China: Strong credit growth in Q1 – UOB

Economist at UOB Group Ho Woei Chen, CFA, assesses the latest credit figures in the Chinese economy.

Key Quotes

“New renminbi loans were higher than expected at CNY2.73 tn in March (Bloomberg est: CNY2.30 tn; Feb: CNY1.36 tn), bringing cumulative increase to a fresh record high of CNY7.67 tn in 1Q21, surpassing the previous record in 1Q20 (CNY7.10 tn). The record loans extended suggests that China’s 1Q21 GDP growth due this Friday (16 Apr), could continue to perform strongly (Bloomberg est: 18.5% y/y; UOB est: 13.5%; 4Q20: 6.5%).”

“The larger-than-expected increase in March was due to strong gains in overall household loans and medium/long-term loans to the corporates. Longer-term loans to households are associated with property investments, the increase of which means that policymakers will continue to watch this space with growing risk that the benchmark interest rate could increase sooner than expected.”

“Credit growth has remained strong at 12.6% y/y in March despite moderating from 12.9% y/y in February. The M2 growth also slipped back to 9.4% y/y in March (Bloomberg est: 9.5% y/y; Feb: 10.1% y/y) which was similar to the pace in January.”

“With the robust loans growth, the People’s Bank of China (PBOC) had reportedly asked the financial institutions to keep the increase in new loans this year to the same level in 2020. Although this would maintain new loans at a record high of CNY19.63 trillion, the implied loans growth rate would slow sharply to 11.2% in 2021 from 12.8% in 2020, the slowest pace since 2005. Given that banks have already booked a strong loans growth in 1Q21, this would imply a sharper slowdown in new loans for the rest of the year.”

“Nonetheless, this remains consistent with PBOC’s target for loans growth to be in line with nominal GDP growth given our 2021 real GDP growth and CPI inflation forecasts of 8.5% and 2.6% respectively. Despite rising debt concern and an expected slowdown in credit expansion this year, we maintain our forecast for both the 1Y LPR and the 5Y & above LPR to be kept unchanged for the rest of 2021 at 3.85% and 4.65% respectively.”