New loans drop sharply in China on rising credit risk

SINGAPORE - New yuan loans in China in July totalled only RMB385.2 billion, much lower than the market consensus of RMB780 billion - and the RMB700 billion recorded in July 2013. ANZ Bank says aggregate financing also surprised markets on the downside, with a number even smaller than new loans, for the first time since the data’s inception.

Undiscounted bank bills declined by RMB416 billion in July, following a RMB144 billion increase in the previous month, due to a crackdown on commodity financing after the Qingdao port fraud case. The trust and entrusted loan growth also softened, indicating that shadow banking activities have slowed sharply, with further negative implications for the property sector.
ANZ says July’s monetary data suggests that Chinese commercial banks experienced a ‘sudden stop’ in credit extensions prompted by a significant increase in risk aversion. “Even before this occurrence, commercial banks had tightened their credit exposure to certain industries and had started to shun commodity financing,” the bank says.
“Today's monetary data should not be viewed lightly. It means that the financial system is engaging a rapid de-leveraging process, which could have significant repercussions on the real economy. Such a sharp drop in credit is, in fact, a quantitative tightening, which will lead to high interest rates and endanger China’s macroeconomic objective.
“It also suggests that past monetary policy tweaks have not worked as intended. Although the PBoC has always been reluctant to ease, China's macro-economic objective will eventually outweigh the current monetary policy inertia. We believe a RRR cut is imminent in order to restore confidence.”  www.live.anz.com (ATI).