Loans fall sharply as stagflation looms

Business | Reuters and Tereza Cai 12 Nov 2019

New bank loans in China fell more than expected to the lowest in 22 months in October as some analysts warned that China may see stagflation.

Chinese banks extended 661.3 billion yuan (HK$738.36 billion) in new yuan loans in October - the weakest since December 2017 and down sharply from September, falling short of analyst expectations.

But the drop was likely due to seasonal factors and policymakers are still expected to ramp up support for the cooling economy in the coming months.

Chinese regulators have been trying to boost bank lending and lower financing costs for over a year, especially for smaller and private companies which generate a sizable share of the country's economic growth and jobs.

But domestic demand remains sluggish as investment and consumption weaken while the escalating US-China trade tensions weigh on exports, suggesting more policy stimulus is needed.

"We think the central bank will need to loosen policy more aggressively in the coming months in order to drive a turnaround in credit growth and prevent economic activity from slowing too abruptly," Julian Evans-Pritchard at Capital Economics said.

China is seeing stagflation, with the inflation reflecting weak demand so that producers are incapable of raising prices, said Chris Leung, chief China economist at DBS Bank, adding that the high pork price has had a huge impact on the low-income population.

The consumer price index rose to a seven-year high of 3.8 percent in October due to the pork prices, and demand during the Spring Festival in January will push it higher to at least 5 percent, according to economists from Barclays, Citigroup, and Bank of China International. Huachuang Securities said the number could even hit 6 percent.

Leung said the monetary policy direction of targeted reduction in the required reserve ratio is correct, but it is hard to execute and there are worries that funds might flow into the property market.

In money marekts, the yuan fell to a one-week low at 7.0065 against the US dollar, down 181 basis points compared to the last trading day.

Meanwhile, China's auto industry executives met with government officials over the weekend to discuss ways to promote car sales in rural areas, sources familiar with the matter said.

Fewer new energy vehicles could be sold in China this year than in 2018, an official at the country's biggest auto industry association said on Monday, as customers hold back on purchases following a government decision to cut subsidies.

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