China May loans slow, money growth at 30-month lows
By Koh Gui Qing and Aileen Wang
BEIJING (Reuters) - China's money growth slowed to a 30-month low in May and banks extended fewer new loans than expected as monetary policy weighed on bank lending, but stubborn inflation is expected to persuade the government to keep its foot on the credit brakes.
The data reinforces signs that growth in the world's second-biggest economy is cooling, although analysts said taming price pressures was a top priority for Beijing, especially as policymakers see little chance of a sharp slowdown for now.
"We continue to look for one more interest rate hike in June and believe it is too early to loosen policy," said Jian Chang at Barclays Capital in Hong Kong, while noting there was a chance the rate increase could be delayed until July.
The timing of the next rate rise could well depend on May inflation data expected on Tuesday. Analysts polled by Reuters predicted annual inflation edged back up to 5.4 percent in May, the highest in more than 30 months, and a government researcher said in remarks reported on Sunday that it may accelerate to more than 6 percent in June.
Investors are eyeing Chinese data and its policy stance even more closely than usual amid signs of a global slowdown.
Chinese banks extended 551.6 billion yuan ($85.1 billion) in local currency loans in May, central bank data showed, missing market forecasts for 610 billion yuan.
New loans so far in 2011 are running 12.5 percent lower than the same year-earlier period.
Annual growth in China's broad M2 measure of money supply slowed to a 30-month low of 15.1 percent in May, while outstanding yuan loans at the end of the month grew 17.1 percent from a year ago.
The median forecast of economists was for a 15.4 percent rise in M2 and a 17.1 percent increase in outstanding loans.
Bank lending is a focal point in China's monetary policy because it is controlled by Beijing through loan quotas to manage economic growth and control inflation.
Indeed, the lower-than-expected loan data shows that Beijing's tightening steps are working and when combined with the weaker money supply growth suggests less room for further tightening, said Qiu Jihua, an analyst at Sealand Securities in Shanghai.
"The government must also stay vigilant on downside risks to the economy, including the risk of a hard landing," Qiu said.
Most analysts said, however, that the moderation in money growth and bank lending were more a result of Beijing's lending restrictions rather than a drop off in demand for loans.
"It is still too early to say that the loan demand is declining because of a slowing economy," said E Yongjian, an analyst at Bank of Communications in Shanghai. "We should not read too much into a single month's loan data."
Indeed, record annual profits for Chinese banks suggest that Beijing's clampdown on credit has not hurt lending. Despite lending less, banks are benefiting from a buoyant demand for loans and are charging higher interest rates.
Anecdotal evidence also suggests China's informal or "grey" lending markets are thriving as smaller cash-starved firms turn to alternative funding sources amid the credit crackdown.
NO HARD LANDING
In past years, Beijing has steered bank lending by announcing an explicit loan target for banks. It refrained from doing so this year, after banks exceeded last year's loan target of 7.5 trillion yuan by lending 7.9 trillion yuan.
Even so, analysts believe that Beijing's implicit lending target for 2011 is about 7.5 trillion yuan, with an M2 growth target of 16 percent.
With such solid growth in money supply, some analysts said China is far from sliding toward a "hard landing."
Li Huiyong, an analyst at Shenyin and Wanguo Securities in Shanghai, estimates that a 13-15 percent growth in M2 will keep China's economy growing at between 9-10 percent. Growth in 2010 was 10.3 percent.
"We continue to believe that the chance of hard landing is very small," said Ting Lu, an economist at Merrill Lynch-Bank of America.
Lu said the slackening in M2 could be a result of households moving their savings to wealth management products, which is excluded in the calculation for M2.
"The current inflation level is achieved through forceful policy intervention by the government," Xu said. "An all-around rebound is very likely to occur once such administrative measures are relaxed."
To quell inflation, China has raised interest rates twice and increased banks' required reserves five times this year. It has also ordered banks to cut lending to local governments and property firms.
Li Xunlei, an analyst at Guotai Junan Securities in Shanghai, estimates that the latest pull-back in money growth could show up as slower inflation reading six months from now.
But Tim Condon, a regional economist at ING in Singapore, noted that much of China's inflation is driven by food prices.
"It's not money. It's really food that is driving inflation. There is not much monetary policy can do about it," he said. "They have done a lot (on policy front). Do they risk over-tightening if they continue? Maybe it's time to wait and see."
(Additional reporting by Kevin Yao; Editing by Ken Wills & Kim Coghill)