The plunge in China’s new loans in July is reinforcing fears of deflation and a worsening economic slowdown, with analysts saying more policy easing is needed.
The onshore yuan fell 0.2%, and is the worst-performing emerging-market currency in Asia this year. The benchmark CSI 300 Index has fallen 3.4% this week, and is close to erasing all the gains driven by optimism from the Politburo meeting last month.
Here are comments from analysts:
Kiyong Seong, lead Asia macro strategist at Societe Generale
- “It is a big disappointment, proving the fragile status of recovery in China. With this, the probability of further easing by the People’s Bank of China in the near term is notably rising. Market speculation about further PBOC easing has already been brewed”
- There’s a chance the PBOC may cut the reserve-requirement ratio soon, but other policy rate cuts will take a bit longer due to the weakness in the yuan
- Though a reaction in the yuan could be limited, the bias is for a weaker currency
Fiona Lim, senior FX strategist at Malayan Banking Bhd. in Singapore:
- “Weaker-than-expected credit growth could increase the chance of monetary policy easing since the officials have pledged to provide counter-cyclical adjustments to support the economy”
- Rising bets on rate cuts could continue to weigh on the yuan versus the dollar
Xing Zhaopeng, a senior China strategist at ANZ.
- July is usually a cool funding season and last month’s government bond supply remained low. The most worrisome among the data is M1 growth at just 2.3%
- “The gap between M1 and M2 continues, showing very sluggish business conditions. Due to the mandate of “stabilizing RMB exchange rate” from the Politburo meeting, we believe the PBOC cannot do much in the short term. Therefore, it is hard to see credit growth turning around. Deflationary risk will remain in place going forward.”
Ken Cheung, chief Asian FX strategist, Mizuho Bank Ltd
- The uncertainty over China’s growth outlook and property turmoil were weighing on China credit demand notably
- Overall, a series of disappointing data painted the reality of weak growth; optimism on the stimulus package after the Politburo meeting continued to fade, adding depreciation pressure on the yuan
Xiadong Bao, fund manager at Edmond de Rothschild Asset Management
- “Together with the fact that Country Garden becomes a penny stock, I think the vicious cycle continues: words are cheap but we are still waiting for priceless actions”
Marvin Chen, Bloomberg Intelligence
- The data “may suggest tight lending conditions or a lack of demand, either of which does not bode well for economic growth”
- It “may add to downside pressure” for China stocks on Monday
Gary Ng, senior economist at Natixis
- The persisting deceleration in loan growth shows corporate and households are very cautious about the future and remain less sensitive to any interest rate cut or liquidity injection, showing confidence is yet to improve.
- Together with the slow government debt issuance, the economy does not see too much support from credit growth at the moment. It will take a stronger shift in regulations and policies to improve sentiment.
--With assistance from Chester Yung, Charlotte Yang, Zhu Lin and Iris Ouyang.
