China’s new loans exceeded estimates in June and foreign-exchange reserves jumped by $153 billion in the second quarter, bolstering the case for more increases in bank reserve requirements.
New loans were 633.9 billion yuan ($98 billion), compared with the 622.5 billion yuan median estimate in a Bloomberg News survey of economists. M2, the broadest measure of money supply, rose by a more-than-forecast 15.9 percent, and foreign-exchange reserves climbed to $3.2 trillion. The People’s Bank of China released the data on its website today.
The central bank last week raised interest rates for the third time this year ahead of a report that showed consumer prices jumped the most in three years, indicating the government’s priority is still fighting inflation. Premier Wen Jiabao may be reluctant to ease monetary policy even amid slowing growth as state planners forecast “elevated” price levels for the rest of the year.
“This suggests more tightening on the horizon,” said Joe Lau, a Hong Kong-based economist at Societe Generale SA. “This may be more likely through further reserve ratio hikes,” he said, adding that slowdown risks and the debt burdens of local governments mean policy makers may be more reluctant to raise interest rates.
Lau said he expects one or two more increases in banks’ reserve requirements by year end. Economists at Nomura Holdings Inc. estimated in a July 8 report the ratio could rise by another 100 basis points in the second half of the year.
Record Reserve Requirements
The benchmark Shanghai Composite Index dropped 1.7 percent to 2,754.58 at the 3 p.m. local-time close, the most in seven weeks, on concerns Greece’s debt crisis may spread and higher- than-estimated new lending in China will make it difficult for the government to ease tightening policies. The yuan fell 0.1 percent to 6.4722 per dollar as of 4:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System.
The central bank has raised requirements nine times since mid-November to a record 21.5 percent for the biggest banks, with the most recent increase announced on June 14. Inflation accelerated to 6.4 percent in June from a year earlier and Mizuho Securities Ltd. estimates consumer prices could jump 6.2 percent to 6.5 percent in July.
The government will stabilize prices, curb “unreasonable” housing demand and increase supplies of hogs to promote a stable market for pork, Wen said in a statement posted on the government’s website today after meetings to discuss the country’s economic situation. The price of the meat surged 57 percent in June from a year earlier, a government report showed last week.
Slowing Growth
Policy makers are trying to cool the fastest inflation in three years without choking growth in the world’s second-largest economy. A report tomorrow may show that gross domestic product rose 9.3 percent in the second quarter from a year earlier, the least in almost two years, according to the median estimate in a Bloomberg survey. That compares with 9.7 percent in the previous quarter.
“The main contradiction in the economy is still the large pressure on price increases and the financing difficulties faced by small and medium-sized enterprises,” Wen said in today’s statement.
He said last month the government may fail to keep price gains within this year’s 4 percent target although they could be kept below 5 percent.
Not As Tight
M2 growth in June rebounded from the slowest gain since 2008 the previous month, although still within the central bank’s full year target of 16 percent. It compared with the median forecast of 15.3 percent in a Bloomberg survey of 18 economists. New local-currency lending in the first six months amounted to 4.17 trillion yuan, 10 percent lower than the same period a year ago.
“Monetary conditions in the past few months have not been as tight” as the money-supply data suggests, said Chang Jian, a Hong Kong-based economist at Barclays Capital. “M2 growth has become less accurate an indicator to measure liquidity conditions and aggregate demand in the past few months as the rapid growth of wealth management products” has shifted loans off banks’ balance sheets, she said.
Chinese banks helped arrange 320 billion yuan of loans between companies in the first quarter that weren’t recorded in the lenders’ balance sheets, central bank data show. Ningbo Bird Co., a maker of cellular phones, said April 30 it had lent 50 million yuan through an entrusted loan at a rate of 18 percent to a property company in Jiangsu province.
Selective Easing
Still, other economists say the June money supply and lending figures show central bank has already started loosening curbs at the margin.
“Some selective easing has already been in progress,” said Ken Peng, senior economist for China at BNP Paribas SA in Beijing. “If local governments don’t get financing, it will affect the normal operation of the economy and could raise the risks of a hard landing.”
Central bank governor Zhou Xiaochuan said last week inflation can’t be the government’s only policy target and that it needs to consider goals including growth, employment and the exchange rate. The PBOC also said yesterday that loans to local government financing vehicles can be contained and that only a “small portion” of loans likely to need “financial grants.”
The second-quarter rise in foreign-exchange reserves was the smallest quarterly gain in a year, according to Bloomberg data.
The growth “still points to solid demand and continued hot money inflows,” said Dariusz Kowalczyk, a senior strategist at Credit Agricole CIB in Hong Kong. “There may be more foreign pressure on China to speed up yuan gains but we think appreciation will slow in the second half as inflation eases.” (Bloomberg)
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