Analysts at Nomura note that China’s M2 growth was 8.3% y-o-y in May, unchanged from April, while the RMB1150bn reading in new loans in May was only slightly weaker than April’s RMB1180bn.

Key Quotes

“Markets will rightly focus on the much more impactful aggregate financing print, which crashed to RMB761bn in May (versus consensus of RMB1300bn) from RMB1561bn in April. The slump in aggregate financing shows that Beijing’s deleveraging drive has inflicted real pain on China’s shadow banking sector, and the impact will likely linger despite Beijing’s recent softening tone on deleveraging.”

“We think the chances of an RRR cut in the next few months increase as the PBoC aims to stabilise credit growth.”

“Bank credit supply remained largely stable in May. New RMB loans were RMB1150bn in May, slightly weaker than April’s reading (RMB1180bn) and market expectations (Consensus: RMB1200bn; Nomura: RMB1250bn).”

“Aggregate financing slumped to RMB761bn in May (Consensus: RMB1300bn; Nomura: RMB1400bn) from RMB1561bn in April. Growth in outstanding aggregate financing slowed by 0.2pp to 10.3% y-o-y in May.”

“The sharp decline in aggregate financing shows that the government’s deleveraging drive since mid-2017 has been effective.”

“Faced with a worse-than-expected domestic slowdown and potential fallout from a trade war, Beijing opted to soften its stance on deleveraging. On 17 April, the People’s Bank of China (PBoC) announced a 100bp reserve requirement ratio (RRR) cut for most banks. On 23 April, top leaders made a call to “continuously boost domestic demand” while carrying out reforms.”

“We expect the Chinese government, in order to meet its growth target, will have to ease its deleveraging measures by taking a softer approach. Beijing may also step up fiscal stimulus by increasing PSL.”

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