China’s new loans hit a 15-year low, but investors ‘should not panic’

China’s new bank loans fell to a 15-year low in July in what some analysts see as a sign of continued weakness in the economy. But others said investors “should not panic” as seasonality and regulations contributed to the unexpected slowness.

New loans in the world’s second-largest economy came in at only 260 billion yuan ($36.28 billion), plunging 88% from a year ago and missing expectations of 450 billion yuan.

Iris Tan, senior equity analyst at Morningstar explained that the decline in July loan growth was driven by weakening credit demand and spending among both corporations and households.

She noted household short-term loans declined significantly, indicating continued weakness in both consumer confidence and spending. Tan said corporate loans continued to expand but at slower pace, mainly driven by discounted bank notes.

Still, other factors beyond economic weakness contributed to the loan declines. Tan noted the decline in short-term corporate loans was due to regulatory measures that prevent the “self-circulating” of money in the financial system.

This “self-circulating” practice, she explained, refers to big enterprises borrowing money at very low costs and putting this money into a bank as a high-yield structured deposit or deposit agreements, instead of operations or investments.

Jasmine Duan, senior investment strategist at RBC Wealth Management Asia said, “New loans didn’t go into the real economy, but they go into all this financial arbitrage, and we think with the PBOC… that’s why they continue to continue to mention we shouldn’t pay too much attention to the overall credit loan growth, because in the past, many of those didn’t go into the real economy.”

In a Tuesday note, Nomura said there is “no sign” that the regulatory crackdown is going to end anytime soon, adding it continues “to expect weak credit growth in the coming months, especially for RMB loans.”

As such, Morningstar’s Tan said the market “should not panic” about the sudden fluctuations in monthly data, as July is typically a weak month for credit growth.

She pointed out that compared with 2023, the year-to-date bank loan growth remains largely stable at 8.7% from 8.8% in June.

“This is in line with the government’s guidance to slow down credit growth. We believe the slower but still reasonable credit growth benefit banks as it reduces their equity consumption and lower the risks of irrational pricing competition for new loan growth,” she said.

Still, these factors don’t negate continued sluggishness in the Chinese economy. RBC’s Duan said the data suggests both households and corporations still have a “relatively low” outlook on the Chinese economy.

“We think without the property market finding a bottom and gradually stabilizing, it is hard to see loan growth pick up significantly,” she concluded.