/27 9:56:22(Beijing Time) Lange Steel

According to data released by the People's Bank of China, the country's central bank, on March 10, the value of new renminbi loans reached 1.81 trillion yuan ($263.98 billion) in February, beating market expectations of 1.43 trillion yuan, or 592.8 billion yuan more than a year earlier.

The aggregate financing to the real economy (AFRE) — including bank loan securities and other forms of financing — increased 3.16 trillion yuan, far outnumbering the expectations of 2.08 trillion yuan and recording a year-on-year increase of 195 million yuan.

China's broad money supply, or M2, grew 12.9 percent year-on-year in February. It is higher than market expectations of 12.3 percent and the previous value of 12.6 percent, hitting a seven-year high.

As January credit and financial data exceeded expectations, the market was eager to see if the upward momentum could be carried into February. Some foreign media even hinted that the PBOC may control the pace of new loan issuances, thus lowering market expectations for February.

However, the February credit and AFRE data exceeded market expectations once again, showing China's accelerated economic normalization and a stronger endogenous growth momentum.

Under closer scrutiny, new RMB loans were significantly higher than expected, with the overall level further improved. Among the newly added 1.81 trillion yuan in loans in February, 1.2 trillion yuan were mid to long-term loans, up 737 billion yuan on a yearly basis. This was the main driver for the increase in loans.

Short-term loans amounted to 700.3 billion yuan, up by 580.3 billion yuan year-on-year. The value of bill financing decreased by 98.9 billion yuan, down 404.1 billion yuan from a year earlier. The increase and decrease of bill financing and short-term loans showed that real loan demand continued to recover.

The continuous recovery of credit in February can be mutually confirmed with some previously released macroeconomic data. For example, the manufacturing purchasing managers index in February continued to increase significantly by 2.5 percentage points after returning to expansionary territory in January, setting a new high since the COVID-19 pandemic began. Exports in the first two months also outpaced expectations to contract only 6.8 percent year-on-year, better than the anticipated decline of 9 percent, and 3.1 percentage points narrower than the previous month figure.

Among the mid to long-term loans in February, nonfinancial institutions' mid to long-term loans increased by 1.11 trillion yuan, hitting a new record for all February readings. This was achieved just after record credit growth in January. Companies' mid to long-term loans are mainly used for fixed-asset investment, which represents long-term planning requiring more caution.

Some market players are saying that new loans are mainly flowing to State-owned enterprises, but data released by the China Banking and Insurance Regulatory Commission show that more than half of the newly issued corporate loans last year were invested in private enterprises. With the recovery of the economy this year, more loans will flow to private enterprises, which are facing more difficulties.

There are signs pointing to an end to declining household consumption loans, but a cautious outlook should be adopted. In February, mid to long-term loans to households increased by 132.2 billion yuan year-on-year, turning positive for the first time, thus showing some signs of recovery. However, considering the impact of the Chinese New Year, mid to long-term loans to households in January and February contracted by 387.1 billion yuan year-on-year, which is still relatively weak.

The secondhand housing market has continued to be active since Spring Festival, however overall sales of new housing are still weak. The top 100 Chinese real estate companies achieved sales turnover of 818.95 billion yuan from January to February, with the year-on-year decline narrowing to 11.6 percent. The year-on-year sales increase of 14.9 percent in February was mainly due to the influence of Spring Festival.

In February, the CBIRC sanctioned five financial institutions for misappropriating loan funds and falsifying statistics. The CBIRC announced on March 9 another six-month crackdown on illegal loan intermediaries, which began on March 15.

Strict regulations are good for cracking down on irregularities but may affect normal loan demand. It should be dealt with especially carefully now as people's confidence is still low.

In February, the balance of various loans increased by 11.96 percent year-on-year, and the growth rate increased by 0.2 percentage points from the previous month. The growth rate has accelerated for three consecutive months. In terms of subitems, the growth rate of short-term loans and mid to long-term loan balances also increased by 1.1 and 0.5 percentage points, respectively, from the previous month. The balance of bill financings increased by 27.3 percent from a year earlier, with the growth rate down 6.2 percentage points. The continuous growth of the RMB loan balance and the structural optimization indicate that the speed and quality of economic normalization are on track.

Amid the 3.16 trillion yuan AFRE in February, new RMB loans amounted to 1.82 trillion yuan, up 911.6 billion yuan from a year earlier, and serving as the biggest driving force for AFRE growth. Government bond financing increased by 813.8 billion yuan, an increase of 541.6 billion yuan year-on-year, which is the second-largest driving force for AFRE.

A total of 1.25 trillion yuan of government bonds were issued in February, up 260 billion yuan year-on-year. Central government bond issuances contributed to the majority of the growth at 190 billion yuan. The issuances of local government debt seem relatively small, mainly due to high issuance intensity during the same period last year. But continued issuances under a high base effect also reflect local governments' will and determination to stabilize the economy.

The existing AFRE increased 9.9 percent year-on-year in February while M2 grew 12.9 percent year-on-year. The gap between M2 and social financing contracted from 3.2 percent in January to 3 percent, the first narrowing since September 2022 and an indicator of economic stabilization.

We have seen the continued growth of M2 since last year, while AFRE remains relatively sluggish. This is mainly due to the declining money creating ability at the credit end. Fiscal expenditure was the major contributor to the M2 increase last year. Of the 2.8 percentage point year-on-year growth of M2 last year, fiscal expenditure contributed 1.9 percentage points.

In summary, economic recovery is on track amid stronger internal driving forces, but the strength of the endogenous growth momentum behind the data in January and February should not be exaggerated. Endogenous demand should also be closely monitored, whose effective impact will not be seen until after the second quarter or even the second half of the year.

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