China credit growth disappoints as lending lags bond sales

China’s credit expansion slowed more than expected in October, as a surge in government bond sales far exceeded growth in lending during a traditionally slow month for financing activity.

Aggregate financing, a broad measure of credit, increased 1.4tn yuan ($195bn), according to Bloomberg calculations based on data released by the People’s Bank of China on Monday. That compares with a median forecast of 1.5tn yuan by economists in a Bloomberg survey, and an increase of 1.8tn yuan in the same month a year ago.

Government bond sales accounted for more three-quarters of all new financing and exceeded 1tn yuan for a third month. The stock of total credit grew at the slowest pace since comparable data begins in 2017.

“October credit data indicated credit demand of private sectors remained weak,” Goldman Sachs Group Inc analysts led by Xinquan Chen said in a research note. “Both household and corporate loan growth remained low, and the loan extension was mainly driven by short-term financing.”

China’s slowing economic activity showed initial signs of stabilisation last month, following a broad package of stimulus introduced from the end of September that included a slew of interest-rate cuts. October is usually a weak month for credit growth because banks aren’t in a rush to hit their quarterly lending targets.

“Credit extended in October to Chinese companies was well below the 2019-2023 average, indicating that stimulus measures announced since late September are having limited impact on the economy and confidence is still weak despite some improvement. Continued policy support is needed until business confidence picks up significantly,” says David Qu, economist, Bloomberg Economics.

Corporate and household borrowing demand has been sluggish in recent years, as the worst property downturn in recent history dampened consumption and investment in many related sectors. As a result, China hasn’t experienced the typical credit cycles seen before 2022, but rather saw a continued slowdown in lending.

Financial institutions offered 500bn yuan of new loans in the month, Bloomberg calculations showed, the lowest amount in three months. The median forecast was for 700bn yuan.

The M1 narrow money supply — which includes cash in circulation and corporate demand deposits — fell 6.1% in October, slightly less than forecast by economists. Companies have been using deposits to pay back loans while consumers stayed cautious about spending.

The PBoC has indicated it’s ready to ease monetary policy further. Governor Pan Gongsheng said the central bank could reduce banks’ reserve requirement ratio by 25 to 50 basis points by the end of the year, depending on market liquidity.

Lowering the ratio frees up money for banks to lend and invest. Economists also expect the central bank to lower interest rates going into next year.