China’s credit rebounds far less than expected amid property crisis

Ting Lu, Chief China Economist at Nomura (Credit: Nomura)

Bank lending in China increased less than expected last month as credit demand remained weak amid property market crisis. New yuan loans increased to CNY 950 billion in May from CNY 730 billion in April, the People’s Bank of China said. This was well below the expected level of CNY 2.25 trillion.

In the first five months of this year, yuan-denominated loans increased by CNY 11.14 trillion. At the end of May, the M2, a broad measure of money supply posted an annual growth of 7.0 percent. At the same time, the narrow measure M1 dropped 4.2 percent. M1 consists of cash in circulation and corporate demand deposits and is seen as a major indicator of private business confidence.

Economists at Capital Economics said government bond issuance should continue to be strong in the near-term. Although the central bank is unlikely to cut policy rates next week, the bank will probably keep monetary conditions loose. Taken together, economists said these factors should drive a moderate pick-up in credit growth in the near term.”But unless the property sector turns around, the pick-up won’t last for more than a few months,” Economists at Capital Economics said.

As of April, there were nearly 391m sq metres of unsold residential property in China, according to the National Bureau of Statistics. Between January and April, sales of newly built residential properties were down more than 30% on last year. New home prices had fallen for a tenth month in a row in April, official data showed. The 0.6% month-on-month decline was the sharpest drop since November 2014.

Property long served as a vital growth engine as China developed to become the world’s second-largest economy but in 2020, regulatory curbs on excessive borrowing and speculation narrowed access to credit. Since then several large property developers have defaulted on their debts. Policy rescue efforts started as early as 2022.

More recently, authorities unveiled new property measures, including a 300bn yuan relending fund to support local governments and state-owned enterprises to buy up unsold stock and convert it into social affordable housing. The central bank also lowered the minimum downpayment required for prospective buyers. China’s ambitious plan to rescue its property market, is a development that investors have eagerly anticipated for months.

But the property rescue package will take time to show results, analysts said. “We believe Beijing is headed in the right direction with regard to ending the epic housing crisis,” Nomura’s Chief China Economist Ting Lu said in a report. “Beijing has already pivoted from building public housing to ensuring the delivery of numerous pre-sold homes to rebuild buyers’ confidence, marking a significant step towards cleaning up the big mess.”

“However, this is proving to be a daunting task, and we think markets need to exercise more patience when awaiting more draconian measures,” he said.