China’s New Yuan Loans In May To Fall As Central Bank Tears Back Incentives, Reuters Survey

© Reuters. FILE PHOTO: This illustration photo dated May 31, 2017 shows a Chinese yuan note. REUTERS / Thomas White / Illustration

BEIJING (Reuters) – New bank lending in China likely fell in May, a Reuters poll found, as the central bank gradually cuts pandemic-induced incentives to reduce debt and financial risks as the economy shows solid signs of recovery.

Chinese banks estimated 1.41 trillion yuan ($ 220.54 billion) in new yuan loans last month, up from 1.47 trillion yuan in April, according to the average estimate of 29 economists.

That would be less than 1.48 trillion yuan spent the same month last year when politics was firmly in emergency mode to cushion the economic impact of the COVID-19 crisis and crippling lockdowns.

Annual yuan outstanding loans are expected to increase 12.2% in May, continue a slow but steady decline since February, and decrease from 12.3% in April, the survey showed. The broad monetary growth M2 was 8.1% in May, at the same level as in the previous month, the lowest value since July 2019.

The central bank is trying to curb credit growth to contain debt risk, but is proceeding cautiously so as not to hurt the mixed economic recovery.

Politicians have repeatedly vowed to avoid sharp policy turns and keep borrowing costs down, suggesting that rate hikes are a long way off. Authorities have ordered banks to keep small business support going, but to be more vigilant about lending to hot areas of the economy like real estate.

Finance Minister Liu Kun informed parliament on Monday that local governments would strengthen the project reserves so that special bonds could be put to good use.

Last week, the Treasury Department approved a 4.27 trillion yuan quota for the local government’s net debt for this year, according to state media, slightly lower than the 4.47 trillion yuan quota previously approved at the annual parliamentary session in March.

“This relatively minor revision could suggest that Beijing is optimistic about growth recovery and is increasingly focused on controlling local government debt,” Nomura said in a research note.

Nomura expects the pace of public finance to pick up significantly in the coming months, as central and local governments closed only 26% of net finance in the first five months of this year.

Any acceleration in government bond issuance could help boost Total Social Funding (TSF), a broad range of credit and liquidity.

In May, the TSF is set to increase from 1.85 trillion yuan in April to 2.00 trillion yuan.

China’s policymakers are on the verge of setting an average annual economic growth target of around 5% for the next five years, at the lower end of what was previously seen as global risks that cloud the outlook, political sources said.

The credit dates are expected June 10-16.

($ 1 = 6.3935 renminbi)

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