China new bank loans rise far less than expected in May as demand wobbles

By Ellen Zhang and Kevin Yao

BEIJING (Reuters) - New bank lending in China rebounded far less than expected in May and some key money gauges hit record lows, suggesting the world's second-largest economy is still struggling to regain its footing even as the central bank seeks to bolster confidence.

Chinese banks issued 950 billion yuan ($130.93 billion) in new yuan loans last month, compared to 730 billion yuan in April, according to Reuters calculations based on the latest data from the People's Bank of China (PBOC) released on Friday.

Analysts polled by Reuters had predicted loans would rise to 1.255 trillion yuan but would still be below the 1.36 trillion yuan issued in May last year.

"China’s credit extension came in lower than expected in May, suggesting that the deleveraging in the households continues," said Zhou Hao, chief economist at Guotai Junan International.

But Zhou said China's central bank may be reluctant to cut interest rates any time soon, as that could lead to further depreciation of the yuan currency as the U.S. Federal Reserve seems in no hurry to start cutting its rates, which are buoying the dollar.

"Balancing all the factors, we think that the PBOC would refrain from policy rate cuts for now but provide more targeted support via relending programs over the foreseeable future," he said.

Over recent months, a flurry of data has shown different parts of the $18.6 trillion economy recovering at varying speeds, heightening uncertainty about its outlook. Activity data for May will be released on Monday along with a key central bank policy rate announcement.

The PBOC not longer provides monthly credit and money supply breakdowns but Reuters calculated the May figures based on the bank's Jan-May data compared with the Jan-April figure.

New loans totalled 11.14 trillion yuan for the first five months of the year, the PBOC said, compared with 10.19 trillion yuan in the first four months.

Household loans, mostly mortgages, expanded 75.7 billion yuan in May, compared with a contraction of 516.6 billion yuan in April, according to the bank's data and Reuters calculations.

Corporate loans dropped to 740 billion yuan from 860 billion yuan in April.

The PBOC has pledged to step up support for the economy and promote a rebound in prices as deflationary pressures persist, but it has also cautioned against the risk of too much cash sloshing around the banking system as credit demand weakens.

Reuters reported last month that the PBOC has guided some banks to boost lending, even as banks face growing profitability pressures.

China has set an economic growth target of around 5% for 2024, but weak demand and a protracted property downturn is weighing heavily on activity, prompting expectations for cuts in interest rates and banks' reserve requirements.

In May, China unveiled a raft of measures to revive its property market, including a 300 billion yuan relending facility to fund state firms' purchases of completed unsold apartments for affordable housing. But analysts say it could take years for the sector - once a major economic growth driver - to recover.

Broad M2 money supply last month grew 7.0% from a year earlier - the lowest on record and below a Reuters poll estimate of 7.2% growth. It rose 7.2% in April.

M1 money supply, which consists of cash in circulation and corporate demand deposits and is seen as a major indicator of private business confidence, fell 4.2% on-year, the sharpest drop since records began.

M2 money supply includes M1, fixed corporate, household and other deposits.

Outstanding yuan loans rose 9.3% from a year earlier - a record low - compared with April's 9.6% rise. Analysts had expected 9.5% growth.

However, annual growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, picked up slightly to 8.4% in May from a record low of 8.3% in April.

"Bank loan growth in China was the slowest on record in May, but accelerated government bond issuance helped broader credit growth edge up. Fiscal loosening should support further gains in the near term," Capital Economics said in a note.

China started issuing 1 trillion yuan in ultra-long government bonds in May.

TSF last month rose 2.07 trillion yuan, following a rare contraction of 72 billion yuan in April. Analysts polled by Reuters had expected May TSF of 2.2 trillion yuan.

($1 = 7.2558 Chinese yuan renminbi)

(Reporting by Ellen Zhang and Kevin Yao; Editing by Kim Coghill)