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 Chinese banks made a much less-than-expected 548.3 billion yuan
($89.5 billion) worth of new loans in October, down 36 percent from
September, central bank data showed on Friday, pointing to deepening
economic weakness in the fourth quarter.
The drop in credit came after some banks reported bad loans rose at
their fastest clip in two years over the summer, while deposits
shrank, limiting their ability to lend and highlighting growing
strains on the financial system as the world's second-largest
economy cools.
"The downward pressure on the economy will increase if we don't step
up policy support," said Wang Jun, senior economist at China Centre
for International Economic Exchanges (CCIEE), a well-connected
think-tank in Beijing.
Wang said the central bank should first consider cutting reserve
requirement ratios (RRR) for all banks to encourage them to lend
more, although cutting interest rates remains an option.
Broad M2 money supply rose 12.6 percent in October from a year
earlier, trailing market expectations of 12.9 percent and the second
slowest growth rate in 2-1/2 years.
Other data on Thursday also showed that China's economy lost further
momentum in October, with factory growth dipping and investment
growth hitting a near 13-year low as the property market continued
to weaken.
The surprisingly weak credit data came despite the central bank's
recent injection of some 770 billion yuan (125.63 billion US dollar)
in three-month loans into some banks via a "medium-term lending
facility", fuelling doubts about the effectiveness of its targeted
policy approach.
"The central bank seems to be more inclined to use innovative tools
to release liquidity, but such tools have limited effectiveness,"
said Niu Li, an economist at the State Information Centre, a top
government think-tank.
Niu said either cutting interest rates or RRR should be policy
options, given low inflation and high borrowing costs. He expects
fourth-quarter growth to slow to 7.2-7.3 percent, bringing full-year
growth to 7.3 percent.
Despite a raft of stimulus measures earlier in the year, China's
annual growth slowed to 7.3 percent in the third quarter, the
weakest since the global financial crisis.
RATE CUT SEEN IN 2015
Still, few government economists see the central bank making any
aggressive policy moves before the end of the year.
"The probability of cutting interest rates and RRR will be high next
year," said Zhang Bin, senior economist at the Chinese Academy of
Social Sciences (CASS), a top government think-tank.
Chinese leaders have indicated they will tolerate slower growth as
long as the job market remains strong, but a further slowdown could
hit manufacturers harder, raising the risk of debt defaults that
could cascade through the financial system.
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Highlighting the growing pressure facing Chinese companies, the
industry ministry has said financing costs of manufacturers jumped
13.5 percent in the first nine months from a year earlier, and were
5.6 percentage points higher than factories' revenue growth.
Sluggish demand and overcapacity are compounding the problems,
particularly for heavy industry like steel mills.
Policymakers have ruled out big stimulus measures as China is still
struggling to deal with a mountain of local government debt, the
hangover from 4 trillion yuan (US$650 billion) in spending rolled
out in 2008/09 to cushion the impact of the global crisis.
Similarly, the central bank has only cut RRR for selected banks and
pumped more short-term cash into the system in a bid to channel
credit to more vulnerable sectors of the economy.
Debt levels at China's 200 biggest companies increased by five times
between 2007 and 2013 and financial pressures on them will likely
intensify as the economy continues to cool, Standard & Poor's said
on Friday.
LOWER GROWTH TARGET EXPECTED
Top government think-tanks, which make policy proposals, have urged
the government to cut its economic growth target next year, probably
to around 7 percent, from around 7.5 percent this year.
Chinese leaders are due to map out economic and reform plans for
2015 at a major work conference next month, including economic
targets for the year ahead which will be unveiled in parliament next
March.
The soft economic performance in October cemented the view that
China is on track to grow at its weakest pace in 24 years.
The government is almost certain to miss its annual growth target
this year for the fist time since 1999, when the economy was hit by
the Asian financial crisis.
(1 US dollar = 6.1290 Chinese yuan)
(Additional reporting by Jake Spring, Xiaoyi Shao and Koh Gui Qing;
Editing by Kim Coghill)
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