Chinese Financial Institutions’ Lending Dives

BEIJING—Lending by Chinese financial institutions slumped in July on weakening demand, signaling further economic headwinds from trade tensions with the U.S. and potentially paving the way for more stimulus efforts by Beijing’s policy makers.

Chinese banks issued 1.06 trillion yuan ($150.2 billion) of new yuan loans in July, down from 1.66 trillion yuan in June, the People’s Bank of China said on Monday—lower than the median forecast of 1.25 trillion yuan by economists polled by The Wall Street Journal.

A protracted trade war with the U.S. has dented market confidence as companies scale back investment plans amid increasing uncertainties, reducing their borrowing needs.

“The lower-than-expected credit growth reflects weak demand in the real economy,” said Liu Xuezhi, an economist with Bank of Communications.

Total social financing, a measure of credit in the economy, stood at 1.01 trillion yuan in July, as some nonbank financial institutions withdrew credit they issued earlier. In June, total social financing was at 2.26 trillion yuan.

According to official data, the sharp month-over-month pullback was largely the result of steep declines in entrusted loans, trust loans and undiscounted bankers’ acceptances—unconventional loans known as “shadow bank lending.” The contraction may reflect a recent regulatory crackdown on shadow financing to property developers, economists say.

New loans typically ebb after June, when lenders move to window-dress their interim earnings at the end of a quarter. Home sales have weakened this year and the government last month announced tighter regulations for the property sector, potentially reducing demand for credit.

China’s broadest measure of money supply, M2, rose 8.1% at the end of July from a year earlier, compared with an 8.5% increase at the end of June. The figure was lower than the 8.4% growth estimated by economists.

China’s central bank has so far refrained from the massive loosening of credit it relied on during the global financial crisis, which jump-started the economy but left it saddled with debt.

But some economists say that more stimulus may be needed now, particularly as China’s trade war with the U.S. threatens to further escalate.

“The latest slowdown in lending highlights the need for further monetary easing if policy makers are to succeed in putting a floor beneath growth,” said Julian Evans-Pritchard, an economist with Capital Economics.

Beijing’s strategy of stimulating growth by cutting 2 trillion yuan in taxes and fees has shown little sign of success so far, with economic growth decelerating to 6.2% in the second quarter, the slowest pace for the country in more than two decades.

With more Chinese goods set to be hit with higher tariffs,

UBS

on Monday lowered its forecast for economic growth this year to 6.1%, from a previous estimate of 6.2%. The investment bank also expects the PBOC to increase liquidity offerings to Chinese banks in a bid to boost lending around the time of the next Federal Reserve meeting, at which rates are expected to be cut.

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